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Islamic banking and finance disputes: the case for semi-secular arbitration (Part 2)

This blog is published in two parts. Part 1, which was published in March this year, provided some background to dispute resolution in the banking and finance sector, highlighting in particular the apparent inaptitude of conventional dispute fora, such as the courts, to deal with Islamic finance disputes adequately. This part 2 addresses how arbitration as an alternative form of dispute resolution can assist in providing Shari’a-compliant solutions where conventional dispute resolution through the courts fails. In doing so, it makes the case for semi-secular arbitration, a form of arbitration that combines Islamic and secular elements to ensure a Shari’a-compliant outcome.

The solution: arbitration

Part 1 of this blog concluded on the note that the English courts have set a mixed example in giving, on some occasions, short shrift to the contracting parties’ reference to the Islamic Shari’a as part of the governing law of an otherwise English law contract (see for example, Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd) whilst endorsing the parties’ choice of a Shari’a-compliant governing law on others (see for example, The Investment Dar Company KSCC v Blom Development Bank SAL).

That said, the English courts recognise a blanket reference to the Islamic Shari’a as a body of rules that can be arbitrated (see Halpern v Halpern). As such, the English courts have enforced an ICC award rendered by a Shari’a arbitrator seated in London and applying the Islamic Shari’a in accordance with a governing law clause providing for “the Law of England except to the extent that it may conflict with the Islamic Shari’ah, which shall prevail” (see Sanghi Polyesters Ltd (India) v The International Investor KCFC (Kuwait)). Therefore, arbitration allows a choice of a national law, and more specifically English law, in combination with the rules of the Islamic Shari’a, even as an undefined or unidentified body of law.

This position also stands confirmed by:

  • Article 1(2)(d) of the Rome Convention/Rome I, which contains an arbitration exemption and as such excludes the application of the choice of law rules promulgated by Rome I to arbitration.
  • Section 46(1)(b) of the English Arbitration Act 1996, which empowers a tribunal to decide a dispute “in accordance with such other considerations as are agreed by [the parties] or determined by the tribunal” and hence endorses the contracting parties’ choice of the Islamic Shari’a as forming part of the body of law governing their agreement.
  • Article 35(1) of the Dubai International Financial Centre (DIFC) Arbitration Law, which empowers a tribunal to decide a dispute “in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute” and hence accommodates a reference to the Islamic Shari’a as forming part of the rules of law chosen by the contracting parties to govern the substance of their dispute.

The arbitration alternatives: secular v Islamic

The choice of arbitration as a form of dispute resolution offers a number of alternatives, some secular others Islamic in nature, thus facilitating the creation of a forum that can cater for the resolution of disputes in Islamic finance more specifically and not only in conventional banking. Following the secular/Islamic dichotomy, the following options come to mind:

  • Secular: Choice of a conventional institution (for example, ICC, LCIA, AAA); using a conventional set of international commercial arbitration rules, such as the ICC, LCIA or AAA Rules; with seat in London (England) or New York (US) as the traditional fora for conventional banking and finance disputes; a tribunal with particular specialism in the banking and finance industry; and under a conventional governing law, such as English or New York law (following the example of contemporary complex banking and finance products), possibly excluding the Islamic Shari’a or Shari’a defence expressly (following the example of the ISDA/IIFM Tahawwut (Hedging) Master Agreement). This option excludes the non-compliance problem, but increases the enforcement risk in Shari’a-compliant jurisdictions.
  • Islamic: Choice of a specialist institution (for example, International Mediation and Arbitration Center (IMAC), Asian International Arbitration Centre (AIAC), International Islamic Centre for Reconciliation and Arbitration (IICRA)) with a focus on Islamic finance disputes; using specialist sets of arbitration rules, such as the IMAC Shari’a Arbitration Rules, the AIAC i-Arbitration Rules (the latter of which provide for a referral mechanism to Shari’a experts, late payment charges, and a technical review of draft awards to ensure Shari’a compliance), or the IICRA Arbitration Rules; with a seat in Hong Kong, Kuala Lumpur or Dubai; a tribunal with particular specialism in Islamic banking and finance; and under a governing law that expressly incorporates the Islamic Shari’a or that incorporates the Islamic Shari’a by definition (such as for example, UAE law). This option eliminates the Shari’a risk by producing a Shari’a-compliant outcome enforceable in a Shari’a-compliant jurisdiction.

Conclusion: the case for semi-secular arbitration

Rather than settling for one or the other option, devoutly Shari’a or entirely secular, there is a viable alternative that combines the two in relevant part in order to ensure a Shari’a-compliant outcome: semi-secular arbitration.

Semi-secular arbitration could take the following shape:

  • Choice of a conventional arbitration centre located in the Middle East, for example, Dubai International Arbitration Centre (DIAC) or the DIFC-LCIA, with relevant experience in dealing with disputes in the Middle East. The DIAC more specifically will provide “soft scrutiny” of a draft award to safeguard, inter alia, against public policy violation, such as Islamic Shari’a.
  • In combination with regional arbitration rules, such as the DIAC or the DIFC-LCIA Rules, which facilitate, inter alia, the appointment of party or tribunal-appointed arbitrators, including ones that may assist in the assessment of issues regarding the Islamic Shari’a.
  • Seated in the region, for example, in Dubai or the DIFC. The 2008 DIFC Arbitration Law more specifically allows the application of “rules” of law, including for that matter the Islamic Shari’a.
  • The tribunal may be specialist, with expertise in banking and finance. Where there is a three-member panel, it might be sufficient for the chairperson (rather than each member of the tribunal) to have Islamic finance experience or expertise. Ultimately, though, the burden of education rests on the disputing parties and the tribunal might be assisted by expert evidence on Islamic Shari’a.
  • Choice of a secular law on the merits, but subject to the Islamic Shari’a (such as UAE law, which incorporates references to the Islamic Shari’a) or with reference to precise Shari’a law principles, in order to ensure enforceability of the Shari’a component of the governing law provision. For the avoidance of doubt, even though a blanket reference will be sufficient, in order to eliminate risk, the reference should be specific.

This alternative, semi-secular option is likely to produce a Shari’a-compliant outcome by mitigating Shari’a risk.

In a global environment where Islamic finance products have come to the fore as an alternative product of investment that attracts Middle Eastern and Western investors alike, a form of semi-secular arbitration may assist the resolution of Islamic finance disputes without losing sight of the mandatory requirement for Shari’a compliance. Here’s to semi-secular Islamic finance arbitration!

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