Monday, November 30, 2009

ISLAMIC FINANCE DISPUTE SETTLEMENT

Parties in a contract involving Islamic finance are free to structure their dealing to take into account Shariah requirements governing transactions, and have their terms documented in the relevant contractual documents. They can insert whatever clauses of their choice in so far as these clauses are not in any way repugnant to any established Shariah rules and principles. In many jurisdictions it is the requirement of regulatory laws that these parties need to ensure that their transactions are free from any element inconsistent with Islamic teachings. However it is very sad indeed to find out that some parties may sometimes indicate through their agreements that in case any dispute should arise in future between them, they would like to settle the possible dispute not in accordance with any Shariah compliant mechanism of dispute settlement.

What may happen is that the parties would instead prefer to settle such a future dispute through trials conducted by courts that are very clear from the very way they are constituted are far from being a suitable forum to dispose of the case in a Shariah compliant manner. Given that these courts are conventional courts in various jurisdictions that as a matter of judicial process are not from the outset suppose to decide cases brought before them in line with Shariah requirements. Hence the big question is how can it be said that the relevant dispute is to be disposed of in an Islamic way?

It is important that dispute related to Islamic financial transactions is settled in a Shariah compliant manner for two major reasons. Firstly when the parties hold out that they are conducting their affairs in Shariah compliant ways, they thereby make a representation to the general public that they are going to abide by the Shariah requirements in all their dealings. So when it turns out to be that they prefer to settle their future disputes in the above described manner, and to turn a blind eye on Islamic alternatives, the general public has all the reasons to ask why it remains so when other Shariah compliant alternatives are available. Secondly, assuming that an award may have been made by the non-Shariah compliant courts, does it mean that the amount so awarded in the judgment cannot be treated as halal/legitimate incomes for the relevant parties, or at least be described as questionable incomes that need to be purified.

What happened in Malaysia recently in the context of the latest amendment to the Malaysian Central Bank law is very interesting development to note. The amendment made it clear that the Malaysian civil courts and arbitrators must consider the published Shariah resolution passed by the Shariah Advisory Council of the Central Bank in deciding Islamic banking cases brought before them. The amendment also made it mandatory for the Court and the Arbitrator to refer any Shariah issue raised in the dispute which is not yet addressed by any published resolution mentioned above, and they must abide by any decision that the SAC may provide.

It remains to be seen whether this approach will solve the dilemma faced by Islamic finance in this respect. Strictly speaking, from an Islamic classical perspective, a Muslim judge is always reminded to consult learned parties before issuing any judgment, and it is held that this approach, although is not mandatory to be taken, is accepted to be a highly recommended thing to be done by any presiding judge. But to put it in the manner that it is mandatory to be undertaken is something new, firstly because at the end of the day it will be the judge himself who is going to be responsible for the issued judgment.

Secondly, with respect to any opinion that may be possibly given by the consulted learned party the most that can be said is that it is a form of fatwa or shariah opinion that is basically not binding. Any court judgment on the contrary is binding on the disputing parties as a matter of authoritative expediency. Perhaps the reason that may have been relied upon by the Malaysian Parliament when the house passed the amendment is based on the fact that civil court judges were not trained in Islamic law, hence they need to abide by the SAC resolutions. But then, judgments are normally not given solely based on rules or law but they are based also on facts of the cases in question for which only the trial judges have the opportunity to establish. Furthermore trials in the civil court do not involve the same procedural process as normally employed in the Shariah court especially in the context of the role that can be played by oaths in establishing civil claims. The fact is that to dispose any given Islamic finance case is not just limited to the law aspect alone, but also the evidential and procedural aspects as well. Unless the relevant additional issues are properly addressed taking into consideration all that need to be considered in terms of Shariah requirements, the hope to achieve full settlement based on Islamic principle will remain something to be very genuine.

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