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Chapter 41
DOI: 10.4018/978-1-7998-0218-1.ch041
ABSTRACT
A unique and independent legal framework is important to effectively adjudicate Islamic finance disputes,
Sukuk bankruptcies, and Takaful disputes. Currently, these disputes are being adjudicated in common
law courts or ineffective arbitration centres where often the Islamic finance transaction is inadvertently
converted into a conventional transaction due to the common law nature of the dispute adjudication. In
this chapter, a framework is proposed for Islamic finance dispute resolution in the form of the Dubai World
Islamic Finance Arbitration Centre (DWIFAC), DWIFAC Jurisprudence Office, the Sukuk Bankruptcy
Tribunal (SBT) and the Takaful Tribunal (TT).
INTRODUCTION
As the Islamic finance industry is growing annually at a rate of 10% to 15% per year, it is imperative
that a unique, independent legal framework is established in order to effectively adjudicate Islamic
finance disputes, Sukuk bankruptcies, and Takaful disputes. Currently, Islamic finance disputes, Sukuk
bankruptcies, and Takaful disputes are being adjudicated in inadequate civil and common law courts and
arbitration centres where the contracts in dispute are being transformed from Islamic to conventional
transactions. It is important to form an effective dispute resolution mechanism, which not only upholds
the intentions of the parties as evidenced by the Islamic finance agreement, however, one, which also
recognizes and enforces the Shari’ah law of the Islamic finance transaction. (Trakic, Benson, Ahmed:
2019). Shari’ah compliance is not only producing products which conform to the Shari’ah, but also
ensuring that the dispute resolution mechanism will uphold the Shari’ah compliance of the product and/
or transaction. (Trakic, Benson, & Ahmed, 2019).
The aim of this chapter is to explore the role of the proposed Dubai World Islamic Finance Ar-
bitration Center (“DWIFAC”) and its’ jurisprudence office (DWIFACJO) plus the proposed Sukuk
Bankruptcy Tribunal (SBT) and Takaful Tribunal (TT) as the dispute resolution center of the Islamic
Dispute Resolution in the
Islamic Finance Industry
Camille Paldi
Ethical Finance Forum, USA
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Dispute Resolution in the Islamic Finance Industry
finance industry, fitting in with the recent 2013 Sheikh Mohammad ‘Dubai as the Capital of the Islamic
Economy’ initiative. These arbitration centres are not yet in existence. The objective of the chapter is
to show how using a common law jurisdiction inadvertently transforms Islamic financial transactions
into conventional disputes. This is done through analysis of the cases Beximco Pharmaceuticals Ltd,
Bangladesh Export Import Co. Ltd., Mr. Ahmad Solail Fasiuhur Rahman, Beximco (Holdings) Ltd. v.
Shamil Bank of Bahrain E.C. [2004] EWCA Civ 19; Investment Dar Co KSCC v Blom Development
Bank Sal [2009] EWHC 3545; Bank Islam Malaysia Bhd v Azhar Osman & Other Cases [2010] 5 CLJ
54 [2010] 1 LNS 251; and Cameron Partners L.P. v. Louisiana Offshore Holding LLC & Ors [2009].
Through case analysis combined with an exploration of the efficacy of existing arbitration centres and
dispute resolution methods available to Islamic finance, this chapter will seek to reveal that the Islamic
finance industry currently lacks an adequate dispute resolution mechanism and facility to adjudicate
disputes arising from Islamic finance contracts including Sukuk and Takaful contracts.
This chapter proposes that Islamic finance, Sukuk, and Takaful contracts should include an additional
standardized dispute resolution contract issued by DWIFACJO with a built-in dispute resolution procedure
similar to FIDIC designating DWIFAC, SBT, or TT as the arbitration center. If the contractual dispute
resolution procedure is exhausted, then the dispute may be referred to DWIFAC, SBT, or TT, which
may utilize the Model Islamic Banking Law created by DWIFACJO as the substantive law of the arbitra-
tion, the procedural law of the seat of the arbitration, Dubai (Refer to Appendix A), and the DWIFAC,
SBT, or TT arbitration rules, which includes Shari’ah and lex mercatoria. The arbitration center may be
staffed with the worlds’ top Shari’ah scholars and Islamic finance lawyers, judges, and experts who can
provide input about the Shari’ah aspects of the dispute through the use of an Islamic form of ex aqueo
et bono, which allows disputes to be settled using commercial practice rather than purely legal devices.
In the event of a Sukuk bankruptcy, the case may be referred to the Sukuk Bankruptcy Tribunal “SBT”
dispute resolution mechanism attached to DWIFAC, which may use the DWIFACJO SBT standardized
dispute resolution contract and will be staffed and regulated in the same manner as DWIFAC, however,
which may utilize SBT arbitration rules. In the event of a Takaful dispute, the case may be referred to
the Takaful Tribunal “TT” dispute resolution mechanism attached to DWIFAC, which may utilize the
DWIFACJO TT standardized dispute resolution contract and will be staffed and regulated in the same
manner as DWIFAC, however, which may utilize TT arbitration rules.
In addition, the author will examine the commercial dispute system of Malaysia, the UAE, and the
UK, arbitration as a method of dispute resolution, and various regional arbitration centers in order to
reveal the inadequacy of existing dispute resolution mechanisms for Islamic finance, which will further
support the author’s argument for DWIFAC, DWIFACJO, and the SBT and TT.
Should Courts Be Used?
Asutay and Hasan (Asutay and Hasan, 2011) state that due to the common law, interpretational approach
used to resolve Islamic finance cases in UK/common law courts, Shari’ah is denied as a valid source
of law for governing a commercial dispute or Islamic finance transaction. When English/common law
is designated as the governing jurisdiction of an Islamic finance contract, courts tend to sever any asso-
ciation with Shari’ah by recognizing conflict of laws and asserting that only a national law can govern
the contract. Judges then strictly apply English law to the commercial dispute, further disassociating
the Islamic aspects of the transaction from the adjudication process. Islamic finance dispute resolution
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Dispute Resolution in the Islamic Finance Industry
must contain recourse to Shari’ah in order to preserve Shari’ah compliance and the Islamic component
of the financial transaction.
Foster (Foster, 2006) promotes the use of English law as the governing law of an Islamic finance
contract and states that preserving Shari’ah through UK litigation is not only possible, but also prefer-
able to arbitration for Islamic finance. He explains an approach based on the practice of UK lawyer Neil
Miller, whereby the Islamicity of the contract is treated as a matter of compliance, rather than substan-
tive law. Foster (Foster, 2006) says that for this procedure, “In the documentation, which is approved
by Shari’ah scholars, the recitals state that the Shari’ah is to be observed and that the bank’s customer
shall make a representation that he/she is satisfied that the contract is Islamic (Neil Miller of Norton
Rose, May 2, 2006).” He (Foster, 2006) elaborates “this method ensures that the documentation meets
Shari’ah requirements by taking advantage of the English court system, thus giving financial institu-
tions effective remedies.” At the same time, Foster (Foster, 2006) explains “it would be difficult for the
customer to argue that Shari’ah issues should not be considered by the court, limiting Shari’ah risk.”
He (Foster, 2006) asserts that arbitration is not well-suited to financial disputes, as arbitration can take
much longer to reach a conclusion than litigation, may be more expensive, and does not benefit from
the same range of remedies.
However, the substantive law of the dispute is still English/common law and a judge shall make the
final interpretation and determination of the law and how it is applied, regardless of the way in which
the contract is drafted. There is no guarantee that the Islamicity of the contract shall be preserved.
Furthermore, even if Shari’ah is mentioned in the contract, if a UK judge does not know Shari’ah then
how can a Judge apply Shari’ah to a dispute? In terms of compliance, getting the parties to confirm
that they are satisfied that the contract is Islamic and having the documentation approved by Shari’ah
Scholars (Investment Dar Co. KSCC v Blom Development Bank Sal [2009] EWHC 3545) means nothing
in common law dispute resolution. The parties may still contend the contract void based on Shari’ah
non-compliance. Although innovative, I find this topical approach to be risky and inadequate.
The Dubai and UAE Courts are more progressive then the UK courts in terms of the application of
Shari’ah to the adjudication of disputes, but still not as advanced as Malaysia. The Dubai Courts utilizes
the Civil and Commercial Code in Islamic finance disputes, which incorporates Shari’ah, however,
giving preference to UAE national law in the event of a conflict of laws. However, the Dubai Courts
are permitted to refer to Shari’ah in the absence of clear legislation and established customary business
practices. Malaysian courts are the most Shari’ah advanced in comparison to the UK and Dubai and
UAE Courts and apply civil law, but also have recourse to a Shari’ah Advisory Committee (“SAC”),
which issues binding Shari’ah rulings.
Case Analysis
When an Islamic Finance dispute or Sukuk bankruptcy goes before a judge in England or New York,
by default, the transaction by default turns into a conventional transaction. The judge declares Shari’ah
law to be invalid due to the conflict of laws and applies the common law and principles of conventional
finance or misapplies Shari’ah to the Islamic Finance transaction. A few cases adjudicated in non-Islamic
courts discussed below demonstrate this point.
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Beximco
In Beximco Pharmaceuticals Ltd, Bangladesh Export Import Co. Ltd., Mr. Ahmad Solail Fasiuhur Rah-
man, Beximco (Holdings) Ltd. v. Shamil Bank of Bahrain E.C. [2004] EWCA Civ 19, the defendant
Beximco Pharmaceuticals Ltd. and the other borrowers entered into a Murabahah agreement with the
plaintiff. The defendants defaulted and after a series of various termination events under the agreements,
the plaintiff finally brought the case to court and made an application for summary judgement. The
defendants argued that the Murabahah agreements were invalid and unenforceable because they were
in actuality disguised loans charging interest (Asutay and Hasan, 2011).
According to the Appeal Case, the Court ruled that an Islamic Finance contract could not be governed
by Shari’ah law in the UK. Even if specified in the contract, the judge further ruled, in fact, that Shari’ah
law is not a recognizable form of law containing principles of law capable of governing a commercial
dispute in the UK. Lord Justice Potter stated in Paragraph 2 of the judgment, ‘It is not in dispute that
the principles of the glorious Shari’ah referred to are the principles described by the defendants’ expert,
Mr. Justice (retd) Khalil-Ur-Rehman Khan as: “…the law laid down by the Qur’an, which is the Holy
Book of Islam and the Sunnah (the sayings, teachings and actions of Prophet Mohammad (May peace
be upon him). These are the principal sources of the Shari’ah. The Sunnah is the most important source
of the Islamic faith after the Qur’an 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 (May peace be upon him). Lord Justice
Potter, in this judgment, recognizes the definition of Shari’ah law stated by Mr. Justice Khalil-Ur-Rehman
Khan, however, Lord Justice Potter stated that Shari’ah law, which in his opinion is more of a religion
than law, could not apply to a commercial banking transaction in the UK.
The Judge declined to construe the wording of the clause as a choice of Shari’ah law as the govern-
ing law for the following reasons. First, Article 3.1 of the Rome Convention (which by s.2 (1) of the
Contracts (Applicable Law) Act 1990 has the force of law in the United Kingdom. It contemplates that a
contract ‘…shall be governed by the law chosen by the parties’ and Article 1.1 of the Rome Convention
makes it clear that the reference to the parties choice of law to govern a contract is a reference to the law
of a country. Lord Justice Potter further argued that the reference to a choice of a ‘foreign law’ in Article
3.3 suggests that the Convention as a whole only contemplates and sanctions the choice of the law of a
country: c.f. Dicey and Morris on The Conflict of Laws (13th ed.) vol. 2 at 32-079 (p.1223) and Briggs:
The Conflict of Laws at p. 159.’ Lord Justice Potter stated that Shari’ah law is not a national system of
law and is classified as a non-national system of law such as ‘lex mercatoria’ or ‘general principles of
law’ and therefore cannot apply to a commercial transaction in the UK. Colon (Colon, 2011) states that
even though 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), the conflict of law rules remain the same.
In this appeal case, English law was confirmed as the governing law and it was further confirmed that
English law does not recognize Shari’ah law as a valid source of law to govern a commercial contract.
Furthermore, even if Shari’ah law were recognized under English law, under the conflict of law rules
applicable in England and Wales, according to this judgment and the new Rome I, English law would
prevail as the governing law must be the law of a State. Colon (Colon, 2011) points out that according
to Beximco, under English law a Murabahah agreement may be treated the same as an interest-bearing
loan, which ironically was part of the initial claim that based on the governing law clause, the Murabahah
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agreements were invalid and unenforceable because they were in truth disguised loans charging interest
(Asutay and Hasan, 2011). In fact, the adjudication of the dispute by an English court guarantees turn-
ing the Murabahah agreements into loans charging interest. Beximco interpreted the contract in light
of the commercial goals that it served to accomplish, as English law requires (Colon, 2011) and in line
with the common law, interpretational approach as explained by Asutay and Hasan. This strict approach
decimated the Islamic finance transaction (2011, p. 431).
Blom Bank
The term Wakalah literally means ‘preservation.’ For instance, in verse [Qur’an 3:173]: “They said: ‘for
us, Allah suffices, and He is the best Disposer of affairs [the best wakil]” The Prophet (May peace be
upon him) was also urged in [Qur’an 73:9] to take Allah (Subhanahu wa Taala), the only true God, as
his preserver and protector (wakil). The term is also used to mean delegation of one’s affairs to another.
Thus, Allah (Subhanahu wa Taala) is also described as the best one to whom one must delegate one’s
affairs: “For those who put their trust (mutawakkilun) should put their trust on Allah,” my Lord, and
your Lord” [Qur’an 11:56] (Al-Zuhayli, 2007).
In the case of Investment Dar Co KSCC v Blom Developments Bank Sal [2009] EWHC 3545 (Ch)
High Court of Justice Chancery Division, the Investment Dar (TID) was an investment company registered
in Kuwait and the Blom Development Bank (BDB) was a bank incorporated in Lebanon. A Wakalah
investment agreement was entered into between the two parties governed by English law (Asutay and
Hasan, 2011). The agreement provided that Blom deposit a certain amount of money with TID, appoint-
ing TID as its wakil (agent) to manage the money as an investment (ISRA, 2012). When TID defaulted
on payments under the Wakalah agreement, BDB sued TID in the High Court of England and applied
for summary judgment on the grounds of default in payment (claim in contract) and the deposits held in
trust (claim in equity) (Asutay and Hasan, 2011). The master found that there was an arguable defence
to the contractual claim, but not to the trust claim due to a misunderstanding of Shari’ah and the ap-
plication of common law to an Islamic finance transaction.
TID raised the defence of ultra vires (Asutay and Hasan, 2011). TID argued that the Wakalah agree-
ment, which was approved by its own Shari’ah board, did not comply with the Shari’ah and was therefore
void and against TID’s constitutional documents (Asutay and Hasan, 2011 and ISRA, 2012). Although
within the Wakalah arrangement some issues of Shari’ah non-compliancy arose, since the contract was
approved by the TID Shari’ah Board and constituted a binding contract in both common and Islamic
law with valid offer and acceptance. Thus, TID should have been held to the terms of the contract.
In terms of Islamic law, the Hanafis stipulated a valid offer and acceptance as the cornerstones of
the agency contract. While the Hanafis restricted the contracts cornerstones to offer and acceptance or
actions implying acceptance, the other jurists enumerated four cornerstones: (i) principal, (ii) agent, (iii)
object of the agency contract, and (iv) the contract language (Al-Zuhayli, 2007). If the compensation is a
ji’alah, whereby the task and the time period are not explicitly stated in the contract, then the majority of
jurists agree that the contract is non-binding on the parties. However, the Malikis ruled that the contract
was, in this case, binding on the principal once the agent begins working. If the compensation renders the
contract an ijarah, then the Hanafis and most Malikis ruled that the agency contract is thus binding. In
contrast, the Shaafis and Hanbalis ruled that the contract was still not binding in this case (Al-Zuhayli,
2007; Rafay, Sadiq & Ajmal, 2017). In this instance, according to the Hanafis, the contract had valid
offer and acceptance with principal and an agent consenting to the terms of the contract and initiating
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investment activity in the form of a Wakalah. In addition, the Wakalah contract appears to be an ijarah
and thus valid and binding according to the Hanafis and Malikis. According to the AAOIFI Shari’ah
standard No. 23 (4/3) and as occurred in this case, ‘when agency is paid, involves the rights of others,
when the agent commences tasks that cannot be discontinued or phased out without causing injury to him
or to the principal, and/or when the principal or the agent undertakes not to revoke the contract within a
certain period, it falls under the Shari’ah rulings on Ijarah and is binding’. The judge ignored the valid
and binding contract and the original contractual intent of the parties, applied western trust law to the
Wakalah arrangement, and unjustly ruled that TID was only liable to pay Blom the principle amount.
In the concerned Wakalah arrangement, at the of every Wakalah period, TID was obligated to pay
5% profit to Blom. The issue arose when TID defaulted on payments of Blom’s principal and the agreed
profits. Blom claimed that TID should pay it the principal deposits plus the contractually agreed 5% profit.
However, TID argued that the agreement was not Shari’ah compliant, being an agreement for deposit
taking with interest, and therefore null, being ultra vires and beyond its legal capacity to conform. The
Judge concurred and stated, ‘I agree…that where one finds, as one does in this master Wakalah contract,
a device to enable …the payment of interest under another guise, that is at least an indirect practice of a
non-Shari’ah compliant activity.’ Due to the constraints faced by the Islamic banking industry in terms
of risk management, the reality of operating in a conventional system, and the need to compete, it is dif-
ficult to adhere to true Shari’ah banking at this moment in time. It may be argued that in fact all Islamic
banking products are devices to enable the payment of interest in another guise.
According to the AAOIFI Shari’ah Standard No. 5(2/2/2) on Guarantees, ‘it is not permissible to
combine agency and personal guarantees in one contract at the same time (i.e. the same party acting as
agent on the one hand and acting as guarantor on the other hand), because such a combination conflicts
with the nature of these contracts. In addition, a guarantee given by a party acting as an agent in respect
of an investment, turns the transaction into an interest-based loan since the capital of the investment is
guaranteed in addition to the proceeds of the investment (i.e. as though the investment agent had taken
a loan and repaid it with an additional sum, which is tantamount to Riba).’ In this case, TID, as agent,
also guaranteed Blom a 5% return. However, even if the Wakalah agreement in question really was a
loan with interest in disguise or a similar contraption, due to the fact that this agreement was approved
by the TID Shari’ah board, TID should be held to the terms of the contract. TID should not be allowed
to suddenly claim that the transaction is non-Shari’ah compliant in order to evade its contractual obliga-
tions to Blom Bank.
Jurists agree that an agent’s possession is one of trust, analogous to deposits and similar to posses-
sions (Al-Zuhayli, 2007). This ruling follows from the fact that the agent would possess goods as a legal
representative of the principal (who is the owner). Thus, his possession is similar (but not the same) to
that of a depository, following its rules for trust and guarantee (Al-Zuhayli, 2007). Under Shari’ah, TID
was holding the 5% profit on trust for Blom as agent for principal even if the guarantee combined with
agency is thought by some to have turned the Wakalah into a deposit taking with interest or to have
simulated an interest-bearing loan.
Although under Shari’ah, TID was technically only supposed to receive an agency fee, in this Wakalah
arrangement, TID was contractually to receive an agency fee plus all return above 5%, thus bearing risk
of loss. In a proper Wakalah arrangement, the principal bears all risk of loss and profit, while the agent
only receives an agency fee. According to the AAOIFI Shari’ah Standard No. 21(4/2/c), ‘…the amount
payable as remuneration for agency should be known, whether in lump sum or as a share of a specific
amount of income. It may also be defined in terms of an amount of income to be known in the future, as
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when remuneration is linked to an indicator that may be quoted at the beginnings of different intervals of
time. However, it is not permissible to leave remuneration for agency undetermined and allow the agent
to take an unspecified share from the entitlements of principal. In this arrangement, the agent was to take
an unspecified share from the entitlements of the principal, being any amount of return above 5%. These
Shari’ah issues were totally ignored by the judge. In this transaction, the judge misapplied Shari’ah law,
ignored the reality of the Islamic finance and banking industry, and then judged the contracts in relation
to Western trust law, unfairly ruling that Blom was only entitled to the principal amount.
The judge ordered an interim payment to be paid to Blom based on the fact that the contract was
null and void (no trust) and that the transaction was ultra vires (non- Shari’ah compliant). The judge
should have ruled that Blom was entitled to the deposit amount plus any profit made up to a limit of
5% (if profit was made) rather than just the deposit amount. TID ultimately withdrew the case (Asutay
and Hasan, 2011).
Bank Islam Malaysia Berhard
In Bank Islam Malaysia Bhd v Azhar Osman & Other Cases [2010] 5 CLJ 54 [2010] 1 LNS 251, the
court ruled that in relation to ibra or rebate for an early settlement of a financing facility, the court may
infer an implied term from evidence and from commercial business practice that the parties to a contract
intended to include the rebate in the contract (ISRA, 2012). The term ibra literally means removal and
acquittal from something. In Islamic jurisprudence, the term refers to one party dropping another’s liability
towards him (i.e. dropping the debtor’s liability for a debt) (Al-Zuhayli, 2007). Al-Zuhayli (Al-Zuhayli,
2007) states that most jurists agree that absolution of debts is legally recommended. Al-Zuhayli explains
that this was the stated opinion of Al-Khatib Al-Shirbini, who said that the rulings for absolution were
much laxer than those for guarantee because of the charitable nature of the former, as evidenced by the
dropping of the creditor’s right. The charitable nature of the contract is manifest regardless of whether
or not the debtor is in a financial bind, as the verse states, ‘If the debtor is in a difficulty, grant him time
till it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew’
[Qur’an 2:280] (Al- Zuhayli, 2007).
Bai Bithaman Ajil (“BBA”) is an agreement whereby a bank buys an asset or property and sells the
said asset or property to a customer at an agreed defined price, which the customer has to pay on a de-
ferred basis or by periodic instalments. The sale will include a profit margin (Thani, Abdullah, Hasan,
2003). The common perception is that this is simply a straightforward charging of interest disguised as
a sale. However, nothing in Islamic law dictates how the price for such a sale is determined: it is simply
determined by what the parties have agreed upon. Therefore, nothing prevents the seller from linking
the sale price to the period of time for which credit is extended (Thani, Abdullah, Hasan, 2003).
It was unsuccessfully contended on behalf of the plaintiff that in a BBA contract, the bank had a legal
right to claim for the full sale price as stipulated in the property sale agreement (“PSA”), regardless of a
premature termination. Counsel for the plaintiff argued firstly that the defendant had agreed to the amount
of sale price and was under a legal obligation to pay the full sale price. This argument was premised on
the underlying presumption that a BBA contract is a sale transaction and not a loan transaction. Counsel
for the plaintiff argued that since it is a sale agreement, the sale price does not change. Secondly, the
plaintiff argued that the court was bound by the decision of the Court of Appeal in Lim Kok Hoe, which
upheld and acknowledged the obligation to pay the full sale price under the PSA.
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Dispute Resolution in the Islamic Finance Industry
The judge disagreed that the court was bound by the decision in Lim Kok Hoe. The judge explained,
‘Whilst it is true that the Court of Appeal in Lim Kok Hoe held that a BBA contract differs in a way dif-
fers from conventional banking because it is a sale transaction, it cannot, however, be regarded as a sale
transaction simpliciter.’ The judge elaborated ‘the BBA contract is secured by a charge and concession
as ibrar is given as a matter of practice to all premature terminations.’ The judge stated, ‘Further, it is
not a simple sale because even if the bank does not make payment of the full purchase price under BBA,
the bank would still be entitled to claim the amount already paid.’ The judge said, ‘Whereas in a simple
sale if the first leg of the transaction fails, the bank’s right to the amount paid will not ipso facto accrue
since the sale was never completed.’ The judge questioned, ‘Why a bank should insist on payment of
the full sale price and thereafter as a matter of practice grant a rebate to the customer simply to show
that it is a sale transaction may have its purpose, but to place the customer in such a precarious position
is quite something else, particularly when such grant is at the bank’s absolute discretion.’ The judge as-
serted, ‘From the practice of the bank it is clear that the insistence on enforcing payment of the full sale
price appears to be merely an attempt to adhere to written text, but I doubt if such appearance achieve
its purpose.’ The judge based her reasoning on commercial business practice and explained, ‘This is
because, despite the written term of the agreement, the bank in reality does not enforce payment of the
full sale price upon a premature termination. It always grants rebate or ibrar based on ‘unearned profit.”’
The judge further stated that granting an order for the full sale price in an order for sale application
would defeat the requirements of s. 266(1) of the NLC, which is designed to protect the charger, whose
property is about to be sold at an auction (ISRA, 2012). The judge ruled that, “The bank should not be
allowed to enrich itself with an amount, which is not due while at the same time taking cognizance of
the customer’s right to redeem his property.” Therefore, where the BBA contract is silent on the issue of
rebate or the quantum of the rebate, by implied term, commercial business practice, and compliance with
Malaysian law, the judge held that “the bank must grant a rebate and such rebate shall be the amount of
unearned profit as practiced by Islamic banks.”
The judge pointed out in this case, “The legal documentation used by Islamic banks should have ad-
dressed the peculiarity of the Islamic banking transaction, instead of adopting a cut and paste approach
of the conventional banking documents” as this would have made her job of Islamic finance dispute
adjudication easier. Therefore, not only is it necessary to have standardized dispute resolution contracts,
but all Islamic finance contracts should be issued in a standardized format by the International Islamic
Financial Market or (“IIFM”).
East Cameron Gas Sukuk Bankruptcy
East Cameron Partners (ECP) issued Sukuk of USD165.67 million in June 2006 with a maturity period
of 13 years as a private placement under Regulation D and an international offering under Regulation
S, which means that the Sukuk certificates represented an ownership stake in ECG. (Colon, 2019) East
Cameron Partners (ECP) was an independent oil and gas exploration company that owned leasehold
interests in a producing natural gas and condensate field in federal waters adjacent to Cameron Parish,
Louisiana. East Cameron’s leasehold interests consisted of a 100% undivided record title interest with
a 79.87% net revenue interest subject to certain Overriding Royalty Interests in East Cameron Block
71/72. These lease interests arose from federal oil and gas leases governed by the Outer Continental
Shelf Lands Act and administered by the Minerals Management Service of the United States Depart-
ment of the Interior. (East Cameron Partners L.P. v. Louisiana Offshore Holding LLC & Ors [2009].)
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The underlying contract was Musharakah in which Sukuk investors owned so called Overriding Roy-
alty Interest (ORRI) in two gas properties located in the shallow waters offshore the state of Louisiana,
USA through an SPV. (Goud, 2010) Specifically, the structure of the transaction involved the purchase
of an ORRI carved out of US federal offshore leases as mentioned herein. (Goud, 2010) Under local
(Louisiana) law, ORRI are considered real property. (Goud, 2010) Because the transaction involved real
property, the Shari’ah Scholars approved this as an asset-backed securitization in the form of a Sukuk
al-Musharakah. (Goud, 2010) The Sukuk investors share the profits and losses in the production of
the originators in a pre-determined ratio determined by their relative capital shares fixed in the Sukuk
documents. (Goud, 2010) The SPV was called East Cameron Gas Company (ECGP) and incorporated
in the Cayman Islands. (Goud, 2010)
The Issuer entered into a funding arrangement with Louisiana Offshore Holdings (LOH) with the
proceeds of the issue flowing back to the oil and gas operating company, ECP. Proceeds from the gas
production flowed to LOH (Owner of the ORRI) and were shared between the Issuer and ECP. The Issuer
passed along its share of the proceeds to the ECP Sukuk investors to repay the 11.25% expected return
and part of the principal. (Hawkamah Institute of Corporate Governance, 2011) Although the investors
would share in the profits or losses derived from the success or failure of the underlying assets, the inves-
tors bore the risk of the oil and gas reserves being insufficient to fully support the issuance of the Sukuk,
natural disaster risk, and price fluctuation risk. (Hawkamah Institute of Corporate Governance, 2011)
This was the first Sukuk issued by a company based in the United States and rated by Standard and
Poor’s. The Sukuk were initially rated CCC+ by Standard and Poor’s and then downgraded to CC and
finally D. Although the East Cameron Gas Sukuk had a fixed payment of 11.25% annually, there was
also a variable component because the Sukuk returns depended upon the production quantities (the
ORRI specified a fixed quantity of natural gas be delivered to the SPV). It also contained a redemption
feature by where a percentage of the Sukuk would be redeemed if production exceeded a certain level.
Sukuk holders were also exposed to risks found in the energy sector i.e. the volatility of natural gas
and condensate prices, which may adversely affect payments on the Sukuk. (Goud, 2010) In order to
hedge against severe price fluctuations in oil and gas markets, there was a Shari’ah compliant hedge that
established a price collar between $7 and $8 per million BTU (MMbtu) on half the expected products gas
production and a put option at $6 per MMbtu for an additional quarter of anticipated production (Goud,
2010). The Shari’ah compliant hedges limited the impact of rising and falling prices on the ability of
the production to be sufficient to generate returns for investors. (Goud, 2010)
In sum, the issuer SPV, East Cameron Gas Company (ECGP), incorporated in the Cayman Islands
issued USD165.7 million of Sukuk whose proceeds would be used to buy the ORRI from the Purchaser
SPV following a Funding Agreement for USD$113.8 million. (Zaheer, 2013) The remaining amount was
appropriated for a development plan, a reserve account, and the purchase of put options for natural gas
to hedge against the risk of fall in gas prices. (Zaheer, 2013) The originator contributed his share of the
capital in the form of transfer of ORRI into the purchaser SPV. (Zaheer, 2013) Next, the purchaser SPV,
holding ORRI in the properties, would be entitled to around 90 percent of ECP’s net revenue generated
through gas production. (Zaheer, 2013)
The production would be sold to two off-takers with Merrill Lynch as a backup off-taker. (Zaheer,
2013) Proceedings of the oil and gas sale would be transferred to an allocation account. (Zaheer, 2013)
After paying around 20 percent to government and private ORRI, the remaining amount would be
transferred to the Purchaser SPV. (Zaheer, 2013) Next, the purchaser SPV would allocate 10 percent for
the originator and the remainder for the payment of expenses, periodic Sukuk returns, and redemption
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amount. (Zaheer, 2013) Any excess amount would go to originator and early redemption of the Sukuk
equally. (Zaheer, 2013) Upon maturity of Sukuk, the issuer SPV would redeem all the Sukuk against the
amount left to be transferred to the Sukuk holders (Zaheer, 2013).
Instead of being solely used to support the capital and operating costs of drilling and operating
wells in the Gulf of Mexico for East Cameron Partners, the proceeds were also used to pay most of the
conventional debt of the company. This brought the debt-to-equity ratio of the company to a Shari’ah
compliant level, however, also bankrupted the Sukuk.
Furthermore, the originator’s business was located in the Gulf of Mexico making it vulnerable to
severe weather and other effects. Shortly after the September 2008 Hurricane Katrina damaged the un-
derlying assets of the Sukuk, S & P downgraded the issuance as a result of the negative impact from the
hydrocarbon mix shortfall enforcement event on the overriding royalty interest in oil and gas reserves
(ORRI), which was the primary collateral for the Sukuk. This enforcement event was triggered by the
breach of the 90% minimum stressed reserve level of the hydrocarbon mix threshold stipulated in the
transaction documents. Thus, in 2008 ECP experienced a shortfall on the ORRI in oil and gas, which is
the primary collateral used as the underlying asset to the Sukuk contract. Consequently, the shortfall event
triggered breach of approximately 90% of the reserve level of the threshold contained in the contractual
agreement. (Busari, 2019) On September 17, 2008, a Notice that an Exogenous Enforcement Event,
namely a Hydrocarbon Mix Shortfall Exogenous Enforcement Event, was served on the Purchaser SPV
(LOH) and East Cameron Partners LP (the “Originator” and, subsequently, the “Debtor”)(McMillen,
2011) S& P downgraded the transaction to CC from CCC+ when the structure hit the aforementioned
trigger, breaching 90% minimum stressed reserve level of the hydrocarbon mix threshold.
On October 16, 2008 East Cameron Partners filed for bankruptcy protection under chapter 11 in the
United States Bankruptcy Court for the Western District of Louisiana “Bankruptcy Court,” claiming
its inability to pay the periodic returns on the East Cameron Gas Sukuk to Sukuk certificate holders. In
March 2009, the agency cut the deal to D on skipped payments and withdrew the rating; the latter event
was in response to a failure to receive service reports.
The issue at hand for the Bankruptcy Court was whether or not the transaction was a secured loan
or a true sale. True sale is a situation whereby contractual parties agree to transfer a financial asset for
fair value with the intent of a sale. (Busari, 2019) The originator claimed that the transaction was not a
true sale, but a secured loan. ECP argued that the ownership of ORRI was not transferred from ECP to
Louisiana Offshore Holdings or “LOH” as the transaction was not a true-sale agreement. ECP further
claimed that the underlying asset is merely a pledge as security for a loan in favour of LOH. (Busari, 2019)
Specifically, according to Colon, ECP requested that the bankruptcy court declare (1) the Sukuk
transaction was a loan; (2) that the conveyance of the ORRI (i.e.) the underlying asset securitizing the
Sukuk and making the private/international offering of ECG a worthwhile investment, did not transfer
ownership of the ORRI to ECG; and (3) the ORRI, was merely security for ECG’s loan to ECP. (Colon,
2019) Colon points out that ECP requested the court to interpret the distinctions of the Sukuk transac-
tion that made in Shari’ah compliant as ineffective, as nothing more than a conventional secured loan.
(Colon, 2019)
Under conditions of a true sale, the Sukuk investors would have the sole rights to the underlying as-
sets and would not have to stand in line behind any other creditors. The contractual agreement of the
true sale would ensure the bankruptcy remoteness of the SPV whereby in the event of a default, the
Sukuk holders could have recourse to the underlying asset that has been established through a true sale
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agreement. (Busari, 2019) Under the secured loan, the originator would have rights to the assets only
after resolving creditor claims in Chapter 7 liquidation.
In a motion to dismiss ECP’s complaint and accompanying memorandum of law, the Sukuk Certifi-
cate Holders responded to the request for declaratory judgment by arguing, (1) that the ORRI convey-
ance was indeed a true sale under controlling Louisiana law; (2) that ECP’s statements of law should be
disregarded in favour of Louisiana’s version of the Uniform Commercial Code; (3) that the complaint
should be dismissed because it asked the court to rewrite the contract; and (4) the complaint should be
dismissed because though asking the court to recharacterize the Sukuk as a loan, it left out every major
detail of what the loan should be. (Colon, 2019) The Court granted the Sukuk certificate-holders motion
to dismiss and the court did not deviate from the objective terms of the Sukuk agreement. (Colon, 2019)
The court found that it was a true sale and that the Sukuk investors had the sole rights to the underly-
ing assets. However, the matter was unclear as to whether Sukuk holders enjoyed contractual rights to
the assets like bondholders or creditors or whether they enjoyed proprietary rights and were, therefore,
considered by the courts to be equity holders. (Khnifer, 2010)
While the event proved successful for Sukuk investors, it was a setback for the Islamic finance in-
dustry in that the deal was structured as a purchase rather than a distribution to owners. The assets of
the Sukuk went to the certificate holders free and clear of claims of creditors, however, a precedent was
set that the Sukuk certificate holders did not own undivided interest in the assets. The Sukuk certificate
holders were treated as if they were third party buyers rather than the asset owners or even secured lend-
ers. (Khnifer, 2010) The Bankruptcy Court did not apply Shari’ah law to the transaction and settled the
Sukuk bankruptcy as a conventional and common law transaction thereby turning it into a conventional
transaction by default. However, the court did uphold the Sukuk agreement. It would be ideal if there
was one Sukuk Bankruptcy Tribunal (SBT) attached to the Dubai World Islamic Finance Arbitration
Centre (DWIFAC) to settle all of the world’s Sukuk disputes and bankruptcies located in Dubai, UAE
rather than common law jurisdictions scattered around the world.
The Four Cases Analyzed
The four cases assessed in this chapter including Beximco, Blom Bank, Bank Islam Malaysia Berhard,
and the East Cameron Gas Sukuk reveal the detrimental effects of using English or common law and
litigation to adjudicate Islamic finance disputes and the advantages of applying Shari’ah and commercial
business practices. Beximco illustrates how selecting English law as the governing law of an Islamic
finance contract may invalidate the application of Shari’ah to the dispute as Shari’ah is not recognized
as a valid source of law for governing commercial transactions in the UK and is not seen as a national
law in relation to Rome I. Blom Bank reveals how the misapplication of Shari’ah by a UK judge may be
detrimental to the effective adjudication of the Islamic finance dispute. Bank Islam Malaysia Berhard
reveals the benefits of applying Shari’ah and commercial business practice to the dispute resolution
process in order to properly adjudicate an Islamic finance transaction. These cases further illustrate the
need for a standardized dispute resolution contract in the form of the DWIFACJO standardized dispute
resolution contract and DWIFAC dispute resolution mechanism. The East Cameron Gas Sukuk case
reveals the need for an international Sukuk Bankruptcy Tribunal (SBT) to be attached to DWIFAC to
adjudicate the world’s Sukuk disputes and bankruptcies. It is unsure in East Cameron Gas whether the
third- party buyers or Sukuk holders are bondholders, creditors, or owners. Furthermore, Shari’ah law was
not used to adjudicate the Islamic Sukuk structure and transaction dispute. With the Sukuk Bankruptcy
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Tribunal (SBT), one tribunal and mechanism would adjudicate all of the world’s Sukuk disputes using
the DWIFACJO SBT standardized contract, the model Islamic banking law, the procedural law of the
Seat of Dubai, SBT arbitration rules, lex mercatoria, and Shari’ah with the Shari’ah Supreme Council
issuing binding decisions about Shari’ah law.
Dispute Resolution Centers and Mechanisms for Islamic Finance
Is Arbitration the Answer?
AAOIFI Shari’ah Standard No. 32(2/1) defines arbitration as an agreement between two parties or more
to designate an external party for resolving a dispute between them through issuance of a binding verdict.
In Islamic finance, it may be beneficial to use arbitration as the parties may select appropriately quali-
fied adjudicators to conduct private dispute resolution, structure the process to the needs of the dispute,
and utilize Shari’ah and lex mercatoria in the adjudication process, which may lead to legal certainty in
decisions and enhance confidence in Islamic finance (Blake, Browne, and Sime, 2013). In using the lex
mercatoria, a party may draw upon inter alia public international law; the general principles of law, the
UNIDROIT and UNCITRAL principles; the 1998 Principles of European Contract Law; as well as the
rules and practices, which have evolved within the international business communities (Redfern, Hunter,
Blackaby, and Partasides, 2009). Furthermore, the process may be cost effective if the dispute is decided
on the basis of written submissions rather than a hearing (Blake, Browne, and Sime, 2013). Among the
potential drawbacks of arbitration may include that the arbitration is not necessarily a cost-saving option
if a process similar to trial is used; the parties leave the final decision to a third party, and will be bound
by it; an arbitration process cannot easily deal with a party who fails to cooperate, as an arbitrator will not
have the wide powers of a judge; and the arbitrator needs to be selected with care as regards to expertise
and experience (Blake, Browne, and Sime, 2013). However, as the benefits of arbitration outweigh the
costs for Islamic finance and due to the fact that arbitration is permissible whether it is sought by two
natural or legal persons, or by a natural person and a legal person (AAOIFI, 2004), this section shall
examine the best venue and mechanism for arbitration for Islamic finance dispute resolution.
Lawrence and Khan (Lawrence and Khan, 2012) explore English arbitration and state that in England,
the English Arbitration Act 1996 permits the arbitral tribunal to decide the dispute in accordance with the
law chosen by the parties or in accordance with other considerations as are agreed by them or determined
by the tribunal s. 46(1)(b). Thus, according to Lawrence and Khan (2012, p. 424), in English-seated ar-
bitrations, the arbitral tribunal may decide the dispute in accordance with Shari’ah law. However, Colon
(Colon, 2011) states that in reality, arbitral tribunals judge the dispute to the greatest extent possible in
accordance with the chosen national law and only resort to applying Shari’ah principles as a gap-filler.
Therefore, in reality, Shari’ah may not be properly applied to the dispute, hindering legal certainty.
Furthermore, obtaining properly qualified arbitrators may pose a problem in English arbitration.
In the UK, a domestic arbitral award may be enforced either by bringing an ordinary civil claim on
the award in the High Court or by using the summary procedure under s66(1) Arbitration Act 1996. This
section allows the court to grant permission to enforce an award of an arbitral tribunal in the same manner
as a judgment or order of the court. Permission is sought by issuing an arbitration claim form in the High
Court, which is considered without notice. Cross-border enforcement of arbitral awards may be achieved
through the New York Convention 1958. An award is treated as made at the seat of the arbitration. A party
seeking the enforcement of a New York Convention award must produce the duly authenticated original
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Dispute Resolution in the Islamic Finance Industry
award or a duly certified copy and the original arbitration agreement or a duly certified copy. Where
permission is given, judgment may be entered in terms of the award (Blake, Browne, and Sime, 2013).
Currently, Islamic finance disputes may be submitted to the institutions listed in Table 1 below. How-
ever, Lawrence and Khan called The Qatar International Center for Commercial Arbitration (“QICCA”),
the Qatar Financial Center (“QFC”), the Cairo Regional Center for International Commercial Arbitra-
tion (“CRCICA”), the International Islamic Mediation and Arbitration Center (“IMAC”) based in Hong
Kong, and the Singapore International Arbitration Center (“SIAC”) and Lawrence and Khan were
told that very few Islamic finance cases had been brought to them for adjudication as of yet. Yakoob,
Smolo, and Muhammad (Yakoob, Smolo, and Muhammad, 2011) state that the reality is that most of
the institutions have not heard of any arbitration or mediation cases based on Islamic finance. Despite
the establishment of the centers, especially the KLRCA, none has been substantially involved in Islamic
finance cases. When Oseni and Ahmed approached KLRCA arbitrators, one arbitrator revealed to them
that not more than two cases had been arbitrated (Oseni and Ahmad, 2011). Agha (Agha, 2009) says
that none of these institutions are globally recognized centers for Islamic finance dispute resolution.
Even though the International Islamic Center for Reconciliation and Arbitration (“IICRA”) in Dubai
was established by the Islamic Development Bank (“IDB”) and has arbitration rules, that give priority
to Shari’ah in the event of a conflict of laws, the IICRA is not a globally recognized dispute resolution
center for Islamic finance and is rarely used.
This table contains a list of dispute resolution centres and courts available for Islamic finance dispute
resolution, the substantive and procedural laws applied to the dispute, and arbitration rules. The table
also addresses whether or not Shari’ah may be applied in the dispute resolution process.
Commercial Arbitration in the UAE
There are various avenues for arbitration in the UAE including but not limited to court ordered arbitra-
tion, Dubai International Arbitration Center (“DIAC”) arbitration, Dubai International Financial Center
– London Court of International Arbitration (“DIFC-LCIA”) arbitration center, the Islamic Center for
Reconciliation and Arbitration in Dubai (“IICRA”), Takheem Sharjah International Arbitration Center,
The Abu Dhabi Commercial Conciliation and Arbitration Centre (“ADCCAC”), the Abu Dhabi Global
Markets Arbitration Centre (“ADGMAC”), and the Ras al Khaimah Centre for Reconciliation and Com-
mercial Arbitration. Furthermore, in June 2013, the Central Bank of the UAE announced plans to create
a governance unit, similar to the Shari’ah Advisory Council (“SAC”) of the Central Bank of Malaysia,
which may act as a reference for all Shari’ah compliant banks operating in the UAE in the event of dis-
putes. In terms of court ordered arbitration or arbitration where Dubai is the seat of the arbitration, the
UAE has enacted Federal Law No. 6 of 2018 on Arbitration based on the UNCITRAL model replacing
the old law.
Article 55 and 53 of Federal Law No. 6 of 2018 provide that applications to ratify and execute, and
to annul, awards must now be made to the relevant Court of Appeal in the UAE. There will now be only
one level of appeal in respect of challenges to, and ratification of, arbitral awards (to the Court of Cas-
sation). (DLA Piper, 2018) Article 53 specifies more grounds for challenge than existed under the old
law. (DLA Piper, 2018) The Article also retains the general provision that awards may be set aside if they
contravene public order or morals of the UAE. (DLA Piper, 2018) Article 54 confirms that a judgment
refusing to annul an award can only be challenged in the Court of Cassation. (DLA Piper, 2018) Article
57 specifically permits an award debtor, having failed to persuade the Court of Cassation to annul an
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Dispute Resolution in the Islamic Finance Industry
Table 1. Dispute resolution for Islamic finance in selected countries
Dispute Resolution Centers for
Islamic Finance Substantive Law Procedural Law Shari’ah
State Courts Law of the Jurisdiction Law of the Jurisdiction No
Kuala Lumpur Regional Center
for Arbitration now the Asian
International Arbitration Centre
KLRCA Arbitration Rules 2012 http://klrca.org.my/userfiles/
File/KLRCA%20Arbitration%20Rules_2012.pdf
i-Arbitration Rules 2018
https://www.aiac.world/Arbitration-i-Arbitration
Kuala Lumpur, Malaysia Yes
Malaysian Mediation Center N/A. http://www.malaysianbar.org.my/malaysian_mediation_
centre_mmc.html N/A Yes
Financial Mediation Bureau N/A. http://www.fmb.org.my/index.htm N/A Yes
The Islamic Center for
Reconciliation and Arbitration in
Dubai (IICRA)
IICRA Arbitration Procedure
http://iicra.com/en/misc_pages/detail/47025a8fda UAE Yes
The Dubai International Arbitration
Center (DIAC) DIAC Arbitration Rules 2007 http://www.diac.ae/idias/rules/ UAE Yes
The Dubai International Financial
Center (DIFC) Courts
DIFC Law except for criminal law, which is governed by UAE
criminal law. http://www.difc.ae/laws-regulations DIFC Law Yes
DIFC-London Court of International
Arbitration (DIFC-LCIA)
DIFC Arbitration Law http://www.difcarbitration.com/
arbitration/arb_law/index.html
DIFC-LCIA Arbitration Rules
http://www.difcarbitration.
com/arbitration/rules_clauses/
Yes
Takheem Sharjah International
Arbitration Center
Takheem Sharjah International Arbitration Centre Rules
http://tahkeem.ae/contents/files/tahkeem_ruls_new.pdf UAE Yes
The Abu Dhabi Commercial
Conciliation and Arbitration Center
(ADCCAC)
Procedural Regulation http://www.abudhabichamber.ae/
English/AboutUs/Sectors/CCAC/Charter/Pages/Part-Two.aspx
UAE http://www.
abudhabichamber.ae/English/
AboutUs/Sectors/CCAC/
Charter/Pages/Part-Three.aspx
Yes
The Regional Center for
International Commercial
Arbitration – LAGOS (RCICAL)
RCICAL Arbitration Rules
http://www.rcicalagos.org/arb_rules.html
Nigeria or the Seat as chosen
by the Parties Yes
Tehran Regional Arbitration Center
(TRAC)
TRAC Rules of Arbitration http://www.trac.ir/rules_
arbitration.aspx Iran Yes
International Islamic Mediation and
Arbitration Center (IMAC)
IMAC Arbitration http://www.arabcci.org/IMAC_arbitration.
htm Hong Kong Yes
The Hong Kong Mediation Council N/A N/A Yes
Bahrain Chamber for Dispute
Resolution (Bahrain) BCDR-AAA
BCDR-AAA Arbitral Rules
https://www.bcdr-aaa.org/2017-arbitration-rules/ Bahrain Yes
The Qatar International Center for
Commercial Arbitration (QICCA)
QICCA Rules of Arbitration and Conciliation http://
qatarchamber.com/wp-content/themes/twentyeleven/forms/
QICCA%20RULES%20ENGLISH.pdf
Qatar Yes
The Qatar Financial Center
(QFC) Qatar International Court
and Dispute Resolution Centre
(QICDRC)
QICDRC Arbitration Regulations
http://qicdrc.com.qa/sites/default/files/qfc_civil_and_
commercial_court_regulations_date_of_issuance_15_
december_2010.pdf
Qatar Yes
The Cairo Regional Center
for International Commercial
Arbitration (CRCICA)
CRCICA Arbitration Rules http://www.crcica.org.eg/
arbitration_rules.html Egypt Yes
Singapore International Arbitration
Center (SIAC)
SIAC Rules 2013 http://www.siac.org.sg/index.
php?option=com_content&view=article&id=427&Item
id=204 or UNCITRAL Rules of Arbitration 2010
Singapore Yes
Abu Dhabi Global Markets
Arbitration Centre (ADGMAC)
ADGMAC Regulations
https://adgmac.com/arbitration-regulations UAE Yes
Ras al Khaimah Centre for
Reconciliation and Commercial
Arbitration
Articles of Association
https://www.rakchamber.ae/data/upload/mainE.pdf UAE Yes
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Dispute Resolution in the Islamic Finance Industry
award and now facing an order for execution of the award, to file a “grievance” against the order. (DLA
Piper, 2018) Such “grievances” can be appealed to the Court of Appeal. (DLA Piper, 2018)
In looking for the appropriate forum or country for arbitration, one should consider the assets, attitude
of the local courts, and adherence to the New York Convention 1958. In reference to these criteria, the
UAE is a prime location for a dispute settlement center for the Islamic finance industry as a signatory
to the New York Convention 1958 and various treaties for reciprocal arrangements of enforcement for
awards (refer to Table 2) and due to the reliability and the efficiency of the local law and courts.
The Enforcement of Foreign Awards in the UAE
In terms of UAE court ordered arbitration and if looking to enforce an arbitration judgment in the UAE
against UAE assets, the award issued by the arbitrators is converted into a judgment through an authen-
tication procedure through the local courts. This needs to be done in order for the arbitration award to
become equivalent to a court judgment and hence to be enforceable against the losing party’s assets.
Execution of the arbitration award will go through the same process as that of execution of a judgment
according to the Civil Procedure Law through the court Execution Department. The final order ratifying
the arbitration award will be considered equal to a judgment delivered by the UAE court.
A judgment (including an arbitration award) or interim order of the Dubai Courts may be enforced in
the DIFC Courts as according to the Summary of the 2009 Protocol of Jurisdiction Between the Dubai
and the DIFC Courts. The award must be final and appropriate for enforcement and translated into Eng-
lish by a legal translator as well as ratified by the Dubai Courts Registry. The award must be submitted
to the DIFC Courts with a letter from the Dubai Courts Registry to the Chief Justice of the DIFC Courts
requesting enforcement of the judgment, award, or order and the applicable fees.
This table contains treaties to which the UAE is a party, which may facilitate reciprocal enforcement
of foreign judgments and awards.
Grounds for challenge may be found in Article 53 of Federal Law No. 6 on Arbitration. It has been
held in many cases such as Cassation Petition 40 of 2004 that the validity of an arbitration award may
only be challenged on the grounds, which are exclusively stated in Article 216 of the Civil Procedure Law
(now Article 53 of Federal Law No. 6). In addition, the rule that the court should not review or consider
the substantive aspects of arbitration awards or their compliance with the law, has been confirmed by
many judgments such as Cassation Petition 88 of 2004 (2009, p. 386). Thus, an arbitration award may
only be challenged in the UAE based on procedural issues, however, public policy may be considered
at the enforcement stage (Nassif, p. 2009).
The Malaysian Adjudication Process
The Malaysian financial system is primarily regulated by the 1989 Banking and Financial Institutions
Act 1989 (“BAFIA”), the Bank Negara Malaysia and the Central Bank of Malaysia Act 2009 “CBMA”
the Securities Commission and the Securities Commission Act 1993, the Futures Industry Act 1993, the
Securities Industry Act 1983, the Capital Markets and Services Act 2007, the Takaful Act 1984, the Kuala
Lumpur Stock Exchange (“KLSE”), and the Labuan Offshore Financial Services Authority (“LOFSA”).
Islamic finance dispute resolution primarily occurs in the Malaysian civil law court, which utilizes the
Shari’ah Advisory Council (“SAC”) and may also be referred to the Kuala Lumpur Regional Center for
Arbitration (“KLRCA”), which is now the Asian International Arbitration Centre (“AIAC”).
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Dispute Resolution in the Islamic Finance Industry
Although Malaysia operates a dual court system, which includes the Shari’ah and civil courts, Aldohni
(2011, p. 203) explains that article 74(1) of the Federal Constitution of Malaysia states that finance,
including banking, is still part of the Federal List (Ninth Schedule of the Federal Constitution, Item 7),
which falls within the civil court jurisdiction. Aldohni (2011, p. 203) states that currently Islamic bank-
ing cases are adjudicated according to civil law in combination with the SAC. The Shari’ah Advisory
Council (“SAC”) was established on 1 May 1997 as the highest Shari’ah authority in Malaysia (Jaris,
Mohd, and Halili, 2011).
Section 56 of the Central Bank of Malaysia Act 2009 “CBMA” makes it mandatory for the court or
arbitrator to refer Shari’ah questions in Islamic finance disputes to the SAC for ascertainment. (Trakic,
2019) Section 57 of the CBMA clarifies that rulings made by the SAC shall be binding on the court or
arbitrator. (Trakic, 2019) Any question which necessitates Shari’ah determination, must be resolved by
the SAC. (Trakic, 2019) According to Trakic, sections 56 and 57 of the CBMA allow for the judicial
functions of the court to be appropriated by the SAC, which is housed by an agency under the Executive
Branch of Government. (Trakic, 2019)
Therefore, in Malaysia, banks are subject to civil and English law, including case law and statute,
which includes the Islamic Banking Act 1983 as well as the binding ruling of the SAC (Aldohni 2011,
p. 204). In April 2019, the Federal Court of Malaysia in a 5-4 majority decision held that Bank Negara
Malaysia’s Shari’ah Advisory Council’s (SAC) findings on Islamic finance are binding on the civil courts.
Table 2. Conventions ratified by the UAE
New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (10 June 1958)
Riyadh Convention ratified by the UAE on 15 April 1999 by Federal Decree No. 53 of 1999 (arbitration awards delivered by GCC
countries can be enforced in the UAE)
The Judicial Co-operation and Recognition of Judgments in Civil and Commercial Matters between the UAE and the Republic of France,
ratified by the UAE on 27 April 1992 by Federal Decree No. 31 of 1992
Agreement between the UAE and the Republic of India on Juridical and Judicial Co-operation in Civil and Commercial Matters between
the UAE and the Republic of India, ratified by the UAE on 27 April 1992 by Federal Decree No. 31 of 1992
European Convention on International Commercial Arbitration (Geneva)
Agreement on Judicial Cooperation, Enforcement of Judgments and Extradition of Criminals (Tunisia)
Agreement on Judicial Cooperation, Service of Process, Letters Rogatory and Extradition of Criminals (Morocco)
Agreement on Legal and Judicial Cooperation in Civil, Commercial, Personal Status and Criminal Matters (Syria)
Agreement on Legal and Judicial Cooperation (Somalia)
Agreement on Judicial Cooperation Service of Process, Letters, Rogatory, Enforcement of Judgments and Extradition of Criminals
(Algeria)
Convention on Judicial Cooperation and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (France)
Agreement on the Enforcement of Judgments, Letters Rogatory and Service of Process (GCC)
The Arab Convention on Judicial Cooperation (Riyadh)
Agreement on Legal and Judicial Cooperation (Jordan)
Agreement on Legal and Judicial Assistance (Egypt)
Agreement on Legal and Judicial Cooperation in Civil and Commercial Matters, Criminal Matters and Personal Status Matters with
Extradition and Assistance in the Settlement Estate (Syria)
Agreement on Legal and Judicial Cooperation in Civil and Commercial Matters, Mutual Legal Assistance in Criminal Matters and
Extradition of Criminals (India)
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Dispute Resolution in the Islamic Finance Industry
The nine-member panel ruled as constitutional Section 56 and 57 of the Central Bank of Malaysia Act
2009 (CMBA) which vested powers to the SAC to ascertain Islamic law.
In Malaysia, an Islamic banking transaction must be valid under Islamic and civil law for it to be
enforceable in the civil courts. According to Thani, Abdullah, and Hasan (Thani, Abdullah, and Hasan,
2004), thus, a contract may be valid under Islamic law, yet it could fail in the civil courts for example, due
to want of common law consideration, and therefore be unenforceable. The converse situation may occur
as well (Thani, Abdullah, and Hasan, 2004). Therefore, in order to obtain successful dispute resolution
in Malaysian courts, the Islamic banking documents or instruments must be drafted in accordance with
Islamic and Malaysian civil law, as well as structured in such a way as to be enforceable in the civil courts
(Thani, Abdullah, and Hasan, 2004). The ability of the civil court to resolve an Islamic banking dispute
differs from one case to another, depending on the judge’s knowledge, the court, and other circumstances
of the case including, but not limited to structure of the documents and/or instrument (Aldohni, 2011).
Oseni and Ahmad (Oseni and Ahmad, 2011) criticize the Malaysian judicial apparatus as inadequate
and state that the only judge in the Mu’amalat Branch of the Commercial Division of the High Court in
Kuala Lumpur experienced in Islamic finance is Dato Rohana Yusuf. In order to address this inadequacy,
Professor Tan Sri Ahmad Ibrahim advocates for the setting up of a Shari’ah Bench in the Federal Court
with provision for the appointment of some Muslim scholars skilled in Islamic law, perhaps based on
the system of Shari’ah trained judges in the Indonesian Mahkamah Agung (Thani, Abdullah, and Hasan,
2004). Recommendation 5.10 of the Bank Negara Malaysia’s Financial Sector Master Plan proposes the
establishment of a committee to establish a Shari’ah commercial court dedicated to deal with Islamic
banking and Takaful. In the interim, an Islamic banking tribunal has been established, which may serve
as the foundation for the Shari’ah commercial court. The use of the civil court in combination with the
SAC remains controversial as the SAC is seen by many as a part of the ‘executive branch of the govern-
ment (2011, 2006).’ Due to doubts about the independence of the SAC, the use of the SAC may face
reluctance by the civil courts (Aldohni, 2011). The same issues may arise in the AIAC as with SAC use
in the civil courts including the lack of confidence in the independence of the SAC and unwillingness of
the AIAC to use the SAC. Colon (Colon, 2011) explains that in the KLRCA, when a Shari’ah principle
is in dispute, the arbitrator adjourns the proceedings and refers the issue to either the SAC of the Central
Bank of Malaysia or a Shari’ah expert agreed upon by the parties (Rule 33).
The Kuala Lumpur International Arbitration Centre became the Asia International Arbitration Centre
“AIAC” and issued a new set of arbitration rules in 2018 based on the 2012 KLRCA i-arbitration rules.
The rules consist of two parts. Part I contains provisions on Shari’ah compliance while Part II reproduces
United Nations Commission on International Trade and Law (UNCITRAL) Arbitration Rules 2010, and in
cases of inconsistency, Part I shall prevail. (Trakic, 2019). Trakic states a problem may arise if Malaysian
law is selected as the law of the arbitration as sections 56 and 57 of the CBMA make such a reference to
the SAC mandatory and the ruling binding on the arbitration tribunal. (Trakic, 2019) This may hinder
the international appeal of AIAC as a mechanism to settle Islamic finance disputes. (Trakic, 2019) This
venue is rarely used and may lack adequate staff and procedure to adjudicate Islamic finance disputes.
Malaysia’s arbitral legislation consists of the Arbitration Act 2005, which commenced from March
15, 2006. The Arbitration Act 2005 is applicable to all international and domestic arbitrations, regard-
less of the rules of the arbitral regimes selected (ISRA, 2012). Unless otherwise agreed, challenges to
international awards may only be made on the grounds set out in the act (Norton Rose, 2010). Malaysia
is a signatory to the New York Convention subject to the reciprocity and commerciality reservations.
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Dispute Resolution in the Islamic Finance Industry
In terms of enforcing arbitration awards in Malaysia, upon application to the High Court, an award
may be recognized and enforced in the same way as a judgment. The granting or refusal of leave to en-
force may be appealed. The allowable grounds for refusing to recognize and enforce an award are those
set out in the New York Convention. The Malaysian courts generally make no distinction for enforcement
purposes between domestic and international awards, where the international award is from a New York
Convention country. There is no difficulty in enforcing foreign awards or in enforcing awards by foreign
parties against a domestic party in Malaysia.
Oseni and Ahmad (Oseni and Ahmad, 2011) purport that a Malaysian court-annexed Med-Ex, a
combination of mediation and expert determination attached to the Muamalat Bench of the Commercial
Division of the High Court of Malaya utilizing the SAC, may be the best dispute resolution mechanism
for Islamic finance. This is an innovative judicial structure for Malaysia, however, it would not satisfy
the needs of the international Islamic finance community due to differing interpretations of Shari’ah,
the unique Malaysian regulatory structure, and the inconsistency of the Muamalat bench. Although a
quality decision may be obtained through using MMC mediators, experts, and the SAC, the Malaysian
adjudication system may not be equipped to serve the international Islamic finance industry due to the
uncertainty of legal decisions and outcomes and the resulting lack of confidence, which may be promoted
amongst business investors. It may be better for the Islamic finance industry to obtain internationally
recognized arbitration awards from a globally recognized arbitration center that is enforceable against
assets in other New York Convention countries.
Why DWIFAC, DWIFACJO, SBT, and TT?
In its’ 2016 Report on Financial Institutions and International Arbitration, the International Chamber
of Commerce (ICC) suggested that a global legal framework for Islamic finance be formulated through
the convergence and codification of Islamic contract law with the option to provide dispute settlement
through arbitration allowing for the principles of Shari’ah to prevail (Jabbar, Said, and Ab Halim, 2019).
The author has produced such a vision for a comprehensive global framework for a dispute resolution
mechanism for the Islamic finance industry with DWIFAC, DWIFACJO, SBT, and the TT.
DWIFAC along with the DWIFAC Jurisprudence Office, SBT, and TT shall be the central command
station for Islamic finance dispute resolution, Sukuk bankruptcies, and Takaful disputes in the UAE, GCC,
and the world, providing a standardized contract with built- in dispute resolution for each arbitration
center, a uniform Islamic banking law, an arbitration center, and a centralized Shari’ah authority in the
form of the Higher Shari’ah Authority attached to the Central Bank of the UAE. In addition, attached
to the comprehensive Islamic finance dispute resolution mechanism, there will be a Sukuk Bankruptcy
Tribunal for all the world’s Sukuk disputes and bankruptcies and a Takaful Tribunal to adjudicate the
worlds’ Takaful disputes.
It is clear that state courts in common and civil law jurisdictions are inadequate to adjudicate Islamic
finance disputes, Sukuk bankruptcies, and Takaful disputes due to the lack of recognition of Shari’ah
law, lack of independent Shari’ah advisory committees, and/or the inability of court staff to effectively
apply Islamic finance and Shari’ah concepts in dispute resolution. In addition, the currently existing
arbitration centers are insufficient to handle Islamic finance matters including Sukuk bankruptcies and
Takaful disputes due to lack of properly trained staff; inadequate procedure and rules; misapplication
and non-application of Shari’ah and preference for national law; legal uncertainty; and lack of popularity
as a mode of dispute resolution. DWIFAC, the SBT, and the TT may offer the Islamic finance industry
822
Dispute Resolution in the Islamic Finance Industry
globally recognized arbitration centres complete with the DWIFAC jurisprudence office, which may
issue a uniform Islamic banking law and a standardized DWIFAC, SBT, and TT dispute resolution
contract, creating harmony, legal certainty, and investor confidence in and across the Islamic finance,
Sukuk, and Takaful industries. The DWIFAC, SBT, and TT standardized dispute resolution contracts
contain a built-in dispute resolution mechanism, facilitating early dispute settlement and completion of
contract. These contracts may be attached to all Islamic finance contracts industry-wide including Sukuk
and Takaful, making DWIFAC, the SBT, and TT the central dispute resolution authority for the industry.
DWIFACJO Uniform Banking Law
As it stands now, the UAE does not have an Islamic Banking law, however, it has the “New UAE Bank-
ing Law” or Federal Law No. 14 of 2018 on the Central Bank and Organization of Financial Institutions
and Activities, which repealed Federal Law No. 6 of 1985 and Federal Law No. 10 of 1980.
Previously, the UAE had a law allowing Islamic Banks to exist, UAE Federal Law No. 6 of 1985
Regarding Islamic Banks, Financial Institutions, and Investment Companies. There had previously been
a proposed law for governing Islamic banks in 1985, but it had not been backed up by a decree and
therefore, that is why the law is not in existence now. However, Federal Law No. 6 of 1985 was pro-
mulgated to legalize Islamic banking in the UAE. Article 5 provides that a Supreme Shari’ah Council
should be established and approved through a cabinet decision, but it never materialized. The Supreme
Shari’ah Council would oversee Islamic banks, financial institutions, and investment companies and
its’ opinion would be binding. However, Article 6 was implemented, which requires that each Islamic
firm establish its own Shari’ah Supervisory Authority (“SSA”) consisting of three members, to be ap-
proved by the Shari’ah Supervisory Council (ISRA, 2013) and inserted into the articles of association
(ISRA 2013, p. 656). The SSA is obligated to apply Shari’ah to the company operations and contracts
(Thani, Abdullah, Hasan, 2004). However, Federal Law No. 6 of 1985 has now been replaced with the
New UAE Banking Law, which now requires the establishment of Shari’ah Supervision Committees
for onshore UAE Islamic Finance Institutions and, which has established the High Shari’ah Authority
to oversee Shari’ah compliance in the UAE excluding the DIFC and ADGM.
DWIFACJO may take the opportunity to formulate and issue a Uniform Islamic Banking Law based
upon the draft of the UAE 1985 Islamic Banking Law, UAE Federal Law No. 6 of 1985 Regarding Is-
lamic Banks, Financial Institutions and Investment Companies, the Law Regulating Islamic Financial
Business DIFC Law No. 13 of 2004, and AAOIFI standards, which compliments the New UAE Banking
Law. The new law may then be utilized as the substantive law in DWIFAC, SBT, and TT arbitrations
and submitted to the UAE government for approval and gazetting as this law would be necessary for
the UAE in order to fulfil its mandate of becoming the capital of the Islamic economy. In addition, the
Higher Shari’ah Authority of the Central Bank may be utilized by all existing UAE dispute resolution
bodies, including the Central Bank of the UAE, the Dubai Courts, and the DIFC/DFSA and the ADGM,
which lacks such a board. The Higher Shari’ah Authority may fulfil its original purpose of approving
the Shari’ah boards of all Islamic financial institutions in the UAE, including in the DIFC and ADGM.
823
Dispute Resolution in the Islamic Finance Industry
The DWIFAC and SBT Standardized Dispute Resolution Contract
I propose that DWIFACJO issue a standardized dispute resolution contract for each DWIFAC, SBT,
and TT, which may be attached to the main contract. The DWIFACJO standardized dispute resolution
contracts may contain a similar built-in dispute resolution mechanism as the FIDIC contract containing
three stages including (1) the Dispute Resolution Board (DAB), (2) amicable settlement, and (3) final
referral to DWIFAC, SBT, and TT arbitration. Within thirty days of the occurrence of the subject-matter
of a dispute, any party to the contract may submit a claim to the DAB, addressed to the chairman of the
DAB and with a copy to all parties of the contract. However, if any of the parties to the contract consid-
ers that there are circumstances, which justify the late submission, she may submit the details to the
DAB for a ruling. If the DAB considers that it, in all the circumstances, is fair and reasonable that the
late submission be accepted, the DAB shall have the authority to override the relevant thirty- day limit
and if it so decides, it shall advise both the parties accordingly.
The DAB shall have sixty days to issue a binding ruling, which must be implemented immediately.
If either party is not satisfied with the DAB ruling, either party can give notice of dissatisfaction to the
other before the thirty days after the day on which she received the decision on or before the thirty days
after the day on which the said period of sixty days expired. If there is no dissatisfaction within thirty
days after the day on which she received the decision, the DAB’s decision shall become final and bind-
ing upon both parties. The DAB’s decision may then only be overturned by settlement or arbitration at
DWIFAC, SBT, or TT.
The DAB shall consist of three people who must be suitably qualified in law, Islamic finance, and
Shari’ah. Each party shall nominate one member for the approval of the other party. The parties shall
consult both these members and shall agree upon the third member, who shall be appointed to act as
chairman. However, if a list of potential members is included in the contract, the members shall be selected
from those on the list, other than anyone who is unable or unwilling to accept appointment to the DAB.
The agreement between the parties and either a sole member (adjudicator) or each of the three
members shall incorporate by reference the General Conditions as written by DWIFACJO, with such
amendments as agreed between them. The composition of the DAB shall be by nomination and then
joint-selection. DAB members are to be re-numerated jointly by the parties with each paying half of any
fees. DAB members may only be replaced by mutual agreement. The appointment of any member may
be terminated by mutual agreement of both parties, but not by any party acting alone. Unless otherwise
agreed by both parties, the appointment of the DAB shall expire when the discharge of the matter shall
have become effective. Where the parties fail or are otherwise unable to agree upon the appointment,
nomination or replacement of any member of the DAB, then the appointing official so named in the
contract shall make the appointment.
DWIFAC, SBT, and TT may establish an Ambassador’s List similar to the FIDIC President’s List,1
from which arbitrators and DAB members may be selected, if not specified in the contract. Persons
who have successfully completed a DWIFAC Adjudication Assessment Workshop and International
Arbitrator’s Islamic Finance Contracts Course and applied for entry to the DWIFAC Ambassador’s
List of Approved Dispute Adjudicators are entered on the List for five years. Successful attendees at an
Adjudication Assessment Workshop are required to be fluent in English and to be thoroughly familiar
with Islamic finance, law, and Shari’ah.
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Dispute Resolution in the Islamic Finance Industry
There may be situations where a party fails to comply with a DAB decision. In such cases, the other
party may refer the failure to DWIFAC, SBT, or TT arbitration. Where notice of dissatisfaction has been
given, both Parties shall attempt to settle the dispute amicably before the commencement of arbitration.
However, unless both Parties agree otherwise, arbitration may be commenced on or after the fiftieth day
after the day on which notice of dissatisfaction was given. The attempt to obtain an amicable settlement
during this prescribed period of fifty days is a condition precedent to a referral to arbitration. There is
no given time frame to refer a dispute to arbitration, however, it should be without undue delay. Once
the arbitration procedure has been initiated, the DWIFAC arbitration shall commence according to the
DWIFAC arbitration rules, the SBT arbitration shall commence according to the SBT arbitration rules,
and the TT arbitration shall commence according to the TT arbitration rules.
The arbitrator(s) shall have full power to open up, review, and revise any decision of the DAB relevant
to the dispute. Neither party shall be limited in the proceedings before the arbitrator(s) to the evidence
or arguments previously put before the DAB to obtain its decision or to the reasons for dissatisfaction
given in its notice of dissatisfaction. Any decision of the DAB shall be admissible in evidence in the
arbitration. Arbitration may be commenced prior to or after completion of the contract. The obligations
of the Parties and the DAB shall not be altered by reason of any arbitration being conducted during the
progress of the contract.
The arbitration at DWIFAC, SBT, and TT shall be conducted in the English language and any arbitral
decision shall be final and binding. All of the DWIFAC, SBT, and TT decisions (see Appendix B) are
to be published in English, French, and Arabic and the arbitration itself to be conducted in English. In
the event of a conflict of laws, the Shari’ah shall prevail. A valid arbitration decision should lead to a
verdict that conforms to the rules of the Shari’ah. The Shari’ah and legal basis of the arbitration deci-
sion shall be mentioned in the decision.
In the context of DWIFAC, SBT, and TT, the centers may make arrangements with the Dubai and
DIFC courts and Abu Dhabi Courts and the ADGM or Abu Dhabi Global Markets Courts for enforce-
ability of DWIFAC, SBT, and TT arbitration awards. However, parties to the dispute must realize that
the arbitration award issued by DWIFAC, SBT, and TT may be overturned or enforced in other jurisdic-
tions (International Bechtel Co. Ltd. v. Department of Civil Aviation of the Government of Dubai 300 F.
Supp. 2d 112 (DDC. 2004)) or challenged in UAE courts based on Article 216 of the Civil Procedure
Law (Now Article 53 of the Arbitration Law). Higher Shari’ah Authority decisions shall act as a source
of precedent and shall be binding, thus providing legal certainty to Islamic finance and Sukuk dispute
adjudication. The Higher Shari’ah Authority shall act as the highest Shari’ah authority for DWIFAC,
SBT, and TT arbitration, the UAE, and the DIFC and ADGM.
DWIFAC and SBT Relationships with Courts and Tribunals
A special component of the DWIFAC dispute resolution mechanism including the SBT and TT will be
the special relationship between DWIFAC, the SBT, the TT, the Central Bank of the UAE, the Dubai
Courts, the DIFC, DIFC-LCIA, DIAC, IICRA, the Abu Dhabi Global Markets Arbitration Centre, the
Abu Dhabi Commercial Conciliation and Arbitration Centre, Takheem Sharjah International Arbitration
Centre, and the Ras al Khaimah Centre for Reconciliation and Commercial Arbitration.
825
Dispute Resolution in the Islamic Finance Industry
The Central Bank of the UAE (“CBUAE”) was formed in 1980 and is primarily responsible for
overseeing banks in the UAE, except in the DIFC, where the regulatory authority is the Dubai Financial
Services Authority or (“DFSA”) and the ADGM where the regulatory authority is the ADGM’s Financial
Services Regulatory Authority (“FRSA”).
The DFSA is a Shari’ah Systems Regulator, requiring that any Islamic firm must have a Shari’ah
Supervisory Board (“SSB”). The DFSA is unfortunately not itself a Shari’ah regulator and has not
constituted its’ own Shari’ah Board to oversee the regimes in Islamic firms (DFSA, 2010). Under the
Shari’ah Systems Regulator requirements, the firm must have systems and controls to implement the
SSB’s rulings and must conduct annual Shari’ah reviews and audits and produce disclosures based on
AAOIFI standards (DFSA, 2010). In general, most of the disclosures recommended by the IFSB are
already mandated in the DFSA rules (DFSA, 2011) and the DFSA currently requires the use of AAOIFI
standards for Islamic financial business (DFSA, 2011). In addition, the DFSA utilizes the IFSB standards
in determining its capital adequacy regulations and there are also special rules for Islamic funds and for
Sukuk (DFSA, 2010).
The DIFC has been actively promoting Islamic finance with the Law Regulating Islamic Financial
Business DIFC Law No. 13 of 2004, the establishment of the Islamic Finance Advisory Council in 2005,
the presence of the Islamic International Rating Agency (“IIRA”) from 2006, and an MOU between the
DFSA and the Securities Commission of Malaysia facilitating cross-border flows of Islamic Finance
between the DIFC and Malaysia in 2006. There appears to be a substantial amount of Islamic finance
business being conducted in the DIFC, under the regulation of the DFSA, however, the DIFC lacks an
adequate Islamic finance dispute resolution mechanism and centralized Shari’ah authority.
The ADGM has issued the Islamic Finance Rules to regulate two categories of Shari’ah compliant
financial institutions: an Islamic Financial Institution (“IFI”) and an Islamic Window. (Shearman &
Sterling, 2016) An Islamic Financial Institution or Islamic Window is required to comply with all of
the regulations that would apply to a conventional financial institution and, in addition, is required to
comply with the ADGM Islamic Finance Rules. (Shearman & Sterling, 2016) The additional regulatory
compliance obligations set out in the Islamic Finance Rules address Shari’ah supervision and account-
ing and audit. (Shearman & Sterling, 2016) The Islamic Finance Rules require that an IFI or an Islamic
window constitute and maintain a Shari’ah Board. (Shearman & Sterling, 2016) The Islamic Finance
Rules allow for the ADGM to establish a central Shari’ah Board, however, the ADGM has not done so
as of yet. (Shearman & Sterling, 2016). In terms of accounting, the AAOIFI standards should be fol-
lowed. (Shearman & Sterling, 2016) The Islamic Finance Rules also prescribe certain regulatory capital
requirements that should be adhered to for IFIs and Islamic windows. Profit-Sharing Investment Accounts
(PSIA’s), Islamic Collective Investment Funds, Islamic Securities, and Takaful are also regulated by the
Islamic Finance Rules (Shearman & Sterling, 2016).
DWIFAC, SBT, and TT, which shall be funded by Sheikh Mohammed bin Rashid Al Maktoum (Ara-
bic محمد بن راشد آل مكتوم), may act as the independent central dispute resolution authority and Shari’ah
regulator connecting all of the adjudication apparatus’s of Dubai, the UAE, and the DIFC and ADGM
into one consolidated framework for the adjudication of Islamic finance disputes, Sukuk bankruptcies,
and Takaful disputes with a centralized Shari’ah authority in the form of the Higher Shari’ah Authority
attached to the Central Bank of the UAE. The decisions of the Higher Shari’ah Authority shall be binding
and available to the public for review, thereby giving certainty to legal decisions and promoting confi-
dence amongst investors. The DIFC, DIFC-LCIA, Dubai Courts, Central Bank of the UAE, the IICRA,
ADGMAC, ADCCAC, the Takheem Sharjah International Arbitration Centre, and the Ras al Khaimah
826
Dispute Resolution in the Islamic Finance Industry
Center for Reconciliation and Commercial Arbitration may refer arbitration to DWIFAC, SBT, and TT
and/or utilize the DWIFAC and SBT Ambassador’s List and facilities. In addition, DWIFAC, SBT, and
TT may utilize the expert determination, mediation, and other services of the Dubai and DIFC Courts
and the arbitrators of the IICRA, DIFC-LCIA, DIAC, ADGMAC, ADCCAC, the Takheem Sharjah Inter-
national Arbitration Centre, the Ras al Khaimah Centre for Reconciliation and Commercial Arbitration,
and the Central Bank of the UAE governance unit. DWIFAC and SBT awards may be enforceable in the
Dubai and DIFC Courts and Abu Dhabi and ADGM courts through a special protocol.
CONCLUSION
It is not efficient for the Islamic finance industry to use domestic common and civil law litigation, which
does not recognize Shari’ah, gives priority to secular national laws, or relies on a controversial Shari’ah
Advisory Committee (“SAC”) to adjudicate Shari’ah issues. It is clear that international arbitration is
more beneficial than mediation and expert determination and the best alternative dispute resolution
mechanism available for Islamic finance including Sukuk bankruptcies and Takaful disputes. However,
it is also evident that none of the existing arbitration centers can provide an adequate mechanism for
adjudication of disputes for the international Islamic finance industry. The DWIFAC arbitration center,
the SBT, and TT along with the DWIFAC jurisprudence office (DWIFACJO) provides the best solution
of the dispute resolution conundrum of the Islamic finance industry, providing a globally recognized
center for dispute resolution located in one of the world’s major financial centers, which adjudicates
disputes using arbitration incorporating lex mercatoria and Shari’ah, the DWIFACJO uniform banking
law, the DWIFAC, SBT, or TT arbitration rules, and the procedural law of Dubai as well as uses highly
qualified Shari’ah and Islamic finance/law arbitrators. DWIFAC, SBT, and TT may also organize and
utilize the existing dispute resolution framework in Dubai, the DIFC, ADGM, and the UAE, consolidating
the centres into one hierarchical system, which includes the Higher Shari’ah Authority for the efficient
adjudication and regulation of Islamic finance disputes.
In addition, the DWIFAC, SBT, and TT standardized dispute resolution contract contains a built-in
dispute resolution mechanism, encouraging early dispute settlement and completion of contract. This
new dispute resolution procedure may increase efficiency, reduce risk, improve capital adequacy ratios,
and allow for Islamic banks to pursue Shari’ah banking in its true form. We should take this opportu-
nity in the creation of the Dubai World Islamic Finance Arbitration Center (DWIFAC), SBT, TT, and
DWIFACJO to encourage practitioners in the Islamic finance industry, which promotes Shari’ah based
rather than Shari’ah compliant products, and to pursue Holy Book Banking based on the concept of
Risalah, recognizing the teaching of all of Allah’s (Subhanahu wa Taala) prophets.
DISCLAIMER
Major part of this chapter is extracted from the unpublished MS Thesis of the author. The thesis was
submitted to Durham University in 2013 to fulfill degree requirements.
827
Dispute Resolution in the Islamic Finance Industry
CLASSIFICATIONS
JEL Classification: K33, K41
KAUJIE Classification: C1, C2
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ENDNOTE
1 http://fidic.org/node/805
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APPENDIX 1
The concept that an arbitration is governed by the procedural law of the place in which it is held, which
is the ‘seat’ (or ‘forum’ or ‘locus arbitri’) of the arbitration, is well-established in both the theory and
practice of international commercial arbitration. Once a place of arbitration has been chosen, it brings
with it its’ own law. If that law contains provisions that are mandatory so far as arbitrations are con-
cerned, those provisions must be obeyed. The Rome Convention provides that a choice of (substantive)
law must be ‘expressed or demonstrated with reasonable certainty by the terms of the contract or the
circumstances of the case.’ The choice in regards to the substantive law, in the absence of any express or
implied choice by the parties, and aside from the principles of international commercial law, appears to
be between the law of the seat of the arbitration, the law, which governs the contract as a whole, and the
law most closely connected with the transaction. Overall, there is no universal law regarding the choice
of law in an arbitral proceeding and there seems to be a wide variety of choices in varying circumstances
such as when no law is designated by the parties to the contract.
Usually, the Contract or Agreement, which is the subject-matter of the dispute, would contain a
dispute resolution clause indicating the method of dispute resolution and if arbitration is designated
as the method of dispute resolution, the clause would normally explain the seat of the arbitration, the
arbitration center, the rules of the arbitration center, the number of arbitrators, as well as the substantive
and procedural law to be applied. If the seat of the arbitration is mentioned, then the procedural law to
be applied may be the law of the seat of the arbitration (Redfern, Alan and Martin Hunter with Nigel
Blackaby and Constantine Partasides, 2009).
APPENDIX 2
The arbitration decision shall include the text of the verdict, names, identities, and addresses of the two
parties of the dispute; reference to the date and number of the arbitration document; summary of the
subject-matter of the dispute; claims of the two parties of the dispute and the supporting documents;
names of witnesses and experts whose help was sought if any; names of arbitrators, date and place of
issuing the verdict; signatures of arbitrators; signatures of the parties of dispute; and reasons of the deci-
sion reached (AAOIFI, 2004, p. 560).
The final arbitration decision should resolve all points of dispute and lead to fair specification of the
rights of the arbitration parties. When arbitration ends up with partial resolution of the points of dispute,
arbitration is incomplete since it has not enabled the disputing parties to avoid resorting to legal suing.
In this case, the disputing parties have the right to demand a further decision from the arbitrator so as
to resolve the remaining points of dispute (AAOIFI, 2004, p. 559).
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ABBREVIATIONS
AAOIFI Accounting and Auditing Organization for Islamic Financial Institutions
ADCCAC Abu Dhabi Commercial Conciliation and Arbitration Centre
ADGMAC Abu Dhabi Global Markets Arbitration Centre
BAFIA Banking and Financial Institutions Act 1989 (Malaysia)
BBA Bai Bithamin Ajil
BCDR-AAA The Islamic Financial Mediation and Arbitration Center
BDB Blom Development Bank
BNM Bank Negara Malaysia
CBUAE Central Bank of the United Arab Emirates
CBM Act 2009 Central Bank of Malaysia Act 2009
CRCICA Cairo Regional Center for International Commercial Arbitration
DAB Dispute Adjudication Board
DFSA Dubai Financial Services Authority
DIAC Dubai International Arbitration Center
DIFC Dubai International Financial Center
DIFC-LCIA Dubai International Financial Center- London Court of International Arbitration
DWIFAC Dubai World Islamic Finance Arbitration Center
DWIFACJO Dubai World Islamic Finance Arbitration Center Jurisprudence Office
FIDIC International Federation of Consulting Engineers
IDB Islamic Development Bank
IFSB International Financial Services Board
IICRA Islamic Center for Reconciliation and Arbitration
IIRA Islamic International Ratings Agency
IMAC International Islamic Mediation and Arbitration Center
ISRA International Shari’ah Research Academy
KLRCA Kuala Lumpur Regional Center for Arbitration
KLSE Kuala Lumpur Stock Exchange
LOFSA Labuan Offshore Financial Services Authority
PSA Property Sale Agreement
QICCA Qatar International Center for Commercial Arbitration
QFC Qatar Financial Center
RCICAL Regional Center for International Commercial Arbitration
SAC Shari’ah Advisory Council
SIAC Singapore International Arbitration Center
SSA Shari’ah Supervisory Authority
SSB Shari’ah Supervisory Board
TID Investment Dar
TRAC Tehran Regional Arbitration Center
UAE United Arab Emirates
