Choice of Law and Islamic Finance

Article excerpt

Abstract

The past decade has seen the rapid growth of Islamic finance on both international and domestic levels. Accompanying that growth is a rise in the number of disputes that implicate Islamic law. This remains true even when the primary law of the contract is that of a common law or civil law country. If judges and lawmakers do not understand the reasoning of Islamic finance professionals in incorporating Shariah law, the result could be precedents and codes that hamper the growth of a multi-trillion dollar industry. This note compares the reasoning of the English court in Shamil Bank v. Beximco Pharmaceuticals to the practice of forums specializing in Islamic finance dispute resolution. The note then addresses other perceived difficulties in applying Islamic law in common law and civil law courts. The practice of Islamic finance alternative dispute resolution (ADR) forums shows a consistent reliance on the use of national laws coupled with Shariah. Also, there are cases showing that U.S. courts and European arbitrators are willing to use Islamic law. Research indicates that the decision in Shamil Bank v. Beximco Pharmaceuticals was not consistent with the intentions of the parties or the commercial goals of Islamic finance. Finally, this note concludes that it is not unreasonable for a Western court to judge a case if the dispute arises out of an Islamic finance agreement.

SUMMARY

INTRODUCTION ............................................................................................................... 412

I. SHARIAH AS A CHOICE OF LAW .............................................................................. 413

A. "A Purely Discretional Form of Justice": Islamic Law in Western Tribunals ...................................................................................................... 413

B. The Need for Combined-Law Contracts ................................................... 415

C. Shariah in Modern Legal Systems ............................................................. 417

D. Current Practices in Islamic Finance Dispute Resolution ........................ 419

II. THE FUTURE OF ISLAMIC FINANCE DISPUTE RESOLUTION IN THE WEST ........ 424

A. Shamil Bank v. Beximco: A Tragedy for Choice of Law Jurisprudence? ............................................................................................. 424

B. Judging Under Shariah: The U.S. Experience ......................................... 427

III. ADVICE FOR SEEKING ARBITRATION IN ISLAMIC FINANCIAL DISPUTES ....... 430

IV. CONCLUSION ........................................................................................................... 434

INTRODUCTION

Financial experts estimate the current worth of Shariah-compliant assets at almost one trillion U.S. dollars globally.1 As measured by these assets, the global market for Islamic financial services has grown ten percent per year since the mid1990s.2 The potential market for Islamic financial products could be as high as four trillion U.S. dollars.3 The bulk of these assets are held by commercial banks, while investment banks, sukuk,4 equity funds, and the assets of takafuf account for twentyfive percent of Shariah-compliant assets.6 Strikingly, business activities in the Islamic financial sector are not confined to countries whose legal systems are Shariah-based. The United Kingdom, a common law country, ranks ninth in the world in holdings of Shariah-compliant assets.7 In the United States, there are approximately nineteen providers of Islamic financial products, including banks, mortgage providers, and investment brokers.8

In common law and civil law countries, the Islamic banking phenomenon experiences growth based on two factors. The first is that the sector is profitable for investors.9 It represents a viable source of growth with an increasingly positive reputation for responsible management. …