Sharia Law and International Commercial Arbitration - Dissertation Example

?The Relationship Between Sharia Law and International Commercial Arbitration Outline International Commercial Arbitration a) Arbitration under different legal systems Arbitration is a dispute-settlement mechanism which may only be used with the consent of the parties, but when resorted to, renders binding decisions mong them.1 The overlap between international commercial arbitration and private international law – issues of applicable law, international jurisdiction, recognition and enforcement of judgments, and arbitral awards – is complex because it involves not only the controversy of which is the applicable system of laws, but also the applicable system of private international law. The application of international commercial arbitration cannot be conducted in a vacuum; it must operate with the support of domestic courts, such as in the taking of evidence, or in the conduct of limited review.2 Areas where international commercial arbitration and conflict of laws overlap in the following issues: The arbitration agreement, its validity and scope, extension to non-signatories, termination, formal requirements, evidential aspects, state immunity, and lis pendens concerning arbitration proceedings in parallel courts.3 Subjective and objective arbitrability, including the persons who can become parties to an arbitration agreement, and which disputes may be submitted to arbitration. Procedural issues, such as: access to justice, service of process, standards of fair trial, evidence, independence and impartiality of arbitrators, joinder, intervention and consolidation, confidentiality of the arbitral proceedings, arbitral interim measures, requirements for an arbitral award. Substantial issues involving the merits of the dispute, such as the application of uniform law and mandatory rules. Acceptance of prior or intervening court judgments/ arbitral awards that may be recognized as res judicata and similar issues.4 Overall, the central debate in resolving issues about the merits of a dispute revolves about whether arbitrators can or should rely upon the general principles of law instead of the legal system of any one State. The debate gains significance when the issue is addressed differently by the general principles of law and the legal system of the state, and controversy exists in the degree to which the clashing principles of sovereignty and pacta sunt servanda should apply. b) Source of general principles of law in international commercial arbitration The phrase ‘general principles of law’ conveys the impression of a set of rules spontaneously arrived at by international businessmen; the truth, however, is that they are rules grounded in national legal systems. It must be clarified that the general principles of international law are not always applicable in all situations. In those instances that the parties have stipulated in their agreement their choice of law or rules of law that is to govern their relationship, there is no instance when general principles of law shall apply. Arbitrators are bound to respect the choice of the parties. The following are the more popular ICA rules according to institution: i) International Centre for Settlement of Investment Disputes (ICSID) Convention, Regulations and Rules ii) ICSID Additional Facility Rules iii) London Court of International Arbitration (LCIA) Arbitration Rules iv) International Chamber of Commerce (ICC) Dispute Resolution Rules v) (United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules vi) Permanent Court of Arbitration Rules vii) American Arbitration Association (AAA) International Arbitration Rules viii) International Bar Association (IBA) Rules on the Taking of Evidence in International Commercial Arbitration 2) Islam and its Legal System a) Overview of Sharia The word “Shari’a” is Arabic for “the path” or “the way,”5 or more descriptively, “a path or way to a water hole in the desert.”6 The more figurative meaning would be the path Allah or God had designated for humankind to follow in order to lead virtuous lives.7 Shari’a aims in general to preserve social order, and when there is disruption of this order it aims to set things right, eliminate the corruption and restore the temporal and spiritual health of the community and society.8 b) Sources and Methodology of Islamic Law The main sources of Islamic law are the Quran and the Sunnah i) Quran – The Quran is held by believers in Islam to be the genuine and unaltered composition of Muhammad, the verbatim revelation sent by Allah.9 ii) Sunnah – The Sunnah refers to the accumulation of the teachings of Prophet Muhammad, his sayings, decisions, actions, and those matters he implicitly approves or disapproves of.10 iii) Ijma, Qiyas, Urf, Fiqh & Ijtihad – The Ijma pertains to the uncontested approval by qualified Shari’a scholars of matters relating to Islamic jurisprudence or case law.11 It also refers to community consensus.12 The Qiyas refers to a systematic method of reasoning by analogy, from a previous identified injunction to a new injunction, to trace the application of Shari’a opinion concerning an issue not previously stated in one of the primary sources. 13 Urf is the Arabic word for custom and public interest, a reference point and source for the determination of where Shari’a position should stand on particular issues.14 Fiqh refers to Shari’a jurisprudence . It is divided into two components, usul al fiqh and furuh al fiqh. Usul al fiqh designates the science of jurisprudence, encompassing the origins and sources which give rise to the rules of human conduct. Included herein are the philosophy of law, sources fo rules, and principles of legislation, interpretation, and application of the Quran and Sunnah.15 Furuh al fiqh comprise the derivatives or the legal rules, which are subject to change.16 Ijtihad means independent reasoning or intellectual effort.17 c) Shari’a’s Relationship to International Law In the study by Khan, it was stated that international law is governed by international covenants, and international covenants abide by a set of principles that all nations may observe and still enable all individuals the greatest degree of autonomy to practice their faith.18 3) Arbitration under the Shari’a Islamic law attributes a religious nature to alternative dispute resolution (ADR). More than that, ADR is given a high religious status under the Shari’a because the Quran teaches the principles of sulh (negotiation, mediation and compromise), tahkim (arbitration), the combination of these two (mediation-arbitration), and muhtasib (ombudsman). Furthermore, it is the moral duty not only of the parties but also of the arbitrator to amicably settle disputes among them during the arbitral proceedings. Equity, justice and fair play are integral elements of ADR, therefore amiable composition is considered to be included in tahkim (arbitration), and as such is mandatory and does not depend on parties’ consent. Additionally, the revocability of arbitration agreement is a unique feature of tahkim.19 This means that parties to an arbitration agreement may at any time before an award is given, revoke the agreement. 4) Arbitration in the Middle East It has been the concern of parties from outside the Gulf region to do business with parties within the Gulf, because of the difficult choices facing them on the matter of dispute resolution. Traditionally, enforcement of foreign judgments has been difficult in the region with the inevitable result that international arbitration agreements are often not respected, and arbitral awards are seldom enforced.20 This is seen as a barrier to conducting open business relationships with international business associates and clientele. More recently, several Gulf states have promulgated modern arbitration laws that are patterned after the UNCITRAL Model Law which recognize party autonomy, uphold the greater authority of arbitral tribunals, and limit the role of the courts in their ability to review the arbitral judgment.21 Coupled with this development is the establishment of arbitral institutions such as the designation of international financial centres. These are the Dubai International Financial Centre (DIFC),22 and the Qatar Financial Centre (QFC),23 both devoted to the establishment of separate common law jurisdictions in Dubai and Qatar. Despite these encouraging developments, regional courts have generally been unsupportive of international arbitration, and have yet to consistently implement the modernised laws on dispute resolution with parties external to the Gulf. Aside from the enactment of laws, several local arbitral institutions have implemented modernised rules in order to make dispute resolution more accessible to foreign parties; seldom, however, have local institutions administered such cases to date, because more international arbitral tribunals have traditionally heard such disputes given the historical aversion to international arbitration in the region. The effect is that most international parties persist in requiring that arbitration agreements specify reliance on the ICC, LCIA or UNCITRAL rules. For this reason, local arbitral institutions have established collaborations with international institutions, examples of which are DIFC-LCIA (Dubai) and BCDR-AAA (Bahrain).24 There are a number of specific changes in the states within the Gulf region. In Bahrain, the New York convention. Furthermore, its 1994 International Commercial Law and Decree No. 30 of 2009, which comprise it international arbitration regime, is patterned after the UNCITRAL Model Law. Shari’a is not mentioned expressly in Bahrain’s arbitral law, but it is a presumption that compliance with Islamic law is included as a matter of public policy in enforcing a foreign arbitral award. 5) Comparative Analysis a) Nature of Arbitration Under International law, the decisions of the arbitrators are generally binding,25 inasmuch as the very purpose of international treaties and agreements is to ensure that arbitration awards are accorded finality.26 Under Islamic law, however, there is no assurance that decisions by arbitrators are binding. The four schools of Islamic jurisprudence appears to espouse two views on this matter:27 Hanafi and Shafi’i schools – With the exception of some Hanafi scholars who expressed their opinion to the contrary, generally the decision of arbitrators should not be considered as having a status higher than that of conciliation.28 The reason for this is that if arbitral decisions are considered final, this may negate the rulings of judges which should be able to modify arbitral judgments. If arbitrators are considered more powerful than judges, it may eventually undermine the authority of the state.29 Maliki and Hanbali schools – Maliki fiqh holds that the judgment of the arbitrator is presumed to be binding, except if a blatant unfairness is proven30; likewise, the Hanbali teaching is that arbitral decisions are obligatory in the same sense as official court rulings.31 It is for this reason that the arbitrators are required to possess the same or equal qualifications as that of a judge.32 From this discussion, it is possible for Islamic jurisprudence to be harmonised with international law in so far as the nature of arbitration is concerned, and arbitral proceedings can be implemented in accordance with Shari’a law. As an example, the Saudi Arbitration Regulation has declared that arbitrators’ decisions are generally binding.33 b) Scope of Arbitration Under international law, international arbitration is a creation of contract, that is, it may be resorted to upon agreement of the parties to submit their disputes to binding resolution to one or more arbitrators, as may be provided for in the contract by the parties.34 The scope of the arbitration procedure therefore depends upon the stipulation of the parties. Under Islamic law, the Quran expressly provides for the settlement of family disputes, and these teachings were extended to the settlement of disputes concerning goods and property.35 The four schools of Islamic Jurisprudence hold the same opinion with regard to the scope of arbitration. It is widely held that arbitration is valid only in cases where the dispute is of a commercial nature.36 In Saudi Arabia, the scope is even narrower, because it declares that arbitration in all matters relating to the public order shall not be allowed.37 This has broad and serious implications on the interpretation of public policy (which includes public order) in the next section. Amicable settlement is encouraged for nearly every dispute whether it is based on family, social, or business matters, except when the dispute concerns what may make a thing considered haram (prohibited) to be halal (permitted), or a thing that is halal to be haram. Furthermore, arbitration agreements are allowed only to cover past and present disputes, but never future disputes.38 c) Choice of Law Under international law, Article 8 of the United Nations Commission on International Trade Law (UNCITRAL) Model Law states that the arbitration panel must decide the dispute before them according to the choice of law chosen by the contending parties. 39 Likewise, the International Chamber of Commerce Arbitration Rules40 and the American Arbitration Association Arbitration Rules41 both provide for the choice of law between parties, which the arbitration tribunal is required to apply in deciding the dispute. Under Islamic law, there is absolutely no option, and it is the obligation of the Islamic faithful to abide by Shari’a law in all disputes, whether personal or commercial.42 d) Scope of Judicial Review and Enforcement Under international law, in some modern legislation in Europe and North America, it is required that before an arbitral award is enforced, the court’s approval must first be secured.43 Islamic law holds, however, that while as a rule the arbitral award is binding and enforceable in the nature of a court judgment,44 it is deemed necessary in certain cases to conduct a limited judicial review of the arbitral judgment to verify that the award is consistent with the tenets of Islamic law.45 The conduct of the judicial review, however, is constrained to examine specific aspects, such as to validate the arbitration agreement, and if the judgment is included in the scope of the agreement. The review cannot decide to reject the enforcement of the arbitral award merely because the arbitrator relied upon a different basis in Islamic jurisprudence.46 There are other bases by which comparisons may be made between Islamic law principles and their compatibility with particular commercial arbitration laws. One such law would be the United Nations Convention on Contracts for the International Sale of Goods, or CISG, which shall be examined as follows. e) Contract formation Concerning contract formation, CISG Article11 provides that unwritten contracts should be honoured and need not be put in writing. The contract is deemed the law between the parties, and parties may enter into any stipulations they may agree between them so long as they are not contrary to law. The same is true with Islamic teaching. The freedom to enter into contract, and respect for contractual obligations, are embodied in the expression ‘Al 'aqd Shari'at al muta'aqqidin’ 47 which means that the contract entered into by the two parties is the Shari’a or sacred law between them. A contract is perfected when there is ijab or offer, and qubul or acceptance, and it is valid if it does not transgress beyond the limits set by the Quran or by the Sunna.48 Under most countries governed by Shari’a law, there is no need for consideration; however, in Saudi Arabia, the requisites of a contract are the same as in the West – there must be offer, acceptance, and consideration.49 Under the Shari’a, an oral agreement stands as a contract that is admissible and enforceable, although in the case of commercial transactions there must be witnesses present.50 f) Parol evidence Concerning the parol evidence rule, the CISG and Shari’a both give great importance to testimonial evidence and the conduct of the parties with each other as proof that a contractual relationship existed. The Quran even prohibits interference with existing evidence, by declaring that the act of suppressing evidence is a sin against God who knows all.51 Additionally, it is interesting to note that in the hierarchy of evidence, the Parol Evidence Rule as contained in American Uniform Commercial Code Section 2-202 holds the written contract and all stipulations within it to be the best evidence and superior to oral evidence. This contradicts Shari’a which accords supremacy to the oral agreement, the primary proof of the contract, and considers the written agreement a mere reminder to the parties of the terms of their agreement. Similarly, Article 8 of the CISG holds written evidence to be only secondary to the oral evidence. Therefore, Shari’a and the CISG, are in agreement, while the American UCC is contradictory to them. g) Custom and lex mercatoria Another legal principle upon which arbitration relies is that of lex mercatoria, or trade customs. The CISG provides that it is the obligation of the parties to comply by both what they have agreed upon, any practices which they have established between themselves, and any usage which the parties know or ought to have known.52 This pertains to the practices of the trade, those which are commonly known and which participants in the industry are accustomed to; although they are not stipulated in the contract, if they are naturally expected in support of the obligations included therein then the This pertains to the practices of the trade, those which are commonly known and which participants in the industry are accustomed to; although they are not stipulated in the contract, if they are naturally expected in support of the obligations included therein then they form part of lex mercatoria. Similarly, Shari’a presumes that usage and practices are vital in commercial transactions. In fact, customs, known as urf 53 in Arabic, comprises one of the minor sources of Islamic law. One such practice observed by all Muslims is the strict prohibition against usury, or riba,54 in all its forms as they may appear in various commercial transactions. h) Statute of Limitations The UN Convention on the CISG of 1974 was amended in 1980 by the Limitation Convention that was enforced in 1988.55 The Convention on Limitation Period provided for uniform periods, during which legal proceedings may be commenced resulting from contracts of international sales. Under the Limitation Convention, the time within which commercial litigation may be brought is four years from the time the cause for action arises. The duration cannot be modified by agreement between the parties, but it may be extended by written declaration of the debtor while the period has not yet ended. Shari’a does not explicitly recognize the concept of a statute of limitations; a hadith taught by the Prophet Muhammed which stated that a Muslim’s right cannot be abolished no matter how long ago the event had taken place that gave birth to that right.56 The Maliki and Hanafi schools, however, allow for certain claims to have a time limit within which action may be taken. Because of variations in the interpretation, different countries operating under Islamic law have different ways of approaching limitations. Historically the Ottoman Civil Code of 1877provided for a statute of limitations lasting 15 years since any action was taken in relation to the subject of the dispute, though when the action is brought by a trustee of a pious foundation, the period within which action may be brought may be as long as 36 years.57 These countries justify the interpretation in favour of time limitations as a necessity in service of the public interest. Other countries like Morocco, however, remain consistent with the traditional stand that rights cannot be extinguish by any lapse of time.58 6) Interest: Reconciling Islamic teaching and international commercial arbitration One of the major points of contention between international commercial is the matter of the treatment of interest. The CISG and nearly all international laws governing commercial arbitration specify that interest must be paid to the party aggrieved as a matter of principle, although they are generally silent as to the interest rate calculation and the time interest is to accrue. Interest is generally translated to riba or usury under Shari’a law, although such translation would be opposed by many in the West as an inappropriate translation, given that usury and the regular form of interest in the Western construct are entirely different from each other.59 Under Shari’a, interest is considered riba and all schools of Muslim interpretation uphold the prohibition against it. Riba is literally translated to “excess” and is taken to mean ‘any unjustifiable increase of capital whether in loans or sales.’60 As suggested by the definition, there are two types of riba, on taken to mean usury in relation to loans and usury in relation to sales. Usury on debt means that the principal of the debt is increased by a certain amount in money, while usury on sales is an increment in terms of certain commodities: wheat, barley, date, silver gold, and salt.61 Under the teachings of Islam, money is not capital but only potential capital. The prohibition of Islam on usury is grounded on principles of equality and social justice as much as it is on property rights.62 It is permitted in Islamic law to earn interest, but not to earn interest because lenders who advance money for trade or business are considered partners and therefore share in the profit-making potential of the trade. The lender is also considered to be liable to share in the losses that may be realized. Under Islam, therefore, a lender shares in the risks of the business, unlike a lender under conventional Western finance who advances the money but does not share in the risk of doing business. Under Islam, riba is associated with unconscionability because of the possibility of the lender as the stronger party to take advantage of an unfair contract with the borrower as the weaker party, and make a profit out of the latter’s hardship during times of losses. This is not too far from the concept of unconscionability provided for in the U.S. Uniform Commercial Code.63 There have been recent modern trends in reconciling the Shari’a prohibition against riba with the conventional treatment of interest, on the basic of judicial interpretations. These are approached in different ways. For instance, awards of interest in Egypt are governed by provisions stating that delay in payment of a known obligation in money should be compensated for by the borrower by a payment to the claimant as damage for the delay.64 In comparison, Moroccan law took the approach of creating a legal fiction that approximation an application of interest in the conventional sense. Moroccan law distinguished between individuals and artificial entities, and arrived at the conclusion that the charging of interest is prohibited between individuals who believe in and practice the Muslim faith. However, artificial persons such as corporations, banks, public agencies and so forth are not natural persons and therefore do not entertain beliefs, in which case they are not bound by the Quran. These corporations or organisations may therefore enter into transactions with provisions for interest, and a Muslim dealing with his or her bank may transact in interests.65 The court of Cassation in Dubai had in one instance rules that it is permitted for a creditor to collect 15% interest on a delayed payment on an obligation to pay the seller for goods purchased in a contract of sale.66 In a case in Iran, it was held that the prohibition on interest still holds even if the applicable law is that of a foreign, non-Islamic legal system, unless the court rules that the laws on riba do not apply to transactions with the non-Muslim party.67 As another instance, the Iran-US Claims Tribunal agreed to treat claims on interests as part of the general claims for damages; and in other cases where arbitrators have awareded interest inspite of the prohibition on interest, these were usually couched in terms of ‘compensatory indemnity’ instead of interest.68 Summary It was observed that arbitration succeeds where the traditional legal system for dispute resolution fails. The nature of arbitration is one of flexibility and rapidity, making it a favoured approach among international businesses. When disputes are resolved quickly and transparently, they reduce uncertainty and allow international managers to arrive at business decisions quickly and accurately.69 Upon comparative analysis of both Islamic and conventional laws and practices concerning arbitration, it is evident that the two share strong common grounds particularly in the concepts and approaches. Both legal systems recognise the importance of arbitration as an alternative dispute resolution process, in order to find speedy and just relief for aggrieved parties in a failed transaction. This is an important assurance in the field of international business because it reduces risks and uncertainties and therefore encourages participation in the global economy for common progress. As far as the substance and procedure of arbitration is concerned, there are no serious discrepancies that cannot be resolved, given the interpretations of the different schools on Islamic interpretation. The most significant disagreement between international arbitration laws and Islamic arbitration is the matter of interest; international laws allow and even mandate interest in case of delay or damage, while Islamic laws do not. This is reconciled through various interpretations, as discussed. References Akaddaf, F. ‘Application of the United Nations Convention on Contracts for the International Sale of Goods (CISG) to Arab Islamic Countries: Is the CISG Compatible with Islamic Law Principles?’ Pace International Law Review, vol. 13. 2001, p. 1-58. Available at: http://www.cisg.law.pace.edu/cisg/biblio/akaddaf.html#vid Alkhamees, A. ‘International Arbitration and Shari’a Law: Context, Scope and Intersections,’ Journal of International Arbitration, vol 28, no. 3, 2011, pp. 255-264 De Ly, F. Conflicts of Law in International Arbitration – An Overview. Erasmus School of Law, Rotterdam. 2010 Available at: http://www.sellier.de/pages/downloads/9783866531703_leseprobe.pdf?code=aa90392d588aedcb96ddf2ff4cd99e28 Finizio, S. & Hale, W. ‘When international arbitration meets Sharia.’ Commercial Dispute Resolution. 27 March 2013. Available at: http://www.cdr-news.co.uk/categories/iraq/when-international-arbitration-meets-sharia Gaillard, E General Principles of Law in International Commercial Arbitration – Challenging the Myths. World Arbitration and Mediation Review (WAMR), vol. 5, no. 2, 2011, pp. 161-172 Kirchner, S. “Transnational Law and the Choice-of-Law Competence of Arbitral Tribunals in International Commercial Arbitration.” May, 2007. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=988677 Kutty, F. ‘The Shari’a Law Factor in International Commercial Arbitration.’ Valparaiso University School of Law, 2006. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=898704 Nottage, L.R. ‘The Procedural Lex Mercatoria: The Past, Present and Future of International Commercial Arbitration.” Sydney Law School Research Paper No. 06/51; CDAMS Discussion Paper No. 03/1E. Dec, 2006. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=838028&download=yes Rajeshbabu, R. ‘International Commercial Arbitration and the Developing Countries.’ AALCO Quarterly Bulletin, No. 4, p. 386, 2006. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=981123&rec=1&srcabs=898704&alg=1&pos=1 Trakman, L. “‘Legal Traditions’ and International Commercial Arbitration.” American Review of International Arbitration, Spring 2007. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=986507 Read More