A two-party partnership agreement protects your capital and effort when written clearly. Learn the key clauses and what Saudi civil law requires.
Short answer: Under Article 528 of the Saudi Civil Transactions Law, a partnership contract must be in writing. At a minimum it should set out each partner's contribution (money, work or both), the profit and loss split, who manages, access to the books, the term, how a partner exits or is removed, and how the partnership is wound up and disputes resolved.
Many partnerships start with trust and a handshake: one side brings money, the other brings expertise and time. A few months later the unanswered questions surface. How are profits shared? Who decides? What happens if one of you wants out? This guide walks through the key clauses of a two-party partnership agreement and links each one to Saudi law, so you know what you are negotiating before you sign. If you need an agreement drafted or reviewed, see Kawkaba Law's partnership and commercial contracts service.
What is a partnership agreement under Saudi law?
Article 529 of the Civil Transactions Law defines a partnership as a contract under which two or more partners each contribute money, work, or both to a venture in order to share its profit or loss.
Three practical points follow:
A contribution can be capital or labour. One partner can fund the venture while the other runs it.
Partners share results, not just returns. A partnership is not a loan; each partner takes part in both profit and loss.
Registered companies follow their own rules. Article 529(2) excludes companies governed by special legislation, such as those registered under the Companies Law (limited liability companies, general and limited partnerships, joint stock and simplified joint stock companies).
Does the agreement have to be in writing?
Yes. Article 528 requires partnership contracts, and any amendment to them, to be in writing, failing which they are void. The nullity cannot be raised against third parties, and between the partners it only takes effect once one of them asks a court for it, from the date the claim is filed. In practice, a verbal understanding or scattered chat messages are not enough, and any change to profit shares or management should also be put in writing.
What are the key clauses?
1. Parties and purpose
Record full names, ID or commercial registration numbers and national addresses. Define the activity precisely. "Operating an online store selling office supplies" is far clearer than "commercial activities". The purpose limits the manager's authority and, under Article 544, the partnership ends when its purpose is achieved.
2. Contributions and how they are valued
State what each partner contributes. Under Article 530, a contribution cannot consist merely of influence, reputation or creditworthiness, and non-cash contributions are valued at their worth when the contract is made or on an agreed basis. Write the agreed value into the contract. If one partner contributes "effort", define it: hours, duties, and whether a separate fee is paid. If one side simply hands money to the other to trade with for a share of profit, the arrangement may be closer to a mudaraba contract (Article 550 onward), which has different loss rules.
3. Profit and loss
By default, Article 534 splits profit in proportion to each partner's share unless agreed otherwise, and losses always follow the shares. Article 535 prohibits fixing a partner's profit as a set amount, excluding a partner from profit, or exempting a partner from loss.
Illustrative example (hypothetical figures): Ahmed contributes SAR 300,000 and Khalid contributes his full-time management. They agree a 50/50 profit split. If the venture makes SAR 120,000 net profit in year one, each takes SAR 60,000. A clause giving Ahmed a fixed SAR 5,000 a month regardless of results would conflict with Article 535; a percentage share of profit is the safer drafting. Also set distribution dates, noting that Article 536 allows distributions only once capital is intact.
4. Management and authority
If the contract is silent, Article 537 treats each partner as the other's agent in managing the venture, with a right to object before an act is completed. Between two equal partners that can cause friction. Specify who runs day-to-day operations, which decisions need both signatures (borrowing, contracts above a threshold, selling assets, admitting a new partner) and how deadlocks are broken.
5. Books and accounts
Article 538 gives every partner the right to inspect the books, and any contrary agreement is void. Build on that: a dedicated bank account, periodic financial reports, and a named person responsible for bookkeeping.
6. Term and renewal
State whether the partnership is for a fixed or indefinite term. Under Article 544, if partners carry on the same business after the term ends, the contract is treated as renewed on its original terms, as an indefinite-term partnership.
7. Non-compete and use of assets
Article 541 bars a partner from keeping or using partnership assets for personal benefit. Add an express, reasonable non-compete clause for the life of the partnership.
How does a partner exit?
Article 545 distinguishes two cases. In an indefinite-term partnership, a partner may withdraw at any time with reasonable written notice, provided the withdrawal is not fraudulent or untimely. In a fixed-term partnership, a partner cannot withdraw early, but a court may release them for acceptable reasons, subject to compensating the other partner. Article 546 lets you agree the exit mechanism in advance, so include a notice period, a valuation method (for example an independent accountant chosen jointly), a right of first refusal for the remaining partner, and a payment schedule. Absent agreement, Article 548 values the outgoing share at the time of the triggering event, payable in cash.
Under Article 547, the partnership ends on a partner's death, legal incapacity, insolvency or withdrawal, unless you agree it continues with the heirs or the remaining partner. In a two-person venture this clause protects both the business and your family.
How is the partnership wound up and how are disputes resolved?
Article 549 applies the partners' agreed liquidation procedure; failing agreement, any interested party can ask the court to liquidate and appoint a liquidator. Set out who liquidates, the order of paying debts and how the remainder is divided. For disputes, provide a time-limited negotiation step and then name the forum: the courts or arbitration. See our guide to arbitration clauses and enforcing awards in Saudi Arabia.
A civil partnership contract governs your relationship but does not create a separately registered entity. Depending on the activity, its size, and whether you need to deal with banks and authorities as an entity, forming a company under the Companies Law may suit you better. See company formation in Saudi Arabia, and before signing any draft, use our contract review checklist.
FAQ
Is there an official partnership agreement template?
No single official form exists. The agreement must be written and should cover the parties, purpose, contributions, profit and loss, management, term, exit, liquidation and dispute resolution. Generic templates rarely fit a specific deal.
What types of partnership contracts does Saudi law recognise?
The Civil Transactions Law covers the partnership contract, the mudaraba contract and the output-sharing contract (including agricultural sharing). Registered commercial companies fall under the Companies Law.
How do I prove a partnership in a dispute?
Start with the written contract, since Article 528 requires writing. Bank transfers to the partnership account, invoices and correspondence showing performance also help. How much weight each carries depends on the case.
Can the working partner receive a salary as well as profit?
A fee for defined work can be agreed if it is clearly stated and does not turn into a fixed profit that breaches Article 535.
Bottom line
A partnership agreement is the rulebook for your relationship in good times and in disputes. Kawkaba Law is based in Jeddah and assists individuals and companies across Saudi Arabia, in person and remotely, with drafting and reviewing partnership agreements.
Request a case assessment
This article is general information for awareness purposes and is not legal advice for any specific case. Outcomes depend on the facts and documents of each matter, so consult a licensed lawyer before making decisions.
