Islamic finance disputes, to litigate or to arbitrate that is the question?
Abdul Karim Aldohni
Islamic finance has proved its credentials not only at the regional level, where it was ideologically founded and emerged, but also at the international level. Islamic finance products are now offered widely in leading international financial markets. Even the United Kingdom Government successfully issued sovereignty Sukuk twice in 2019 and then in 2021.
The transnational phase in the Islamic finance industry’s evolution brought different sets of legal challenges, which are primarily stemmed from the central role that Islamic law plays in the governance of Islamic finance. On the one hand, there are legal and regulatory challenges concerning the operations of Islamic finance in countries that do not recognise Islamic law as a source of law and the extent to which Islamic law requirements could be accommodated in their legal and regulatory financial frameworks. On the other hand, the international offering of Islamic finance products has also meant that parties from different jurisdictions could become parties to Islamic finance disputes. This is particularly challenging where the English court and the law of England are chosen to settle the dispute yet compliance with Islamic law is still expected. This was seen in a number of cases, such as Shamil Bank of Bahrain v Beximco Pharmaceuticals Limited and Others and Dubai Islamic Bank PJSC v PSI Energy Holding Company BSC.
My recent article, ‘Rethinking dispute resolution mechanisms for Islamic finance: understanding litigation and arbitration in context’ in the Northern Ireland Legal Quarterly (2022) 73(4), brings particular focus to the latter legal challenge concerning the settling of Islamic finance disputes. My article provides critical views of the mechanism of litigation before the English court and the mechanism of arbitration where England is the seat for arbitration.
With regard to litigation, any law graduate who is familiar with English private international law knows that the English legal system and its judiciary are equipped to deal with the question of a foreign law. Therefore, the article does not repeat what has already been discussed in the literature as to how the key Islamic finance cases were decided by the English court. Rather it examines the two elements central to litigating an Islamic finance dispute before the English court where parties can benefit from the high standards of the English judiciary while upholding the principles of Islamic law. First, is the validity of the chosen governing law that Islamic law, when it is referred to as an abstract concept rather than a national state law, fails to satisfy. While the second important factor is the satisfactory proof of the chosen governing law when the choice is a national system of law that factors elements of Islamic law. The article argues that, given the adversarial nature of the English legal system and the classification of a foreign law as a ‘peculiar fact’, the court’s application of Islamic law is influenced by the parties’ expert witness statements. These tend to conflict as each would likely advocate a more favourable position of their party. I argue that having a convincing expert witness is a decisive factor in the court’s understating of Islamic law, however, this does not always correlate with the most rigorous understating of Islamic law.
Therefore, I argue for the incorporation of Islamic law principles in the terms of the contract for an optimal use of the English judiciary. This requires compliance with the procedural and substantive requirements under English law. The article examines Islamic Investment Company of the Gulf v Symphony Gems NV & Ors, as an example of how not to incorporate. The parties in this case failed to refer to Islamic law principles in the terms – the reference was made in the recital – and also failed to identify ‘black letter’ provisions; the term they used was ‘Islamic Sharia’. I argue that the incorporation of the relevant Sharia standards of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in the terms of the contract could be the way forward. They provide the clarity and certainty that allow the court to deal effectively with highly contested Islamic law matters. In addition, it is the judge who interprets these terms as terms of an English contract.
As for the arbitration mechanism where England is the arbitration seat, the article demonstrates in depth the complexities that are associated with applying three sets of law – namely, the curial law (lex arbitri), the law governing the actual arbitration clause or agreement and the substantive law – to the arbitrated dispute. The article critically examines the Arbitration Act 1996 and demonstrates how it does not provide the parties with the interim measures that are critical to protect the interests of the parties to a disputed Islamic finance agreement. Further, the question of the ‘substantive jurisdiction’ of the arbitrators remains a serious threat to the enforceability of the award. Finally, although the 1996 Act allows the choice of Islamic law, a non-national system of law, as the substantive governing law, this does not resolve a bigger problem concerning the certainty of its interpretation. The mere choice of an arbitrator who is expert in Islamic law does not necessarily guarantee a mutually accepted interpretation of Islamic law by all parties.
I conclude that there is no binary choice to make between litigation and arbitration, with the latter being the optimal choice just because a non-national system of law, such as Islamic law, can be chosen as the substantive governing law. As for litigation, I suggest the incorporation of the internationally accepted AAOIFI Sharia Standards in the terms of the agreement as the way forward in this context. It provides the court with a ‘black letter’ point of reference that the court can apply impartially. However, the caveat remains whether the parties are genuinely interested in upholding the principles of Islamic law in the agreement, and any arising disputes, or just the façade of it.
  EWHC 2118 (Comm);  2 All ER (Comm) 894. The appeal decision is reported in  2 Lloyd’s Rep 1.
  EWHC 3186 (Comm).
  2 WLUK 313.