A Landmark Judgment of 23 January 2004 by the England and Wales Court of Appeal

Author(s): Nabil Saleh

Source: Arab Law Quarterly, Vol. 19, No. 1/4 (2004), pp. 287-291
Published by: Brill
Stable URL: https://www.jstor.org/stable/3382118
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 A LANDMARK JUDGMENT OF 23 JANUARY 2004
BY THE ENGLAND AND WALES COURT OF APPEAL

Nabil Saleh

(Clause provides that "subject to the principles of the Glorious Sharia the M
agreements shall be governed and construed in accordance with the laws of E
Reference to Sharia principles interpreted as no more than a pious statement
bank, with no effect on the governing law.)

Summary of the Factual Background and the Lower Court Decision

1. Shamil Bank of Bahrain EC (hereinafter referred to as the

requested from the Queen's Bench Division, The Commercial C
(Mr. Justice Morison), a summary judgment against: (1) Be
Pharmaceuticals Ltd., (2) Bangladesh Export Import Co. Ltd. as
principal debtors, (3) Mr. Ahmed Sohail Fasiuhar Rahman, (
Ahmed Salman Fazlur Rahman, and (5) Beximco Holdings L
guarantors. (Defendants 1 and 2 shall be referred as the Pr
Debtors; defendants 3, 4 and 5 shall be referred to as the Guara
and all the defendants shall be referred to collectively as the Defen
2. The Bank claimed that it had advanced monies to the Defendants to
the terms of two "Morabaha Financing Agreements" which, in form,
related to the sale of goods, and that the Defendants failed to pay
back what they owed, namely some US$49.7 million.
3. A Morabaha agreement is an instrument used by Islamic banks and
Islamic financial institutions whereby the seller (bank or institution)
agrees to purchase goods desired by the buyer and to sell them to the
buyer (the client) for a deferred price; the difference between the orig-
inal purchase price to be paid by the bank or institution and the
deferred price paid by the client being a stated profit known to and
agreed upon by both seller and buyer.
4. Each agreement between the Bank and the Principal Debtors states
that "subject to the principles of the Glorious Sharia, this agreement

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 288 NABIL SALEH

shall be governed and constru

England." The guarantees state t
construed in accordance with Engli
jurisdiction of the English courts.
ciples of the Sharia.
5. The Defendants argued, inter alia
the wording of the agreement s
and the law of the English jurisdic
able if it was recognized by both
and (ii) that the agreement was
and Ijara leases when in reality
lawful interest, not recognized
unenforceable.

6. Mr. Justice Morison held: (i) it was clear from the terms of the agree-
ment that the parties choose English law to be the jurisdiction of the
contract. Whilst the Rome Convention on the Law Applicable to
Contractual Obligations permitted two different laws to govern different
parts of the agreement, it did not permit two conflicting laws to gov-
ern the enforceability of a contract. Moreover, the Rome Convention
makes it clear that the reference to the parties' choice of the law to
govern a contract is a reference to the law of a country, whereas
Sharia law is a non-national system. The effect of the Defendants'
argument is that English law would not permit the enforceability of
the agreement since it was not recognized by Sharia law. If that was
the intention of the parties clear words would have been required; and
(ii) it was clear that it could not have been the intention of the parties
to have asked the English courts to determine matters of Sharia law
which, the evidence established, raised opposing points of view on geo-
political and opposing religious beliefs. There was no guarantee that
either party would have accepted a determination on such issues by
an English secular court, since there was clearly great controversy as
to the strictness of the law and its application. Whilst the court would
attempt to answer issues posed to it, it was highly unlikely in the cir-
cumstances that the parties would have intended that the English court
to be the answer to such issues as to the applicability of Sharia law.
7. By his Judgment of 1 August 2003, Mr. Justice Morison dismissed the
Defendant's arguments as fanciful and decreed that the Bank was enti-
tled to a summary judgment. The Defendants were refused permission
to appeal by Justice Morison, but permission was granted on 17
September 2003 in relation to a single issue relating to the construction

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 A LANDMARK JUDGMENT OF 23 JANUARY 2004 289

and effect of the form of the governing law clause contained in the
financing agreements. The clause reads as follows:

Subject to the principles of the Glorious Sharia, this Agreement shall be governed
and construed in accordance with the laws of England.

Grounds for the Court of Appeal's Judgment Regarding the Governing Law

8. The Defendants (hereinafter referred to as the Appellants) appealed

the Judgment of Mr. Justice Morison but their appeal was dismissed
on 28 January 2004. The Court of Appeal adopted the following
reasoning:

(i) The central question in the appeal is one of construction in respect

of the relevant 'Governing Law' clause and the task of construc-
tion is to ascertain the presumed intention of the parties. It is com-
mon ground that when the parties entered into the Morabaha
Agreements and subsequently, neither side was under the illusion
as to the commercial realities of the transaction, namely the pro-
vision by the Bank of working capital on terms providing for long
term repayment, and both were content to draw the loan trans-
actions up as Morabaha sales or Ijara, though took no interest in
whether the proper formalities of such a sale or lease were actu-
ally complied with.
(ii) The court should lean against a construction which would or might
defeat the commercial purpose of the agreements.
(iii) The general reference to principles of Sharia in this case affords
no reference to, or identification of, those aspects of Sharia law
which are intended to be incorporated into the contract, let alone
the terms in which they are framed. It is plainly insufficient for
the Appellants to contend that the basic rules of the Sharia applic-
able in this case are not controversial. Such "basic rules" are neither
referred to nor identified in the contract. Thus the reference to

the principles of Sharia stand unqualified as a reference to the body

of Sharia law generally. As such, they are repugnant to the choice
of English law as the law of the contract, and render the clause
self-contradictory and therefore meaningless.
(iv) The words "subject to the principles of the Glorious Sharia" are
intended simply to reflect the Islamic religious principles accord-
ing to which the Bank holds itself out as doing business. These

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 290 NABIL SALEH

principles are not intended as a

application of English law as t
ing the liability of the parties un

Commentary

9. The Judgment of the Court of Appeals just summarized, in my view,

reflects two trends: (i) Islamic banks and institutions straying from the
raison d'itre of interest-free establishments, i.e. their pledged objective
to deal with instruments where interest is neither given nor taken
(riba), and where material uncertainty in the elements of any trans-
action (gahar) has a minimal impact; and (ii) the actual climate pre-
vailing in the West towards the Islamic countries and their institutions.
10. Factor number (i), which I believe to be most significant, comes into
being with the proliferation of Islamic banks and institutions which
accompanied the newly found wealth of oil producing countries in
the early 1970s. The majority of these banks and institutions-which
were supposed to cater to devoted Muslims who considered sinful the
dealing with riba and gharar-resorted to the use of legal stratagems
(h~yal) in order to overturn the prohibitions of riba and gharar. The
transgressing banks and institutions acted as if lawful means can
achieve aims which are not necessarily lawful (that is precisely the
objective of a legal stratagem), and rationalized their techniques by
claiming that flexibility would increase the chances of infiltrating the
existing system. In fact, what the transgressing banks and institutions
achieved was to pervert the whole system they had much trumpeted,
and to betray its adherents. That being the case, it is not astonish-
ing that the pseudo-Islamic banking system lost much of its credibility.
11. A second factor (ii) which may have prompted the Court of Appeal
to dismiss the principles of the Sharia as part of the law governing
the Morabaha agreements, is the climate prevailing in the West after
the attacks of 11 September 2001. The outrage of the United States
and the often heavy handed and clumsy reprisals of this only sur-
viving super-power after the demise of the Russian Empire, brought
two cultures and religions to the point of clash.
In this new environment, the United States and some other Western
countries have grown increasingly uncompromising in their dealings
with the Muslim and Arab worlds, whether in political, economic or

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 A LANDMARK JUDGMENT OF 23 JANUARY 2004 291

legal realms. Moreover, the Arab world has further lost leverage eco-
nomically through loss of oil revenues and poor economic decision-
making (for example, investment in obsolete weaponry), and politically
through loosing its position role as a religious bastion against com-
munism.

12. The prevailing climate in the West may have contributed to the
English courts' scepticism toward incorporating Sharia principles into
English law, while opening their eyes to a misguided system which
has failed devoted Muslims. The Judgment of the Court of Appeal
will hopefully assist in cleaning up the network of interest-free banks
and institutions by sending a message to the transgressors not to try
to meld two basically inconsistent legal systems.

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