With reference to legal issues in business contracts, particularly regarding the issue of the choice of the law to be applicable in case of dispute(s),
as a rule here each party is to propose a certain law to govern the contract as he sees appropriate to his case.
According to Rome Convention, legally speaking, it is important to choose a governing law that is known and very familiar to you and, if possible, to the opponent party. The applicable law, to be chosen, could be the local law or a foreign law.
The parties in a contract related to this particular banking case, included a clause stating that ...“based on Sharia Rules the English law shall be applicable law to this contract.” At the outset, this provision could be very dangerous to the party or parties who have proposed its inclusion in the subject-matter contract.
The parties herein combined two elements in the clause specifying the applicable law to their contract, that is to say “Sharia rules and English law”. Unfortunately, if we could say, The English Courts explained that the “Sharia Rules” are not framed or drafted in a certain specific law. Moreover, they represent general principles with different schools of thought expressing many ideas. Whereas, on the other hand, with reference to the English Law or any other codified laws like the French or German Law…etc., its provision is clear and gives clear legislation. This is, in a nutshell, what has been said by The English Court, and not necessarily we agree with this judgment or their interpretation to the “Sharia Law”.
In this case the defendants didn’t dispute the amount they received from the plaintiff “Shamil Bank” however they argued that since the governing law clause states "… Subject to the principles of Sharia this agreement shall be governed by and construed in accordance with the laws of England"…., then the obligations are only enforceable if they are enforceable both under Sharia and English law.
The defendants claimed that the agreements provide for “interest”, “usury” or "riba", and therefore they are not enforceable under Sharia law which totally prohibits “riba” in any sort…. Moreover they added that the agreements were merely, "…a disguise for an otherwise undocumented interest bearing loan".
An expert called by the plaintiff explained to the Court that “the clause (subject to the principles of Sharia) does not constitute a choice of law at all but is a reference to, or reflection of, the fact that the bank seeks to conduct its affairs according to Sharia principles under the supervision of its Sharia Supervisory Board”.
The expert also said that”Sharia law is made of conflicting pronouncements and that there is considerable debate as to what is and what is not permissible under it. It is because of these systematic uncertainties and controversies that Islamic banks submit themselves to the supervision and scrutiny of appointed supervisory religious boards”.
The expert argued that “Rome Convention makes it clear that reference to the parties (choice of law) to govern a contract is a reference to the law of a country. It does not sanction the choice of non-national systems of law, such as “lex mercatoria”, or general principles of law. Obviously, the Sharia law is not the law of the country in Bahrain and therefore does not qualify to be considered under Rome Convention. Even if the Convention is to be applied in a hypothetical case, it will not permit a situation where two laws simultaneously govern the question of the enforceability of a contract”.
The Court mentioned that “ the doctrine of incorporation could only sensibly operate where the parties had by the terms of their contract sufficiently identified "black letter" provisions of a foreign or international code or set of rules opted to be incorporated as terms of the relevant contract, such as a particular article or articles of the French Civil Code or the Hague Rules. By that method, English law was applied as the governing law to a contract into which foreign rules have been incorporated”.
“The general reference to Sharia law in this instant afforded no reference to, or identification of, those aspects of Sharia law which were intended to be incorporated into the contract, let alone the terms in which they were framed. The words were intended simply to reflect the Islamic principles according to which the bank held itself out as doing business, rather than a system of law intended to "trump" the application of English law to be applied in ascertaining the liabilities of the parties under the terms of the agreement”.
Based on the above, I take the opportunity to say that, it is our clear opinion that it is very important for the contracting parties, in business contracts , to choose a very specific clear and certain law to govern the contract. Islamic Banks referring to principles of “Sharia law \ English law as per Sharia law” as the applicable governing law in their contracts are advised to study this point carefully with reference to their future contracts..
We highlight this point; as such clause(s) may be interpreted differently or against Sharia law principles and ultimately could lead to judgments against their favor. It’s a real issue many banks are facing and could create major legal risks for them… We need to benefit from the outcome of “Shamil Bank” case and look for the most appropriate legal measures to protect our interests.
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