In the high court in London earlier this year a Muslim businessman brought a case against a fellow Muslim businessman concerning a dispute over the arbitration process relating to a contract between the two parties. The one businessman objected to his counterpart appointing a non-Muslim arbitrator stressing that under Islamic law the arbitrator must be Muslim.
Normally arbitration involves an alternative dispute resolution to costly litigation. But in the above case, the dispute was over the arbitration process itself. Whether an arbitrator must be a Muslim in a case involving a Muslim business or say in the Islamic finance industry is a moot point. At the Kuala Lumpur Regional Centre for Arbitration (KLRCA), for instance, the general requirement for a case involving Islamic financial institutions, says Director Sundra Rajoo, "is that the prospective arbitrator has to either be an Islamic scholar with experience in arbitration or an Islamic Banking Law practitioner. The arbitrator need not be a Muslim and what we look for in an arbitrator is their qualification and their award writing skills."
KLRCA claims to be one of the first arbitration centers in the region to provide institutionalized Islamic Banking and Financial Services Arbitration based on specialized Islamic Banking and Financial Services Arbitration Rules.
Given the growing number of court cases involving Islamic banks or financial transactions over the last few years, including several in the high court in London, financial regulators are keen to see the industry adopt alternative dispute resolution schemes involving arbitration. The Shariah, the Islamic Canon Law derived from the Qur’an, the Muslim holy book, the Sunnah, the practices of the Prophet Muhammed (peace be upon him), and Hadith, the authentic sayings of the Prophet Muhammed, prefers dispute resolution through arbitration than through lengthy and in modern times, very expensive litigation.
According to Rajoo, "the business and commercial fraternity would prefer arbitration to litigation due to several factors. We opine that the Shariah fraternity would prefer arbitration due to the confidentiality of the proceedings, as goodwill means an awful lot to the financial and business sector as well as the expertise and knowledge of the arbitrator. Apart from that, the enforceability of arbitral awards in foreign jurisdiction may also attribute to the preference of arbitration over litigation to resolve disputes."
Arbitration is fast becoming the preferred method of dispute resolution as opposed to litigation. It forms an integral part of financial and businesses culture especially those dealing with transnational companies. According to Rajoo, the KLRCA presided over 50 arbitration cases of which 40 involved domestic parties and 10 involving foreign companies.
Both the KLRCA and other centers are witnessing a steady increase in the number of arbitration cases, including several involving Islamic financial institutions and the number is increasing on a yearly basis.
Muhammad Ibrahim, deputy governor, Bank Negara Malaysia, in a speech a few months ago, warned about the importance of an effective adjudication system to give customers, banks, and other stakeholders recourse to law. "An efficient and authoritative adjudication system," explained Ibrahim, "helps create certainty and establishes the legitimacy of Islamic financial contracts. Islam places great importance on contracts and on parties to a contract. The ability of parties to enforce a contract is thus critical as it constitutes the core of maintaining the confidence of the public at large. Therefore, there is a crucial need for a dispute settlement mechanism that is able and competent to dissect in a judicious manner Shariah matters in contracts, so that issues of dispute in Shariah interpretation could be resolved and enforced accordingly."
In Malaysia, for adjudication purposes for instance, added Ibrahim, a dedicated judge in the commercial division of the high court in Malaysia has been assigned to preside over litigations relating to Islamic banking and finance. The court's adjudication role in Islamic finance is reinforced by the support from the SAC in its capacity as a consultative body to the Malaysian judiciary system.
Under the law, the Central Bank of Malaysia Act 2009 prevails, if a question concerning a Shariah matter arises in any proceedings relating to Islamic financial business, where the court or the arbitrator shall take into consideration any published rulings of the SAC or refer the matter to the SAC for its ruling. The SAC's rulings are binding on the courts and arbitrators.
This referral system, explained Ibrahim, preserves and enhances the sanctity of Shariah rulings and the consistency in the interpretation and application of Shariah principles in Islamic financial transactions. To complement the court system, specific arbitration rules for Islamic banking and financial services have also been developed, enabling disputes for both domestic and international cases to be dealt with by the KLRCA.
Indeed, KLRCA sees itself as the pioneer in Islamic banking arbitration. Since the launch of the Islamic banking and financial Arbitration Rules in 2007, stressed Rajoo, "we have worked towards positioning KLRCA as the go-to center for Islamic banking arbitration. Some of the initiatives that we have thus far include expanding our pool of Islamic Banking Arbitrators. KLRCA has also initiated negotiations with the Central Bank of Malaysia in hopes of revising the Islamic banking arbitration rules to cater for the current needs of the society. We intend to obtain the assistance from various Islamic banking scholars, eminent arbitrators to revise the rules to ensure that the awards rendered are in compliance with the New York Convention on the Enforcement of Foreign Arbitral Awards.
The Asian economies are high growth ones where high single to double digit GDP growth has prevailed before and even now after the global financial crisis and the credit crunch. Not only has Asia's trade and investment increased with the West but also intra-emerging country trade has increased ten-fold over the last few years. Increasingly, businesses are at a risk of being sued in foreign jurisdictions where their commercial rights and obligations become subject to unfamiliar laws and procedural process.
One of the most effective ways to avoid being sued in a foreign jurisdiction, advises Rajoo, is to ensure that all commercial contracts entered into contain a comprehensive and effective arbitration clause. There is increasing recognition throughout the modern world that arbitration is the most effective way of resolving international commercial disputes.
Not surprisingly, the demand for international commercial arbitration as a mode of dispute resolution is growing year by year in line with the expansion of transnational commerce, trade and the rapid globalization of the world economy.
Few foreign parties to international contracts will be content to submit disputes to the national courts of the other party. If they do so, contends Rajoo, it will usually be only as a result of the superior bargaining power of the other party, or a failure to agree otherwise. A claimant, who initiates court proceedings will, in the absence of an agreed submission to the jurisdiction of another court or to arbitration, usually be obliged to sue in the court of the defendant's home country.
At the KLRCA, the Islamic Banking and Financial Services Rules for Arbitration 2007 is drafted to cater for disputes arising out of business arrangement or transactions which are premised on Shariah principles which would generally be applicable to the Islamic finance and investment industry. The arbitral procedure has to be in conformity with the provisions of Section 56 and 57 of the Central Bank Act of Malaysia 2009. Under section 56 of the said act, "should any question concerning a Shariah matter arises in an arbitral proceeding, the arbitration has to either take into consideration any published rules of the Shariah Advisory Council or in absence of such published rules, refer the said question to the Shariah Advisory Council. The ruling made by the Shariah Advisory Council shall be binding and shall prevail."
Malaysia’s KLRCA has three sets of rules as far as arbitration is concerned The include the Rules for Arbitration of the KLRCA 2010; the Fast Track Arbitration Rules 2010; and the Islamic Banking and Financial Services Rules for Arbitration 2007. It has signed up to the UNCITRAL (United Nations Commission on International Trade Law) and New York conventions.
The most glaring difference between the conventional and Islamic banking arbitration is that in the latter whenever an arbitrator has to form an opinion on a point related to Shariah principles and decide on a dispute arising from the Shariah aspect of an Islamic banking and financial business, which is based on Shariah principles, the arbitrator shall refer the matter to the relevant Council for its decision.
In circumstances where the arbitration relates to a dispute arising from the Shariah aspect of an Islamic banking and finance business, that is beyond the purview of the Shariah Advisory Council and the arbitrator has to form an opinion on a point related to Shariah principles and decide on a dispute arising from the Shariah aspect, the arbitrator shall refer the matter to a Shariah expert or council to be agreed between the parties. Arbitration can be very cost effective as compared to litigation as disputing parties has to go through one dispute resolution process as the arbitral awards are final and binding. This is not the case for court proceedings, stress some market experts, as there is an avenue for appeal to the higher courts. Apart from that, parties need not spend countless hours educating the judges on the Shariah or Islamic Finance principles as the arbitrators deliberating their dispute would be an expert in the respective field. This, says Rajoo, would in time save time and costs for the parties.
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