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Public and Private Internaonal Law Bullen, 39(1): 295–323
DOI: 10.26650/ppil.2019.39.1.0001
hp://ppil.istanbul.edu.tr/en/_
Submied: 06.09.2018
Revision Requested: 07.12.2018
Last Revision Received: 27.01.2019
Accepted: 21.02.2019
Public and Private International Law Bulletin
©The Authors. Published by the İstanbul University under the terms of the Creave Commons Aribuon License hp://creavecommons.org/licenses/
by/4.0/, which permits unrestricted use, provided the original author and source are credited.
1 Correspondence to: Berk Hasan Ozdem (LLB), Galatasaray University, Faculty of Law, Istanbul, Turkey. Email: berkhasanozdem@gmail.com
ORCID: 0000-0002-0327-6489
To cite this arcle: Ozdem BH, “The Path of Eastern Arbitraon to Take Islamic Finance Disputes from the Hands of English Ligaon”
(2019) 39(1) PPIL 295. hps://doi.org/10.26650/ppil.2019.39.1.0001
Abstract
Over the last decades the exponenal growth in Islamic nance and the globalizaon of the industry has resulted in the
disputes amongst internaonal enes arising out of Sharia-compliant agreements to be more commonplace. It has been
a common pracce amongst the pares of Islamic nance transacons to choose English law as the governing law. This
paper, aer examining the limitaons in the applicability of Islamic law in English courts, focuses on the crics that the
current pracce of choosing English law as the governing law faces and discusses the potenal of arbitraon to provide a
more advantageous dispute resoluon method for the pares that agree on resolving their issues compliant with Islamic
law. Finally, this paper explains the adventure of Eastern arbitraon to take Islamic Finance disputes from the hands of
English courts by examining the iniaves taken by the arbitral instuons so far, as well as the ideas that came from
scholars to create beer soluons for the pares of Islamic nance transacons in their disputes.
Keywords
Arbitraon • English courts • Islamic nance • Islamic law • Sharia
Doğu Tahkiminin İslami Finans Uyuşmazlıklarını İngiliz Mahkemelerinin Elinden Alma Yolundaki Süreci
Öz
İslami nansta son yıllarda gözlenen büyüme, endüstrideki küreselleşme ile birlikte, şeriat uyumlu anlaşmalardan
kaynaklanan uyuşmazlıkların uluslararası boyua yaygınlaşması ile sonuçlanmışr. İslami nans işlemlerinin taraarı
arasında uygulanacak hukuk olarak İngiliz hukukunun seçilmesi yaygın bir uygulama olmuştur. Bu makalede, İslam
hukukunun İngiliz mahkemelerinde uygulanabilirliği konusundaki sınırlamalar incelendikten sonra İslami nans
uyuşmazlıklarında uygulanacak hukuk olarak İngiliz hukukunun seçilmesi prağine yönelen eleşriler üzerinde
yoğunlaşılmış ve sorunlarını İslam hukukuna uygun olarak çözme konusunda uzlaşan taraar için tahkim yolunun daha
avantajlı bir uyuşmazlık çözüm yöntemi sağlama konusundaki potansiyeli tarşılmışr. Son olarak, tahkim kurumları
tarandan başlalan girişimler incelenerek, Doğu tahkiminin İslami Finans uyuşmazlıklarını İngiliz mahkemelerinin elinden
alma yolundaki sürecinden ve İslami nans uyuşmazlıklarında taraara daha iyi çözümler üretebilmek için yazarlarca ileri
sürülmüş kirlerden bahsedilmişr.
Anahtar Kelimeler
Tahkim • İngiliz mahkemeleri • İslami nans • İslam hukuku • Şeriat
Berk Hasan Özdem1
The Path of Eastern Arbitraon to Take Islamic Finance Disputes
from the Hands of English Ligaon
Public and Private Internaonal Law Bullen
296
“when you judge between men, you
judge with justice”.1
The Path of Eastern Arbitration to Take Islamic Finance Disputes from the
Hands of English Litigation
Introduction
Since the peaceful nature of human beings intervened in finding pacific solutions
for conflicts rather than using force for settling disputes through the passage of time,
people started to refer their disputes to the third parties that had been chosen by
them.2 Though it would be nothing but exaggeration to claim that it has been identical
to the contemporary practice since the very beginning, as a deeply-rooted historical
means used to settle different disputes, arbitration predates the state judiciary or
even the state itself.3 In addition to several other ancient communities, the Arabs
knew and used arbitration as a method for settling their disputes in the Pre-Islamic
period.4 Arbitration was the only publicly-sanctioned system of disputes-resolution
in the Pre-Islamic Arab community, and was the alternative to self-help remedies.5
If the parties failed to resolve their conflicts over matters such as rights of property,
succession, or torts through negotiations, these disputes were often referred to
a trustworthy individual, an arbitrator (Hakam), rather than an organized judicial
justice for decision.6 The Hakam was a special personality chosen for his personal
qualities, his reputation -because he belonged to a family famous for its competence
in deciding disputes- and most importantly because of the community’s belief
about his supernatural powers which were often tested by the parties beforehand.
Since these supernatural powers were frequently believed to belong to soothsayers
(Kahins), these last were most commonly chosen to decide on the disputes.7 Although
the decision of the Hakam was final, it was not an enforceable judgement but rather a
1 Qur’an, 4:58.
2 Abdulrahman Yahya Baamir, ‘Saudi Law and Judicial Practice in Commercial and Banking Arbitration’ (Dphil thesis,
Brunel University 2008) 24.
3 Zeyad Alqurashi, ‘Arbitration under the Islamic Sharia’ (2003) 1(2) Oil, Gas and Energy Law Intelligence <https://www.
ogel.org/article.asp?key=149> accessed 4 October 2018; It is worth mentioning that the ancient dispute resolution method
which will be explained in the introduction, differed in many aspects such as its subject matter and procedure from today’s
modern arbitration. For instance, the enforcement process which nevertheless leaves place for court intervention and
constitutes a crucial part of today’s arbitration did not exist in ancient dispute resolution. Also, subjects such as certain
criminal matters which are considered to be beyond the power of modern arbitrators were able to be decided in ancient
dispute resolution methods. However, notwithstanding the differences, the word “arbitration” will be used to describe
the -in the author’s opinion- “arbitration-like” ancient dispute settlement method which will be further explained in the
introduction.
4 ibid; Abdelsattar Khouildi, ‘L’Arbitrage en Droit Financier Musulman Moderne’ (2016) 8(1) Etudes en Economie
Islamique 37, 37.
5 Sayed Hassan Amin, Remedies for Breach of Contract in Islamic and Iranian Law, (Royston 1984), 24-27.
6 Vincent Powell-Smith, ‘Settlement Of Disputes ByArbitration Under Sharı
’ah And At Common Law’ (1995) 34(1)
Islamic Studies 5, 6; Arthur J Gemmell, ‘Commercial Arbitration in the Islamic Middle East’ (2006) 5(1) Santa Clara
Journal of International Law 169, 173.
7 Joseph Schacht, An Introduction to Islamic Law, (rev edn Clarendon Press 1964), 7.
Özdem / The Path of Eastern Arbitraon to Take Islamic Finance Disputes from the Hands of English Ligaon
297
statement of right on a disputed point, a statement as to what the customary law was
or should be.8 The arbitrator’s respectability and stature within society were the sole
determinants as to the enforcement of an arbitral award. 9 Although these proceedings
were simple and rudimentary, the Hakam during the hearings had to abide by certain
principles such as the obligation to hear the parties on equal bases and the respect of
the customary rules when examining the proofs presented by the parties.10
In addition to the famous dispute related to the Hacer-ül Esved stone11 where
arbitration was used for dispute settlement in the pre-Islamic era, there are also a
number of cases for which it is mentioned that the Prophet (pbuh) supported the use
of arbitration after the revelation came to him.12
Arbitration continued as a dispute resolution practice in the post-Muhammad
era, as well.13 Under Islamic law, arbitration is known as al-Tahkm, a verbal noun
of the Arabic word hakkama which primarily means the turning of someone back
from wrongdoing.14 The primary sources of Sharia law which are the Qur’an and
the Hadith, as well as the custom and the practices of the transactions of the earlier
Muslims establish the platform for the institution of al-Tahkm as a means of dispute
8 Gemmell (n 7) 173.
9 Aseel Al-Ramahi, ‘Sulh: A Crucial Part of Islamic Arbitration’ (2008) LSE Law, Society and Economy Working Paper
12/2008, 5 <www.lse.ac.uk/collections/law/wps/wps.htm> accessed 4 October 2018.
10 Alqurashi (n 4).
11 A dispute arised between various tribes of Quraysh during reinsertion of the Black Stone in the Kaaba following its
renovation since no clan chief wanted to relinquish this great honour to any other clan. This almost led to war between the
leaders of Quraysh in the area of the Kaaba. However, a couple of days later, intervention came at the right moment by
Abu Umayyah bin Al-Mughirah bin `Abdullah bin `Amr bin Makhzum, the oldest man from Quraysh. He suggested that
the first man to enter the Sacred House from its entrance should be appointed to settle the dispute between the leaders.
That first man entered through the gate was Muhammad (pbuh), the future Prophet of Islam. Since the people of Quraysh
used to call the Messenger of Allah (cc) as “Al-Amin” (the honest one) even before the revelation came to him, seeing
him as their arbitrator they spontaneously gave their consent with his verdict. Informed about their dispute, the future
Prophet (pbuh) asked the leaders to bring a garment and place it on the ground. He placed the Black Stone on it and asked
each leader to hold the garment from one side; thus, participate in bringing the Black Stone to its designated area. Then
after, the Prophet (pbuh) by himself placed the Black Stone in its position. Thus, a potential war amongst the Quraysh
tribes was prevented through the successful arbitration of the dispute by the Prophet Muhammad (pbuh) Saud Al-Ammari
andTimothyMartin,‘Arbitrationin theKingdom ofSaudiArabia’(2014)30ArbitrationInternational,387,388;Sadık
Kirazlı,‘ConflictandConflictResolutioninthepre-IslamicArabSociety’(2011)50(1)IslamicStudies25,49-52;Mustafa
Monjur, ‘An Analysis on the Practices of Prophet Muhammad (Pbuh) in Resolving Conflicts’, (2011) 1(1) Journal of the
Bangladesh Association of Young Researchers 109, 115.
12 Gemmell (n 7) 173-174; Abu-Nimer mentiones such a case when the Prophet (pbuh), in a dispute between himself and
the Banu Qurayza (a Jewish tribe) agreed to submit their dispute to a third party chosen by them notwithstanding his
prominence. He also points out to another conflict between Arab and Jewish tribes where the Prophet (pbuh) was selected
by the disputants as arbitrator. Mohammed Abu-Nimer, ‘A Framework for Nonviolence and Peacebuilding in Islam’ (2001)
15 Journal of Law & Religion 217, 247; See also, Majid Khadduri, War and Peace in the Law of Islam (Oxford University
Press 1955) 231ff; The commitment and participation of the Prophet (pbuh) in the arbitral proceedings caused scholars to
refer to Muhammad (pbuh) as an exemplary standard for the independence of arbitrators. Nudrat Majeed, ‘Investor-State
Disputes And International Law: From The Far Side’ (2004) 98 Proceedings of the ASIL Annual Meeting 30, 32.
13 MehmetNar,‘TahkiminKamuHizmetlerineUygulamaSorunsalıveOlasıSonuçları’(2012)103,TürkiyeBarolarBirliği
Dergisi 112, 114;Yusuf Şen, ‘İslam Hukuku’ndaArabuluculuk’, (2012) 11(22), Hitit niversitesi İlahiyat Fakültesi
Dergisi 105, 108.
14 MahdiZahraaandNoraAHak,‘Tahkm(Arbitration)inIslamicLawwithintheContextofFamilyDisputes’(2006)20(1)
Arab Law Quarterly 2, 3; Edward William Lane, Arabic-English Lexicon, vol 1 (The Islamic Texts Society) 616; See,
EnsariYücel,‘İslamHukukundaTahkimveKatılımBankalarındaUyuşmazlıklarınTahkimYoluylaÇözümü’(2017)3(2)
Journal of Islamic Economics and Finance 137, 140.
Public and Private Internaonal Law Bullen
298
resolution under Islamic law.15 For matrimonial disputes the holy Qur’an provides as
follows
If you fear a breach between them twain (the man and his wife), appoint (two) arbitrators, one
from his family and the other from her’s; if they both wish for peace, Allah will cause their
reconciliation. Indeed, Allah is Ever All-Knower, Well-Acquainted with all things16
The Qur’an further states in another verse
nay, by your Lord, they can never be believers, until they appoint you the arbitrator in all
the disputes between them, and find in themselves no resistance against your decisions, and
accept (them) with full submission.17
It further provides
Verily! Allah commands that you should render back the trusts to those, to whom they are
due; and that when you judge between men, you judge with justice. Verily, how excellent is
the teaching which He (Allah) gives you! Truly, Allah is Ever All-Hearer, All-Seer.18
The above verses of Qur’an show that the availability of arbitration, under Islamic
law, is not limited to family disputes, instead, it includes commercial and other civil
and financial matters.19 Treaty of Medina in AD 622 was the first treaty signed by
the Muslim community, provided for arbitration to resolve disputes. Since then, with
its permissibility unquestioned by the Islamic jurisprudence, the major schools of
Islamic thought have supported and used arbitration for centuries.20
I. Islamic Finance Disputes
Today it is undoubted that the subject of arbitration in Islamic disputes is both
materially and morally of great importance. Over the past 25 years, the considerable
contribution of economic, social and political changes to the wealth held by Muslims,
leveraged their need to make the most of this wealth in compliance with the Islamic
principles.21 The exponential growth in Islamic finance has resulted in an increase
15 Abdul Azeez Maruf Olayemi and Bandar Khalid Al-Zabyani, ‘Arbitration Clause in Islamic Banking Contracts: A
Contractual Necessity’ (2014) 1(7) International Journal of Interdisciplinary and Multidisciplinary Studies 1, 1; Arif A
Jamal, ‘ADR and Islamic law: the cases of the UK and Singapore’ (2015) National University of Singapore Faculty of Law
WorkingPaper2015/004,4ff<http://law.nus.edu.sg/wps/>accessed4October2018;See,MuharremBalcı,İhtilâfların
Çözüm Yolları ve Tahkim(SeçkinPress1999)72ff;Yücel(n15)142ff.
16 Qur’an, 4:35.
17 Qur’an, 4:65.
18 Qur’an, 4:58.
19 Farouq Saber Al-Shibli, ‘The Role of Arbitration in Settling the Disputes of Islamic Banking’ (2017) 1(2) Journal of
Humanities, Language, Culture and Business 221, 226; Olayemi and Al-Zabyani (n 16) 2; For the perspectives of different
islamic doctrines on the availability of arbitration for different types of disputes see, Yücel (n 15) 145ff.
20 Al-Ammari and Martin (n 12) 388; Alqurashi (n 4).
21 ŞtefanaMaria Dima and others, ‘Adiscussion over IFRS’adoption in Islamiccountries’(2014)13(1)Accounting and
Management Information Systems 35, 36.
Özdem / The Path of Eastern Arbitraon to Take Islamic Finance Disputes from the Hands of English Ligaon
299
in the breadth and sophistication of product offerings in international finance.22
However, although arbitration is a concept that is favoured to adjudication in Islamic
jurisprudence, international arbitration is still far-away from fulfilling its potential in
the area of Islamic finance transactions and dealings.23
With its origin dating back to the dawn of Islam 1,400 years ago, Islamic finance
can be described as financial intermediation accomplished in a way that is rooted
in fundamental principles of Islam.24 The compliance with these principles that are
articulated in the Sharia must be maintained throughout the lifecycle of the transaction.25
In addition to the Sharia-compliance, Islamic finance must offer financial products
that are compliant with the requirements of operations in global financial markets.26 The
best description of this task was perhaps given by ElWaleed M. Ahmed, a legal consultant
in Kuwait, when he compared Islamic finance to conventional finance: ‘Conventional
finance bows to one master, “profit”. Islamic finance however, has two masters, “profit’”
as well as “Sharia’a principles”. In parallel with the ancient Latin saying “Nemo potest
duobus dominis servire”27, obedience to two masters is no easy task.28
Result of attempting to please two masters simultaneously can result in unique
challenges not only for capital adequacy, corporate governance, risk management,
transparency and disclosure, but also for dispute resolution.29 Notwithstanding
the fact that compliance to Islamic principles is verified upfront by Sharia boards,
problems may still occur, as in any dispute resolution process.30
In order to preserve Sharia-compliance and the Islamic component of the financial
transaction Islamic finance dispute resolution must resort to Sharia.31 Though secular
22 ICC Commission on Arbitration and ADR Task Force, Report of the ICC Commission on Arbitration and ADR Task
Force on Financial Institutions and International Arbitration (International Chamber of Commerce March 2018) para
108 <https://cdn.iccwbo.org/content/uploads/sites/3/2016/11/icc-financial-institutions-and-international-arbitration-icc-
arbitration-adr-commission-report.pdf> accessed 4 October 2018.
23 ibid; Al-Ramahi (n 10) 1.
24 Abdelkader Chachi, ‘Origin and development of commercial and Islamic banking operations’ (2005) 18(2) Journal of King
Abdulaziz University 3, 4; Ahmad Alhabri, ‘Development of Islamic Finance in Europe and North America: Opportunities
and Challenges’ (2016) 2(3) International Journal of Islamic Economics and Finance Studies 109, 110; Mabid Ali Al-Jarhi,
‘An economic theory of Islamic finance’ (2017) 9(2) ISRA International Journal of Islamic Finance 117, 117.
25 ICC Commission on Arbitration and ADR Task Force (n 23) para 109.
26 ibid para 110.
27 Book of Matthew 6:24.
28 ElWaleed M. Ahmed, ‘Challenges facing sector’s growth; Global Islamic finance’ Arab Times (Kuwait, 17 April 2007)
<https://sudaneseonline.com/cgi-bin/sdb/2bb.cgi?seq=msg&board=100&msg=1176828078&rn=1> accessed 4 October
2018; Aida Maita, ‘Arbitration of Islamic Financial Disputes’ (2014) 20(1) Annual Survey of International and Comparative
Law 35, 63-64.
29 ICC Commission on Arbitration and ADR Task Force (n 23) para 110.
30 ibid.
31 Camille Paldi, ‘The Dubai World Islamic Finance Arbitration Center and the Dubai World Islamic Finance Arbitration
Center Jurisprudence Office as the Dispute Resolution Center and Mechanism for the Islamic Finance Industry: Issues
and a Proposed Framework’ (Submitted as partial fulfillment of the requirements of the degree of MA in Islamic Finance,
Durham University 2013) 7.
Public and Private Internaonal Law Bullen
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dispute resolution is also a choice for Islamic finance transactions,32 this paper focuses
on the disputes where the parties agree on resolving their issues in compliance with
the Islamic principles.
A. The Common Practice: English Litigation
With the globalization of the industry, disputes amongst international entities
arising out of Sharia-compliant agreements have become more commonplace.33 This
has brought one unwanted side effect: The emergence of Islamic finance litigation.
As Bälz states “Once Islamic finance was no longer confined to a small like-minded
community, borrowers defaulted and banks sued and enforced”.34
English law is the preferred legal jurisdiction in most Islamic finance agreements,
especially those involving cross-border transactions.35 Moreover, the transaction
documents including the declaration of trust are also subject to the decision of the
English judges indicating that the courts of England have exclusive jurisdiction to
settle any Islamic finance disputes under such arrangements.36
Since Investment Company of The Gulf v Symphony Gems37 the first case pertaining
to this field in the UK courts was decided on 13 February 2002, the English judges
ruled on landmark Islamic finance cases.
1. The Issues Arising in UK Courts
Perhaps the most ground-breaking decision of the English courts related to Islamic
finance was the case Shamil Bank of Bahrain EC v. Beximco Pharmaceuticals Ltd.
and the Others.38
32 In this case, the parties to an Islamic finance transaction provide in their agreement that any dispute will be referred to
arbitration, however they require the arbitrators to apply only the selected law to the exclusion of sharia. Such a dispute
resolution clause may even contain a “waiver of Shariah defense” which means that the parties are agree to waive any
claim that the agreement is invalid under Islamic law in case of a dispute. In 2010, ISDA and the International Islamic
Financial Market (IIFM) endorsed the secular arbitration option following the launch of ISDA/IIFM Tahawwut (Hedging)
Master Agreement. Section 13(c) of the agreement offers the parties the option of choosing ICC arbitration with London
or New York as the seat, and English or New York law as the governing law. Also, in order not to cause any doubts section
1(d) particularly notes that the governing law does not include Sharia; ICC Commission on Arbitration and ADR Task
Force (n 23) paras 121-122.
33 Maita (n 29) 40.
34 Kilian Bälz, How Islamic Finance Has Transformed Islamic Contract Law (Islamic Legal Studies Program Harvard Law
School 2009), 21.
35 Michael Ainley and others, ‘Islamic Finance in the UK: Regulation and Challenges, Financial Services Authority’ (2007),
17 <https://www.isfin.net/sites/isfin.com/files/islamic_finance_in_the_uk.pdf> accessed 4 October 2018; Kilian Bälz,
How Islamic Finance Has Transformed Islamic Contract Law (n 35) 13; ‘Special report on Islamic finance’ Financial
Times, (London 1 July 2010); Paldi (n 32) 7.
36 Zulkifli Hasan and Mehmet Asutay, ‘An Analysis of the Courts’ Decisions on Islamic Finance Disputes’, (2011) 3(2) ISRA
International Journal of Islamic Finance 41, 54.
37 Investment Company Of The Gulf (Bahamas) Limited v Symphony Gems N.V. and Ors [2002] West Law 346969, QBD
(Comm. Ct.).
38 Beximco Pharmaceuticals Ltd. v. Shamil Bank of Bahrain, [2004] EWCA Civ.
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In the case, Beximco and the other borrowers entered into a murabaha39 agreement
in 1995 resulting in the acquisition of nearly forty-seven million US dollars in assets
with the plaintiff, Shamil Bank of Bahrain.40 The agreement included a choice of law
clause stating that “Subject to the principles of the Glorious Sharia’a, this agreement
shall be governed by and construed in accordance with the laws of England”.41 The
plaintiff brought the case to the English court and made an application for summary
judgment claiming the amount outstanding under the agreement, following the
default of Beximco and after numerous termination events under the agreements. On
the other hand, Beximco objected and claimed that the agreement was unenforceable
due to Sharia non-compliance as it contained a hidden form of riba.42
Interpreting the governing law clause, the English court found the provision
“Subject to the principles of the Glorious Sharia’a” to be inadequate for the purpose
of incorporating the Islamic law principles into the agreement, and thus, the English
law, rather than Sharia, governed the transaction.43 The judge, Morison J, declined to
apply Sharia law to the substance of the dispute for the following reasons.
First, since the Article 3(1) of the Rome Convention on the Law Applicable to
Contractual Obligations (Rome Convention) 198044, which had the force of law in the
United Kingdom, states that “a contract shall be governed by the law chosen by the
parties” the judge held that it would be non-justiciable, and therefore impossible for
contracts, to be subject to two separate systems of law.45 Moreover, the wording of the
Article 1(1) of the Convention which contemplates that “the rules of this Convention
shall apply to contractual obligations in any situation involving a choice between the
laws of different countries” and the reference to choice of a “foreign law” in Article 3(3)
make it clear that the Convention as a whole only contemplates and sanctions the choice
39 Murabaha is a type of contract frequently used in Islamic transactions. Instead of lending money at interest to a client
wishing to purchase goods in return for the grant of a security interest on those goods, the bank first buys the goods
itself and subsequently sells them to the client with the addition of a pre-agreed profit. That is why it is also known
as the “cost-plus-profit” contract. From the Sharia-compliance point of view, the bank must acquire ownership of the
asset together with the temporary risks of ownership Jason CT Chuah, ‘Islamic Principles Governing International Trade
Financing Instruments: A Study of the Morabaha in English Law’, (2006), 27(1) Northwestern Journal of International
Law & Business 137, 140; For the concepts riba and murabaha see, Kilian Bälz, ‘Islamic Law as Governing Law under
the Rome Convention Universalist Lex Mercatoria v. Regional Unification of Law’ (2001) 6(1) Uniform Law Review 37,
38ff.
40 Beximco Pharmaceuticals Ltd. v. Shamil Bank of Bahrain, [2004] EWCA Civ [55ff].
41 Beximco Pharmaceuticals Ltd. v. Shamil Bank of Bahrain, [2004] EWCA Civ [54].
42 Riba roughly corresponds to unlawful gain which Islamic finance transactions are designed to avoid. Although there is
no universally agreed definition for the term, the nature of riba is clearly prohibited by the Qur’an. There is a general
agreement among jurists that interest constitutes riba, however interest and riba are not the same since the ambit of riba
is considerably wider than that of interest. Sale is permitted, though. In this context, a well-known verse (2:275) of the
Qur’an is frequently quoted: ‘They said that sale is like riba whereas Allah has allowed sale and has banned riba’. Nicholas
HD Foster, ‘Encounters between legal systems: recent cases concerning Islamic commercial law in secular courts’ (2006)
(68) Amicus Curiae 2, 3; Fazlur Rahman, ‘Riba and Interest’ (1964) 3(1) Islamic Studies 1, 2ff; Hasan and Asutay (n 37)
56.
43 Chuah (n 40) 141; ICC Commission on Arbitration and ADR Task Force (n 23) para 111.
44 80/934/EEC: Convention on the law applicable to contractual obligations [1980] OJ L 266/1.
45 Beximco Pharmaceuticals Ltd. v. Shamil Bank of Bahrain, [2004] EWCA Civ [48].
Public and Private Internaonal Law Bullen
302
of the law of a country. Morison J, concluded that there was no provision allowing the
choice or application of a non-national system of rules such as Sharia.46 Furthermore, in
any event, the principles of the Sharia were not simply principles of law but principles
which applied to other aspects of life and behaviour.47 In the Judge’s opinion, even
treating the principles of Sharia as principles of law, the application of such principles
in matters of commerce and banking were plainly matters of controversy. In particular,
there was controversy as to the strictness with which principles of Islamic law will be
interpreted or applied.48 Consequently, the Judge found it highly improbable that the
intention of the parties to the agreement was the determination of an English court
for any dispute concerning the nature or application of such controversial religious
principles which would involve it in the task of choosing between contrasting views
which themselves might be based on geopolitical and particular religious beliefs.49
Dismissing the arguments put forward by the defendants, the High Court dismissed
granted summary judgment in favour of the plaintiff.
The ruling was upheld by the Court of Appeal, which confirmed Morison J in his
conclusion, broadly for the reasons which he gave.50 Although Lord Justice Potter
recognized the definition of Sharia law made by the defendants’ expert,51 he noted
that in his point of view Sharia law was more of a religion than law, and could not
be valid for the banking and finance transactions in the UK.52 For the Court, the
reference to the Glorious Sharia in the choice of law clause was merely a result of the
intention to reflect the plaintiff’s nature of business rather than replacing the English
law as the governing law.53
“[…] the words [of the provision] are intended simply to reflect the Islamic religious principles
according to which the Bank holds itself out as doing business rather than a system of law
intended to “trump” the application of English law as the law to be applied in ascertaining the
liability of the parties under the terms of the agreement”.54
There are a couple of points that are worth highlighting in the judgment of the
English courts. First, despite the appellant’s argument that the reference to Shariah
should be treated as an inclusion of the lex mercatoria of Islamic finance and that the
46 Beximco Pharmaceuticals Ltd. v. Shamil Bank of Bahrain, [2004] EWCA Civ [39] [48] [51].
47 Beximco Pharmaceuticals Ltd. v. Shamil Bank of Bahrain, [2004] EWCA Civ [53].
48 Beximco Pharmaceuticals Ltd. v. Shamil Bank of Bahrain, [2004] EWCA Civ [49]-[53].
49 Beximco Pharmaceuticals Ltd. v. Shamil Bank of Bahrain, [2004] EWCA Civ [49]-[54].
50 Beximco Pharmaceuticals Ltd. v Shamil Bank of Bahrain EC [2004] APP.L.R. 01/28 [61]-[63].
51 “...the law laid down by the Qu’ran, which is the Holy Book of Islam and the Sunnah (the sayings, teachings and actions
of Prophet Mohammad (pbuh). These are the principal sources of the Shari’ah. The Sunnah is the most important source
of the Islamic faith after the Qu’ran and refers essentially to the Prophet’s example as indicated by the practice of the faith.
The only way to know the Sunnah is through the collection of hadith, which consist of reports about the sayings, deeds,
and reactions of the Prophet.”’ Beximco Pharmaceuticals Ltd. v Shamil Bank of Bahrain EC [2004] APP.L.R. 01/28, [2].
52 Beximco Pharmaceuticals Ltd. v Shamil Bank of Bahrain EC [2004] APP.L.R. 01/28, [40].
53 Beximco Pharmaceuticals Ltd. v Shamil Bank of Bahrain EC [2004] APP.L.R. 01/28, [41].
54 Beximco Pharmaceuticals Ltd. v Shamil Bank of Bahrain EC [2004] APP.L.R. 01/28, [54].
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appellate court should apply those principles which relate to murabaha contracts, the
use of a combined-law clause was rejected by the court taking into account the principle
that a contract cannot be governed by two systems of law and the wording in the Rome
Convention stating that a “contract shall be governed by the law chosen by the parties”.
Second, for the court, the reference to Sharia in the governing law clause of the contract
was nothing more than a statement of intent reflecting the nature of the business, and
thus, non-binding. Third, under the Rome Convention 1980 only the choice of state laws
is contemplated, not of a non-state legal system such as Sharia. Fourth, the reference
was ambiguous since the parties did not clearly state which specific principles were to
applied; and finally, even though Muslim scholars have diversifying views as to the
application of Sharia, it was quite improbable that the parties desire was to confer the
decision on the principles of Islamic law to a secular UK court.
Although, since then the Rome Convention has been replaced by Regulation (EC)
No. 593/2008 of the European Parliament and the Council of 17 June 2008 on the
Law Applicable to Contractual Obligations (Rome I)55 and the correlating articles
in Rome I have been revised, the doubts still remain as to the future of governing
law clauses in Islamic financial contracts involving Islamic principles in English
litigation.56
The following wording of an early draft resolution contemplates the application of
a non-state law, so long as it is precise enough
“To further boost the impact of the parties’ will, a key principle of the Convention, [draft
Article 3] paragraph 2 authorizes the parties to choose as the applicable law a non-State body
of law. The form of words used would authorize the choice of the UNIDROIT principles, the
Principles of European Contract Law or a possible future optional Community instrument,
while excluding the lex mercatoria, which is not precise enough, or private codifications
not adequately recognized by the international community. Like Article 7(2) of the Vienna
Convention on the international sale of goods, the text shows what action should be taken
when certain aspects of the law of contract are not expressly settled by the relevant body of
non-State law”.57
Furthermore, draft Article 3, paragraph 2 reads as follows
“The parties may also choose as the applicable law the principles and rules of the substantive
law of contract recognized internationally or in the Community. However, questions relating
to matters governed by such principles or rules which are not expressly settled by them
55 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to
contractual obligations (Rome I) [2008] OJ L 177/6.
56 On the contrary, see Abdullah Abdul Rahman, ‘Shariah as the governing law of Islamic finance contracts in the UK:
The impact of Rome I Regulation and the position in arbitration’ (Young ICCA Blog, 24 November 2014) <http://
www.youngicca-blog.com/shariah-as-the-governing-law-of-islamic-finance-contracts-in-the-uk-the-impact-of-rome-i-
regulation-and-the-position-in-arbitration/> accessed 4 October 2018.
57 Proposal for a Regulation of the European Parliament and the Council on the Law Applicable to Contractual Obligations
(Rome I) Brussels, 15.12.2005 COM(2005) 650 final 2005/0261 (COD), 5.
Public and Private Internaonal Law Bullen
304
shall be governed by the general principles underlying them or, failing such principles, in
accordance with the law applicable in the absence of a choice under this Regulation”.58
Similar to the wording of the draft resolution, the final session of regulation
explicitly offers parties the means to incorporate non-state law or international
standards by reference into their contract. Recital 13 of the preamble to Roma I
provides that the regulation does not preclude parties from incorporating by reference
into their contract a non-state body of law or an international convention.59
However, even if the same issue had to be decided in accordance with the new
wording, commentators mention that the problems of certainty and the impossibility
of such a combined-law clause would persist.60 Despite the fact that the reference
to the “laws of different countries” does no longer exist in Article 1(1), the wording
of Article 3(3) of Rome I is still open for the same reasoning in Shamil Bank, as it
currently provides as follows61
Where all other elements relevant to the situation at the time of the choice are located in a
country other than the country whose law has been chosen, the choice of the parties shall
not prejudice the application of provisions of the law of that other country which cannot be
derogated from by agreement.
Furthermore, Article 3(1) remains the same and still provides that “a contract shall
be governed by the law chosen by the parties”. Should the reasoning of the court in
Shamil Bank is followed, in accordance with the rule stipulating that only one system
of law may govern a contract, combined clauses that refer to a national law subject
to the principles of Islamic finance will not be available for the parties since they
will be seen as in tension with the continued use of the singular form of “law”.62 In
conclusion, the revision of Rome Convention did not solve the problems convincing
an English court that the Sharia is a body that can be incorporated into the agreements
as applicable law.63
The Court’s approach in Shamil Bank v. Beximco established the English courts’
precedent on governing law in Islamic finance cases, and was followed by subsequent
cases such as Dar v. Blom64 which was rendered in 2009 concerning a different type
of Islamic finance contract.65
58 Proposal for a Regulation of the European Parliament and the Council on the Law Applicable to Contractual Obligations
(Rome I) Brussels, 15.12.2005 COM(2005) 650 final 2005/0261 (COD), 15.
59 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to
contractual obligations (Rome I) [2008] OJ L 177/6, Recital 13; Jonathan Ercanbrack, The Transformation of Islamic Law
in Global Financial Markets, (Cambridge University Press 2015), 230.
60 Foster (n 43) 3.
61 Julio C. Colón, ‘Choice of Law and Islamic Finance’ (2011) 46 Texas International Law Journal 411, 425.
62 ibid 425ff.
63 Ercanbrack (n 60) 230-231.
64 The Investment Dar Co KSSC v Bloom Developments Bank Sal [2009] All ER (D) 145.
65 Maita (n 29) 40; Hasan and Asutay (n 37) 58.
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The current practice of choosing English law as the governing law is criticized by
scholars. It is proposed that the choice of parties to be adjudicated in a non-Islamic
jurisdiction by a non-Islamic court is a sign that due recognition is not given to the
validity and the principles of Islamic law.66 Since it is up to the common law judges to
make the final interpretation and determine the governing law and how it is applied,
regardless of the way in which the contract is drafted, there is no guarantee for the
preservation of the Islamicity of the agreement.67 Also, the possibility that the refusal
of the application of Sharia by English courts may turn an Islamic finance transaction
into a conventional dispute based on English law and make it possible to enforce
it even if the contract is deemed as being non-compliant with the Sharia, is seen as
“detrimental to the survival of the Islamic finance industry” since this will have a
negative impact on the industry’s growth by putting to inconvenience its customers
who become increasingly sceptical about the compliance of their contracts with
Sharia.68
Furthermore, the civil court judges have been facing slings and arrows because
of their alleged lack of knowledge regarding Islamic law.69 For instance, Al-Shibli
noted that since the experience of civil court judges is very limited in field of Islamic
banking as they rarely study Sharia law or Islamic finance at university or even at
judicial institutions, they generally need to rely on other experts who have knowledge
of the transactions of Islamic banks.70 This was underlined by Justice Suriyadi in the
case of Arab Malaysian Merchant Bank v Silver Concept71 where he observed that
“in the event any litigation is commenced, it must be appreciated that not every presiding
judge is a Muslim, and even if so, may not be sufficiently equipped to deal with the matters,
which ulamaks [Islamic scholars] take years to comprehend”.
B. The Wise Choice of Arbitration
While the industry historically has preferred litigation over alternative dispute
resolution mechanisms, and non-Islamic jurisdictions to decide on disputes, there
have been calls by legal and financial experts for those who want to settle their
disputes in accordance with Sharia to refer their disputes to ADR methods, especially
arbitration, and provide custom arbitration clauses, procedures and practices more in
66 ibid 63.
67 Paldi (n 32) 8.
68 Hasan and Asutay (n 37) 63; Paldi (n 32) 6; ICC Commission on Arbitration and ADR Task Force (n 23) para 118.
69 See Kamilah Wati binti Mohd and others, ‘Sustainability of Islamic Finance Industry: Arbitration as Forum for Dispute
Resolution’, 2014 (5) Shariah and Law Discourse 58; Umar A Oseni, ‘Dispute Resolution in Islamic Banking and Finance:
Current Trends and Future Perspectives’ (International Conference on Islamic Financial Services: Emerging Opportunities
for Law/Economic Reforms of the Developing Nations, Saudi Arabia 6-8 October 2009); Olayemi and Al-Zabyani (n 16)
1; Maita (n 29); Hasan and Asutay, (n 37); Paldi (n 32).
70 Al-Shibli (n 20) 223.
71 Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2005] 5 MLJ 210.
Public and Private Internaonal Law Bullen
306
line with Sharia Law.72 With regard to the criticism mentioned above, arbitration may
provide a more beneficial way of dispute settlement in various aspects for Islamic
finance disputes.
First of all, compared to other areas, one big particularity of Islamic financial
dispute resolution is the uniqueness of choice of law clauses. In theory, the parties
willing to resolve such disputes by means of Shariah-compliant ways have three
options as to the governing law:
The contract may be:
(1) subject exclusively to Islamic law by means of a complete denationalization;
(2) subject exclusively to a national Islamic legal system, whether or not said system be
based on Sharia law; or
3) subject to a combined system which uses Islamic principles to limit the application of a
national law.73
Although the applicable law in classical Islamic law can only be the Sharia
without any exception, with Khouldi’s definition, “un assouplissement considérable
(a considerable relaxation)” has occurred in the concept of Islamic finance.74 Most
arbitration in Islamic finance is governed by combined-law clauses that subject national
laws to the principles of Islamic law. In other words, rather than denationalizing their
contract in a very straightforward way by asking to abandon the law of a particular
country and submitting the contract directly to Islamic law, parties in Islamic financial
transactions predominantly put their confidence in national laws -such as those of the
United Kingdom- to the extent that they do not contradict the rules of Sharia.75 As
the Standart 32 Article 9/4 of the Accounting and Auditing Organisation for Islamic
Financial Institutions (AAOIFI) mentions “if the arbitrator is obliged to apply a certain
law, he should still not violate the rulings of Shari’ah”. This results in governing law
clauses such as the following: “This dispute shall be governed by the Laws of (state
name) except to the extent it may conflict with Islamic Sharia, which shall prevail.”76
At this point the very important question arises: is it possible for the parties of an
arbitration to select non-national rules, namely Sharia as the governing law alongside
the national law that they choose?
Regarding the applicability of Sharia as the governing law, some cases from mid-
1900’s demonstrate that arbitrators refused the idea that Islamic law was sophisticated
72 “This is similar to what has been established for arbitration of other industries such as Intellectual Property, Construction
and Sports, and many others.” Maita (n 29) 36.
73 Colón (n 62) 431.
74 Khouildi (n 5) 55.
75 Colón (n 62) 431.
76 Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) Sharia Standarts, <http://aaoifi.com/
shariaa-standards/?lang=en> accessed 4 October 2018.
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enough to be applied in complex commercial disputes. In year 1952, for instance,
Lord Asquith acted as the arbitrator in the case Petroleum Development Ltd. v. Sheikh
of Abu Dhabi77 which related to a dispute arising out of a contract executed in Abu
Dhabi. Notwithstanding the fact that he acknowledged that the applicable law was that
of Abu Dhabi’s, which was based on Islamic law, Lord Asquith subsequently went to
undermine the validity of the latter on the grounds that, according to him, “it would
be fanciful to suggest that in this very primitive region there is any settled body of
legal principles applicable to the construction of modern commercial instruments.”78
After describing the Sheikh of Abu Dhabi as an absolute monarch who controls a
“purely discretionary form of justice with some assistance from the Koran”79 the
arbitrator relied on principles of English law instead of applying Abu Dhabi law to
the dispute.
Four years later, the arbitrator in the case Ruler of Qatar v. International Marine
Oil Co. Ltd.80 arrived at a very similar conclusion with a parallel reasoning. After
acknowledging that Islamic law was the proper law, the arbitrator made a clear statement
as to his belief concerning the inadequacy of Islamic law.81 For him Islamic Law did not
“contain any principles which would be sufficient to interpret this particular contract.”82
Colón mentions that the arbitrators’ opinions in both cases confined to very general
statements that disdain the ability of Islamic law, rather than putting forward a particular
principle due to which they came to the decision not to apply it.83
In another case named State of Saudi Arabia v. Arabian American Oil Co.84, Aristotle
Socrates Onassis, a leading shipping tycoon of the era, concluded a contract with the
Saudi Arabian Government and given a quasi-monopoly to transport oil from out
of the country. This was protested by Arabian American Oil Company (ARAMCO)
claiming that in light of its concession agreement made on May 29, 1933 it had
the right to choose its own method of transporting oil. Despite acknowledging the
applicability of Saudi Arabian law due to existence of the clear mandate, during the
arbitration proceedings in Geneva, the arbitrator decided that the rights of ARAMCO
could not be “secured in an unquestionable manner by the law in force in Saudi
Arabia ... [and that Saudi laws] must be interpreted or supplemented by the general
principles of law, by the custom and practice in the oil business and by notions of
pure jurisprudence.”85
77 Sheikh Abu Dhabi v Petroleum Development Ltd. [1952] ICLQ 247.
78 Sheikh Abu Dhabi v Petroleum Development Ltd. [1952] ICLQ 247.
79 Sheikh Abu Dhabi v Petroleum Development Ltd. [1952] ICLQ 251.
80 Ruler of Qatar v. International Marine Oil Co. Ltd. (1956) 20 Int L Rep 534.
81 Colón (n 62) 414.
82 Ruler of Qatar v. International Marine Oil Co. Ltd. (1953) 20 ILR 534.
83 Colón (n 62) 414.
84 State of Saudi Arabia v. Arabian American Oil Co. (1963) 27 Int L Rep 117.
85 Saudi Arabia v. Arabian American Oil Co. (ARAMCO) (1963) 27 ILR 117,169.
Public and Private Internaonal Law Bullen
308
Despite the fact that “the landscape was clouded”86 by these three mid-1900s
awards questioning the ability of Islamic law, it is worth mentioning that today, it
is not that easy to prove that the cloud-break has not even begun. Although there
might be variations amongst different schools of Sharia and differences from
jurisdiction to jurisdiction due to the fact that some states are relatively more open
to Western influences, Islamic law, traditions, and language give these states a
common heritage.87 Similar to international commerce, Islamic banking has also
established certain unified standards. For instance, a Model Islamic Banking Act
with the goal of setting forth unified rules for Islamic finance was established by
the International Association of Islamic Banks.88 As Bälz states, “notwithstanding
manifold divergences on individual points, there exists a set of general rules and
principles which may serve as a basis for an arbitral decision”.89
Contrary to the above mentioned cases, Islamic Law, especially with a combined
system that pairs a national legal system with Islamic principles, may work like a
charm in arbitration to resolve financial disputes in accordance with the parties’ wish
to comply with Sharia. Juxtaposing the outcome of the case Sanghi Polyester Ltd.
V International Investor KCSC90 serves to highlight the ability of such a clause in
resolving finance disputes in accordance with Sharia, contrary to the limitations in
the applicability of Islamic law in English courts.91
The case pertained to an istisna’a financing arrangement92, arbitration was the
dispute resolution mechanism of choice, the place of arbitration was London, and
applicable substantive law was provided as follows in the contract “This dispute shall
be governed by the Laws of England except to the extent it may conflict with Islamic
Shariʿah,whichshallprevail”.93
Gave effect to the parties’ will, the arbitrator, who was an expert in Islamic law
86 İbrahimFadlallah,‘ArbitrationFacingConflictsofCulture-The2008AnnualSchoolofInternationalArbitrationLecture
sponsored by Freshfields Bruckhaus Deringer LLP’ (2009) 25(3) Arbitration International 303, 305; Nigel Blackaby and
others, Redfern & Hunter on International Commercial Arbitration (6th edn Oxford University Press 2015) 215.
87 Ibid, 215.
88 Bälz, ‘Islamic Law as Governing Law under the Rome Convention Universalist Lex Mercatoria v. Regional Unification of
Law’ (n 40) 44.
89 ibid 44. Bälz also notes that, in contrast to the ambiguous and disputed character of the lex mercatoria, it is hard to deny
that the provisions of the Islamic Sharia constitute law.
90 Sanghi Polyesters Ltd. (India) v The International Investor KCSC (Kuwait) [2001] C.L.C.
91 Aisha Nadar, ‘Islamic Finance and Dispute Resolution: Part 1’ (2009) (23) Arab Law Quarterly 1, 4.
92 Istisna’a is a contract whereby a party agrees to produce specific goods and services, made in accordance with certain
agreed-upon specifications at a determined price and for a fixed delivery date. This undertaking of production includes
any process of manufacturing, construction, assembling or packaging. Since the work in Istisna’a is not conditioned
to be accomplished by the undertaking party alone, the work or part of it can be done by others under his control and
responsibility. Contrary to murabaha which is an order to buy goods or commodities which are in existence in hand or
possible to be found in the market, Istisna’a is a contract where the deal can be referred to something not in existence
at the time of concluding the contract; Abdul Rashid Khairuddin, ‘Shari’ah Compliant Contract: A New Paradigm in
Multi-National Joint Venture for Construction Works’ in Kiyoshi Kobayashi (ed), Joint Ventures in Construction, (ICE
Publishing, 2009) 103, 112.
93 Sanghi Polyesters Ltd. (India) v The International Investor KCSC (Kuwait) [2001] C.L.C., p. 750.
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issued a monetary award of both principal and profit, however did not allow claims
for additional damages since although such claims were in compliance with English
law, they would have been in conflict with Sharia principles.94
Furthermore, in the realm of arbitration, the scope of party autonomy is often
broader when it comes to the parties’ ability to choose non-state law to govern
their contract.95 In other words the choice of non-state law is widely accepted.
This possibility is expressly recognized in numerous state arbitration laws and
most arbitration rules adopted by international bodies such as the United Nations
Commission on International Trade Law (UNCITRAL) or outstanding arbitral
institutions such as the International Chamber of Commerce (ICC) or the American
Arbitration Association (AAA).96
Providing that “the arbitral tribunal shall decide the dispute in accordance with
such rules of law as are chosen by the parties as applicable to the substance of the
dispute”, the article 28(1) of the UNCITRAL Model Law, for instance, speaks of the
choice of “rules of law” rathen than using the single word “law”.97 From this it may
be concluded that the parties’ autonomy as to the choice of law is not restricted to a
certain national legal order. Instead, a body of non-national rules or principles such as
provisions of an international convention or even the provisions of an old version of
an international document may also be determined as the proper law of the contract.98
However, one should keep in mind that even though the scope of party autonomy
is often broader in arbitration, the validity of the choice of non-state law depends on
the law to which the arbitration is subject. This means that if the relevant provision
refers to the parties’ ability to designate “law” to govern their contract rather than
using the expression “rules of law” the parties will not be able to benefit from the
choice of non-national set of rules.99
A brief look at different state laws may be useful to understand the varying
positions of different jurisdictions towards the choice of non-national rules.
For instance, Article 46 of the Arbitration Act 1996 which regulates arbitration
proceedings within the jurisdiction of England and Wales and Northern Ireland states that
94 Sanghi Polyesters Ltd. (India) v The International Investor KCSC (Kuwait) [2001] C.L.C., p. 749; ICC Commission on
Arbitration and ADR Task Force (n 23) para 114.
95 NurayEkşi,Roma Konvansiyonu(LegalYayıncılık2004)97.
96 Doug Jones, ‘Choosing the Law or Rules of Law to Govern the Substantive Rights of the Parties’ (2014) 26 Singapore
Academy of Law Journal 911, 916-917.
97 UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006. Available
at: <http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/2010Arbitration_rules.html>
98 Sibel Özel, Milletlerarası Ticari Tahkimde Kanunlar İhtilafı Meseleleri,(LegalYayıncılık2008)124;İrfanSönmez and
GencayKarakaya,‘Milletlerarası TahkimdeEsasaUygulanacakHukuk’(2015)23Selcuk UniversitesiHukuk Fakultesi
Dergisi 203, 216.
99 Özel (n 99) 125.
Public and Private Internaonal Law Bullen
310
“the arbitral tribunal shall decide the dispute in accordance with the law chosen by the
parties as applicable to the substance of the dispute, or if the parties so agree, in accordance
with such other considerations as are agreed by them or determined by the tribunal.” As
mentioned above, by using of the word “law”, Arbitration Act 1996 empowers the parties
to choose non-national rules as applicable to the substance of dispute.100
In this regard, the applicability of Sharia in the field of arbitration as a non-
national set of rules in the UK was confirmed by the High Court of Justice in the
case of Musawi v R E International Ltd. and others101 where an Iraqi citizen and an
Iranian family concluded a series of agreements to jointly acquire, develop and own
a land adjoining the Wembley Stadium in London. Due to disagreements as to their
respective rights, case became subject to arbitration and all relevant agreements were
governed by Shia Sharia law. An Ayatollah (a religious leader among Shiite Muslims)
was hired as arbitrator and “Islamic legal judge”.102 At the enforcement process of the
award issued in favour of the Iraqi party, High Court made it clear that the Article
46 of the UK 1996 Arbitration Act “allows parties the freedom to apply a set of
rules or principles which do not in themselves constitute a legal system”103 and that
“such a choice may include a non-national set of legal principles (such as the 1994
UNIDROIT Principles of International Commercial Contracts) or, more broadly,
general principles of commercial law or the lex mercatoria.”104 Consequently, the
Court affirmed that the arbitration agreement validly chose Shia Sharia law as the
proper law and ruled in favour of the enforcement of the award.
In parallel with the Arbitration Act 1996, the Turkish International Arbitration Law
(MilletlerarasıTahkimKanunu) alsoallows theuse ofnon-national set ofrules by
stating that “the arbitral tribunal shall decide the dispute in accordance with such rules
of law as are chosen by the parties as applicable to the substance of the dispute.”105 To
cite another example, the Decree No. 2011-48 of France reforming the law governing
arbitration mentions in its Article 1511 that the arbitral tribunal shall decide the dispute
in accordance with the “rules of law” chosen by the parties. The parties are able to
choose non-national rules as well as general principles of law or lex mercatoria.106
On the other hand, in addition to the existence of jurisdictions that only grant
the parties the opportunity to choose national laws by solely using the word “law”
100 ibid.
101 Musawi v RE International (UK) Ltd. [2007] APP.L.R. 12/14
102 Musawi v RE International (UK) Ltd. [2007] APP.L.R. 12/14 [74].
103 Musawi v RE International (UK) Ltd. [2007] APP.L.R. 12/14 [22].
104 Musawi v RE International (UK) Ltd. [2007] APP.L.R. 12/14 [22].
105 See also, Ziya Akıncı, Milletlerarası Tahkim(4th edn VedatYayıncılık 2016) 229ff;Armağan Ebru Bozkurt Yüksel,
‘UNCITRALve UNCITRALModel Kanunu’na Genel BirBakış’(2011)2(4) TürkiyeAdaletAkademisiDergisi, 135,
160.
106 For a detailed catalogue of arbitration laws of different jurisdictions see, Jones (n 97) 932ff; See also, Koray Güven, ‘Lex
MercatoriaveMilletlerarasıTahkim’34(2)PublicandPrivateInternationalLawBulletin,1,1ff.
Özdem / The Path of Eastern Arbitraon to Take Islamic Finance Disputes from the Hands of English Ligaon
311
instead of “rules of law” in their pertinent laws (such as Sweden)107, it is also possible
that the adoption of Rome Convention may result in discussions related to the proper
law at a certain jurisdiction, notwithstanding the existence of a provision providing
that the tribunal shall decide the dispute in accordance with the rules of law chosen
by the parties.
For instance, the choice of non-national rules is permitted under the Article 1051(1)
of the German Zivilprozessordnung (ZPO) which uses the expression “rules of law”.
The parties may designate the Convention on International Sales of Goods (GISG) or
UNIDROIT principles as the applicable law. However, since the Rome Convention
is based on national law while the UNCITRAL Model Law allows the choice of non-
state law, Özel notes that different opinions are put forward in the German doctrine
related to the scope of party autonomy in the context of the governing law.108
Moreover, where an arbitral tribunal may be entitled to rule ex aequo et bono
as opposed to rules of law, a maiore ad minus, an arbitral tribunal may also base
its decision on a set of general principles such as the lex mercatoria.109 Bälz claims
that this argument likewise applies to the case in which the parties have chosen the
principles of the Islamic Sharia rather than some set of predominantly Europe-based
legal principles such as the lex mercatoria.110 Similarly, according to Yücel111, there
is nothing preventing an arbitral tribunal from applying Sharia as the proper law of
the dispute in a situation where the parties have expressly authorized the tribunal to
rule ex aequo et bono.
Therefore, notwithstanding the existence of some jurisdictions that evidently
confine the choice of applicable law to state laws, preferring arbitration to English
litigation and choosing the right seat may serve to the parties of Islamic finance
disputes as a better method in the concept of applicability of the principles of Sharia
by means of a combined clause.112
107 See, Özel (n 99) 125ff.
108 Özel(n99)126;Seealso,HaticeÖzdemirKocasakal,‘SözleşmelereUygulanacakHukukunMÖHUKm.24Çerçevesinde
TespitiveçüncüDevletinDoğrudanUygulananKuralları’33(1)PublicandPrivateInternationalLawBulletin27,38ff;
SeeİnciAtamanFiganmeşe,‘MilletlerarasıTicariTahkimileYatırımTahkimiArasındakiFarklar’(2010)30(1-2)Public
and Private International Law Bulletin 91, 117; Burcu Yüksel, ‘The Relevance of the Rome I Regulation to International
Commercial Arbitration in the European Union’ (2011) 7(1) 149, 157ff; Paul Lagarde, ‘Le nouveau droit international
privé des contrats après l’entrée en vigueur de la Convention de Rome du 19 juin 1980’ (1991) 2 Revue Critique de Droit
InternationalPrivé287,301;DavorBabić,D‘RomeIRegulation:bindingauthorityforarbitraltribunalsintheEuropean
Union?’(2017)13(1) Journal of PrivateInternationalLaw,70,79ff.;AJ Bělohlávek, ‘LawApplicable to theMeritsof
International Arbitration and Current Developments in European Private International Law: Conflict of laws rules and
applicability of the Rome Convention, Rome I Regulation and other EU law standards in international arbitration’ (2010)
Czech Yearbook of International Law 25, 40.
109 Bälz, ‘Islamic Law as Governing Law under the Rome Convention Universalist Lex Mercatoria v. Regional Unification of
Law’(n40)44;See,ZeynepÖzgenç,‘MilletlerarasıTicariTahkimdeHakeminveyaHakemKurulununExAequoetBono
Karar Verme Yetkisi’, (2014) 34(1) Public and Private International Law Bulletin 31, 32-33.
110 Bälz, ‘Islamic Law as Governing Law under the Rome Convention Universalist Lex Mercatoria v. Regional Unification of
Law’ (n 40) 44.
111 Yücel (n 15) 155-156.
112 Kocasakal (n 109) 40.
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312
A further important benefit of arbitration is the ability of the parties
to select arbitrators with qualifications tailored to the needs of the dispute in
question.113 Autonomy to select arbitrators is of particular interest for the parties in
Islamic finance disputes since they can select arbitrators with relevant experience,
knowledge, and training which are not available in judges for complex topics of
Islamic finance. 114 The arbitrator can be amongst scholars in Islamic banking and
finance matter.115 In some Islamic finance cases, the disputing parties may choose
arbitrator with Islamic financial experience over those with legal knowledge; or
choose a mixed group, such as one arbitrator who has banking background, and
another with a legal background.116 Particular to characteristics of each case, parties
can create the best combination in order to achieve the most effective process, for
instance three arbitrators; a banker, a lawyer, and a third one with a degree in Islamic
banking or in Sharia law.117
Additionally, the advantageous features that have enabled arbitration to become
the preferred dispute resolution method over the past thirty years such as finality,
speed, confidentiality, cost-effectiveness, and flexibility are also available to
Islamic finance disputes.118 For instance, an arbitration can be conducted in venues
close to home while maintaining the applicable substantive law abroad. Maita states
that this will particularly benefit the parties of Islamic finance disputes because the
seat is London while most of them are in Muslim States.119 Legal scholars have
also advocated the use of arbitration in the Islamic finance given that the quick
and amicable means of dispute settlement through arbitration align more closely
with the spirit of Islam than traditional litigation.120 Also, the parties of an Islamic
transactions may well want to preserve confidentiality as to Sharia compliance
disputes as it may present a very sensitive issue for the reputation of the company
and its clients for whom their religion is the primary driving force.121
113 Al-Shibli (n 20) 225.
114 ibid 225; Wati binti Mohd K and others (n 70) 62.
115 ibid.
116 Al-Shibli (n 20) 225.
117 ibid.
118 Maita (n 29) 36.
119 ibid 53.
120 Alison Wirtz, ‘Resolving Islamic Finance Disputes Through International Commercial Arbitration in the Gulf Region’
(2016) University of Chicago Law School International Immersion Program Papers 24/2016, 2 <https://chicagounbound.
uchicago.edu/international_immersion_program_papers/> accessed 4 October 2018.
121 Bälz, ‘Islamic Law as Governing Law under the Rome Convention Universalist Lex Mercatoria v. Regional Unification of
Law’ (n 40) 37; Olayemi and Al-Zabyani states that the divergent of opinions between the Islamic schools of law is also a
clear indication for the necessity of arbitration clauses in the Islamic commercial contracts since even in the situation where
there is a competent Sharia court to decide on the disputes that arise from Islamic finance, the problem of appropriate court
forum will arise in the event that the parties belongs to different jurisdiction of the Islamic schools of law; Olayemi and Al-
Zabyani (n 16) 5; For the issue of the broad spectrum of legal opinion in Islamic arbitration agreements see, Jamal (n 16).
Özdem / The Path of Eastern Arbitraon to Take Islamic Finance Disputes from the Hands of English Ligaon
313
C. Initiatives from the East
Parallel to the growth of Islamic finance industry to unprecedented levels, the
lack of modern arbitration laws in many Muslim states has been fading away,
leaving its place to an up-to-date approach to arbitration with the purpose of
competing in the alternative dispute resolution scene. Oman, in 1997, passed
legislation implementing the UNCITRAL Model Law on International Commercial
Arbitration.122 Bahrain recently adopted a new arbitration law in 2015, also based
on the Model Law.123 Qatar passed Law No. 2 of 2017 on rules of arbitration on
March 13, 2017. The new Law is largely based on the UNCITRAL Model Law,
though with some variations, particularly in relation to timelines.124 The UAE
and Qatar recently established arbitration centres affiliated with the key arbitral
institutions in the world.125 The DIFC-LCIA was established to combine the
international best practices with the unique understanding of the local and regional
legal and business cultures in the Gulf and wider MENA region.126 Saudi Arabia
modernized its arbitration law by enacting a new arbitration law as an improvement
over the thirty-year old arbitration law that it replaced. The new arbitration law
is largely based on the UNCITRAL Model Arbitration Law with amendments
as adopted in 2006 but with modifications to ensure that the arbitration process
does not violate Sharia as practiced in the Kingdom.127 Recently during a regional
arbitration conference128 funded by The U.S.-Middle East Partnership Initiative
(MEPI), the case law on the interpretation of Sharia in the context of arbitration
was presented by a delegation of Saudi judges. The delegation claimed that Islamic
law would not vitiate the enforcement of foreign arbitral awards any more than
the public policy exception for enforcement refusal that New York Convention
allows. Following the discussions, and further consultations, Saudi Arabia was
added by UNCITRAL to its map of countries. Furthermore, just before the first
international arbitration institution in the Kingdom of Saudi Arabia, the Saudi
Centre for Commercial Arbitration (SCCA), was officially inaugurated in October
2016129, a new era in the history of Saudi women began on May 10, 2016, when
the Saudi administrative Court of Appeal did not object to the appointment of
122 Mutasim Ahmad Alqudah, ‘The Impact of Sharia on the Acceptance of International Commercial Arbitration in the
Countries of the GULF Cooperation Council’, (2017) 20(1) Journal of Legal, Ethical and Regulatory Issues 1, 1.
123 In 2010, the Bahrain Chamber for Dispute Resolution (BCDR) and American Arbitration Association (AAA), launched
BCDR-AAA to conduct arbitrations according to the AAA rules; Alqudah (n 123) 1.
124 Qatar: New Arbitration Law Passed, 5 June 2017, <http://www.loc.gov/law/foreign-news/article/qatar-new-arbitration-
law-passed/> accessed 4 October 2018.
125 Alqudah (n 123) 1.
126 See, DIFC-LCIA Arbitration Center <http://www.difc-lcia.org> accessed 4 October 2018.
127 Al-Ammari and Martin (n 12) 387ff.
128 ‘The U.S.-Middle East Partnership Initiative, Saudi Arabia Adapts UNCITRAL Arbitration Law, 18 January 2018’
<https://mepi.state.gov/arbitration-law/1> accessed 4 October 2018; Saudi Centre for Commercial Arbitration (SCCA)
<https://www.sadr.org/about-scca?lang=en> accessed 4 October 2018.
129 See, Saudi Centre for Commercial Arbitration (SCCA) <https://www.sadr.org/> accessed 4 October 2018.
Public and Private Internaonal Law Bullen
314
Ms. Shaima Aljubran, the first Saudi female arbitrator, in the field of commercial
disputes.130
Based on the wide criticism over the attitude of the English courts, notable Islamic
countries came up with initiatives striving to create platforms specialized in the
arbitration of Islamic finance disputes for the purpose of changing the convention of
leaving Islamic finance disputes to the hands of English courts.131
Malaysia takes the lead in this regard as part of its broader goal to establish itself
as an Islamic finance hub.132 With the purpose of solving the problem of civil court
jurisdiction over the Islamic commercial contract, Asian International Arbitration
Centre (formerly known as Kuala Lumpur Regional Centre for Arbitration [KLRCA])
provides a specific mechanism, i-Arbitration, to resolve the disputes that arise from
the Islamic finance transactions.133
Before the i-Arbitration Rules, KLRCA had the Rules for Arbitration of Kuala
Lumpur Regional Centre for Arbitration – Islamic Banking and Financial Services
2007 (2007 Rules).134 The Rules included a model clause that stated as follows
“Any dispute, controversy or claim arising from Islamic banking business, Takaful Business,
Islamic financial business, Islamic development financial business, Islamic capital market
products or services or any other transaction or business which is based on Shari’ah
principles out of this agreement/contract shall be decided by arbitration in accordance with
the Rules for Arbitration of Kuala Lumpur Regional Centre for Arbitration (Islamic banking
and Financial Services)”.135
Although applauded by many practitioners in the field as it represents a significant
innovation in the drive towards creating better ways of settling disputes in the industry
by making it possible to obtain rulings by Islamic finance experts conforming
legally and substantively to the provisions of Islamic Law, Oseni and Ahmad find
130 The New Saudi Arbitration Law neither stipulate any gender requirements for arbitrators, nor contain any language that
prohibits a woman from acting as an arbitrator. According to the wording of Article 14 an arbitrator must only fulfil three
conditions: 1) being legally competent, 2) being of good conduct and behavior and 3) holding a degree in Islamic or legal
studies. Also, in the event that the arbitral tribunal is composed of more than one arbitrator, the last condition is considered
met as long as the Chairman holds the specified degree; Mulhim Hamad Almulhim, ‘The First Female Arbitrator in Saudi
Arabia’ (Kluwer Arbitration Blog) <http://arbitrationblog.kluwerarbitration.com/2016/08/29/the-first-female-arbitrator-
in-saudi-arabia/> accessed 4 October 2018.
131 See generally, George Khoukazz, ‘Sharia Law and International Commercial Arbitration: The Need for an Intra-Islamic
Arbitral Institution’ (2017) 1 Journal of Dispute Resolution, Article 14.
132 See generally, Mohammad Noorizzuddin Bin Nooh and Joni Tamkin Bin Borhan, ‘The Global Hub Process: Malaysia’s
Vision towards Becoming the Islamic Finance Global Hub Country’ (2014) 5(8(1)) International Journal of Business and
Social Science 206.
133 See, Asian International Arbitration Centre (AIAC) <https://www.aiac.world/Arbitration-i-Arbitration> accessed 4
October 2018; Olayemi and Al-Zabyani (n 16) 3.
134 Rules for Arbitration Islamic Banking and Financial Services 2007, Kuala Lumpur Regional Centre for Arbitration,
2007, <https://arbitrationlaw.com/sites/default/files/free_pdfs/KLRCA%20Arbitration%20Rules%20%28Banking%20
%26%20Financial%20Services%29.pdf> accessed on 8 October 2018.
135 Rules for Arbitration Islamic Banking and Financial Services 2007, Kuala Lumpur Regional Centre for Arbitration,
2007, 4 <https://arbitrationlaw.com/sites/default/files/free_pdfs/KLRCA%20Arbitration%20Rules%20%28Banking%20
%26%20Financial%20Services%29.pdf> accessed on 8 October 2018.
Özdem / The Path of Eastern Arbitraon to Take Islamic Finance Disputes from the Hands of English Ligaon
315
it discouraging that during an informal discussion with one of the arbitrators, she
revealed that not up to two arbitrations were conducted under the 2007 Rules.136
This led to a total overhaul of the procedural aspects of Islamic finance arbitration at
KLRCA and resulted in the creation of the new rules called the KLRCA i-Arbitration
Rules in 2012.137 The Rules were revised in 2018 after KLRCA became AIAC.138
Datuk Sundra Rajoo, director of the AIAC, defines the role and the purpose of the
i-Arbitration Rules with the following words
“i-Arbitration Rules is the first of its kind in the world, and it should appeal to local and
international parties that deal in sharia-based transactions. In its efforts to revolutionise
arbitration by integrating sharia-based laws in its rules, the KLRCA aims to familiarise
different jurisdictions with how this new system would work and would demystify the
complexity of sharia law as perceived internationally”.139
The i-Arbitration Rules have two parts. Part I is largely based on the AIAC
Arbitration Rules with some modifications related to Sharia-compliant transactions.
One important article is Rule 11 stating that whenever the arbitral tribunal has to
form an opinion on a point related to Sharia principles and decide on a dispute arising
from the Sharia aspect of the contract; the arbitral tribunal may refer the matter to
the relevant Council or Sharia expert for its ruling.140 Part II of the i-Arbitration
Rules is the UNCITRAL Arbitration Rules 2013 which is also applicable in Sharia-
related disputes. However, in the event of a conflict between Part I and Part II of the
i-Arbitration Rules, the provisions in Part I prevails.141 Although under i-Arbitration
the parties are allowed to designate any country as the seat of the arbitration, this
remains a challenge in practice since the rules have not met with remarkable uptake
outside South East Asia.142
Another arbitral institution that promoted itself as delicately suited to Islamic
finance disputes is International Islamic Centre for Reconciliation and Arbitration
136 Umar A Oseni, ‘Islamic Finance Arbitration: Integrating the Classical and Modern Legal Frameworks’, in Adnan Trakic
and Hanifah Haydar Ali Tajuddin (eds), Islamic Banking and Finance: Principles, Instruments and Operations (2nd edn
The Malaysian Current Law Journal Sdn Bhd 2012) 549, 563; Umar A Oseni and AUF Ahmad, ‘Dispute Resolution in
Islamic Finance: A Case Analysis of Malaysia’ (8’th International Conference on Islamic Economics and Finance, Qatar
19-21 December 2011), 11 <http://www.oja.coj.go.th/doc/data/oja/oja_1526456975.pdf> accessed 8 October 2018; Jasri
Jamal and others, ‘Alternative Dispute Resolution in Islamic Finance: Recent Development in Malaysia’ (2011) 3(1)
International Journal of Social Sciences and Humanity Studies 185; Paldi (n 32) 24.
137 Oseni(n137)563;ThomasR.Klötzel,‘KLRCARules’,inRolfASchütze(ed),Institutional Arbitration: A Commentary
(Beck/Hart, 2013) 671, 683.
138 Asian International Arbitration Center i-Arbitration Rules (Effective as of 9th March 2018), <https://www.aiac.world/
Arbitration-i-Arbitration> accessed 4 October 2018.
139 See “Q&A with Datuk Sundra Rajoo, Director of the Kuala Lumpur Regional Centre for Arbitration (KLRCA)” in
Kanishk Verghese, ‘Arbitration in Asia: The next generation?’ (Legal Business Online 1 July 2014) <http://www.
legalbusinessonline.com/reports/arbitration-asia-next-generation> accessed on 4 October 2018.
140 Rule 11, Asian International Arbitration Center i-Arbitration Rules (Effective as of 9th March 2018), <https://www.aiac.
world/Arbitration-i-Arbitration> accessed 4 October 2018.
141 Rule 1(3), Asian International Arbitration Center i-Arbitration Rules (Effective as of 9th March 2018), <https://www.aiac.
world/Arbitration-i-Arbitration> accessed 4 October 2018.
142 ICC Commission on Arbitration and ADR Task Force (n 23) para 117; Maita (n 29) 59.
Public and Private Internaonal Law Bullen
316
(IICRA) which is based in Dubai, UAE. Established as a representative of the Islamic
finance industry by an agreement between the UAE and the General Council of Islamic
Banks and Financial Institutions, IICRA became operational in January of 2007.143
The centre applies the procedural and substantive laws selected by the parties, and its
rules explicitly declare that it will not apply laws which it judges to be “incompatible
with the Sharia”.144 This compliance is determined by the arbitration panel which
may invoke for the disputed issue whatever it deems appropriate from amongst the
viewpoints of various schools of Islamic thought, rulings of Islamic Fiqh academies,
and opinions of Sharia supervisory boards at Islamic financial institutions.145
IICRA claims that it is the only accredited institution for obtaining Sharia compliant
provisions by the Islamic finance industry and is undoubtedly one of the supporting
infrastructure organizations for Islamic finance. However, the centre does not provide
any published record for its case load.146 Although it mentions a significant increase
in the number of Islamic finance cases submitted to the centre in its semi-annual
publication of January 2012147, Maita rightfully states that without knowing the its
case load and the involved parties, it is not an easy task to evaluate the effectiveness of
these rules.148 In its recent report, Financial Institutions and International Arbitration,
the ICC Commission states that IICRA has reportedly administered a small number
of cases but has not gained common acceptance in the Islamic financial community.149
Camille Paldi, CEO of the Franco-American Alliance for Islamic Finance
(FAAIF), made a presentation about her proposal for the Dubai World Islamic
Finance Arbitration Centre (DWIFAC) and Jurisprudence Office (DWIFACJO)
in the International Congress on Banking, Economics, Finance, and Business, on
June 24-26 2016 in Sapporo, Japan.150 Paldi explained that the Islamic finance
industry is in need of a solid regulation and a dispute resolution mechanism in order
to survive as a viable industry.151 According to the proposal, DWIFAC may offer
a globally recognized arbitration centre complete with the DWIFAC jurisprudence
office, which may issue a uniform Islamic banking law and a standardized DWIFAC
dispute resolution contract that would result in harmony, legal certainty, and investor
143 ibid 59.
144 Colón (n 62) 422.
145 See, IICRA Arbitration and Reconciliation Procedures, Article 28 <http://www.iicra.com/iicra/> accessed 4 October 2018.
146 Maita (n 29) 60.
147 ‘TAHKEEM’ an IICRA semi-annual publication (2012) (7).
148 Maita states that the fact that it is possible to trace not a single case to this center from external resources could mean that
most cases handled by this center are either local or insignificant. Maita (n 29) 59.
149 ICC Commission on Arbitration and ADR Task Force (n 23) para 117.
150 See, Islamic Finance Portal, ‘Camille Paldi (FAAIF) Participates in Sapporo 2016 International Congress on Banking,
Economics, Finance, and Business’<http://www.islamicfinancialportal.com/2016/07/13/camille-paldi-faaif-participates-
insapporo-2016-international- congress-on-banking-economics-finance-and-business-june-2426-2016> accessed 4
October 2018
151 ibid.
Özdem / The Path of Eastern Arbitraon to Take Islamic Finance Disputes from the Hands of English Ligaon
317
confidence in and across the Islamic finance industry.152 The DWIFAC standardized
dispute resolution contract contains a built-in dispute resolution mechanism similar
to FIDIC designating DWIFAC as the arbitration centre, facilitating early dispute
settlement and completion of contract.153 This contract may be included to all Islamic
finance transactions in the world, making DWIFAC the central dispute resolution
authority for the industry.154
Another scholar, Colón, suggests that155 the Dubai International Arbitration Centre
(DIAC) appears to be tailored to provide services specialized for the resolution of
Islamic finance disputes. Located in the Jebel Ali Free Zone, and in the same city as
the Dubai International Financial Centre, Islamic banking hubs and outstanding free
trade zones, the DIAC does not purport to specialize in the Islamic finance dispute
settlement, although it routinely hears disputes related to matters of Islamic finance
and the centre is staffed with legal scholars known with their numerous publications
in the fields of Islamic finance and Sharia.156 According to Colón, these specialties
plus the centre’s status of being the busiest arbitration centre in the region indicate
that the centre would interpret a provision stipulating the arbitration be governed
under “the laws of so-and-so nation, subject to the principles of the Shariah as a
binding choice of law”.157
Conclusion
With its roots predating the state judiciary, or even the state itself, arbitration
has been known and used as a method of alternative dispute resolution in the
Muslim countries, as a concept favoured to adjudication in Islamic jurisprudence
given that its quick and amicable means that align more closely with the spirit of
Islam than traditional litigation. Over the last decades the exponential growth in
Islamic finance and the globalization of the industry have resulted in the disputes
amongst international entities arising out of Sharia-compliant agreements to be more
commonplace. Choosing English law as the governing law for these disputes has
been the common practice amongst the parties in most Islamic finance agreements.
Since Shamil Bank of Bahrain EC v. Beximco Pharmaceuticals Ltd. and the Others
made clear that the English courts may disregard the parties’ choice of Sharia to
govern their contract, the conventional choice of parties to be adjudicated in a non-
Islamic jurisdiction by a non-Islamic court has been a target of criticism by scholars
152 Paldi (n 32) 38.
153 ibid 5 & 38.
154 ibid 38.
155 Colón (n 62) 422.
156 ibid.
157 ibid.
Public and Private Internaonal Law Bullen
318
and seen detrimental to the survival of the Islamic finance industry. The possibility
of the English courts to validate the transaction based on English law and enforce
it even if the contract is deemed as being non-compliant with the Sharia, is said to
leave no guarantee for the preservation of the Islamicity of the agreement while the
experience of civil court judges is claimed to be very limited in the field of Islamic
banking as they rarely study Sharia law or Islamic finance at university or even at
judicial institutions.
While the industry historically has preferred litigation over alternative dispute
resolution mechanisms, there have been calls by legal and financial experts for those
who want to settle their disputes in accordance with Sharia to refer their disputes
to ADR methods, especially arbitration. In addition to its well-known advantages
such as finality, speed, confidentiality, cost-effectiveness, and flexibility, with a right
choice of seat arbitration makes possible for a choice of law clause to be in favour of
Islamic law contrary to the English litigation and also allows the parties of the dispute
to select arbitrators with relevant experience, knowledge, and training which may be
not available in judges for complex topics of Islamic finance.
With this regard, many scholars and arbitral institutions from the East have
been coming up with ideas over the past few years to provide better solutions to
the participants of Islamic finance transactions in their disputes such as creating
platforms specialized in the arbitration of Islamic finance disputes. Notwithstanding
the fact that the outcomes of the steps taken still could not reach the desired level and
the potential risk that English courts may disregard the parties’ choice of Sharia to
govern their dispute will not cause all participants in Islamic finance transactions to
reject the benefits of submitting their disputes to the English courts, these initiatives
may be useful to promote arbitration as a forum that could prove more conducive to
furthering the commercial purpose of Islamic finance and to create models for other
jurisdictions of Islamic banking and finance to borrow a leaf from.
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