ENFORCEABILITY OF A SHARIA CONTRACT IN THE ENGLISH COURTS

 Introduction

Contracts are nothing new they were here long before the advent of Islam, the earliest being recorded as far back as 2300 BC[i] and on the whole non-Islamic contracts only deal with the performance of the contract in line with the wishes of the parties to the contract and often accord with the  principles of laissez-faire[ii]. In a non-Islamic contract, the parties have the freedom to choose how they contract with each other, subject to certain limitations which has given rise to the sanctity of a contract[iii] . This is not the case when it comes to a Sharia-based contracts which from an Islamic perspective have to accord with the Islamic belief system, which requires that business is conducted in a socially just manner for the benefit of all, not just the parties to the contract.  Islam does not restrict the making of money but seeks to encourages individual to have empathy and regard for others as ultimately, they are brothers[iv], seeking to promote the concept of wealth distribution by reminding that property and wealth is given by God and those who are recipients are merely trustees[v].

Historically (in part) Islamic business and commerce was a locally based within areas, regions or within the parameters of a country/empire which meant that one could keep in line with the Sharia and the risk of dealing with non-Islamic contracts was not a major concern.  This is not to say that Sharia has been applied with any a degree of consistency and this is reflected by how the Ottoman Empire from the 18050s onwards adopted secular systems[vi].  However, we now live in another era and with the advent of the global world means that parties from all over the world can engage in business as companies or individuals, coupled with the fact that post the 2nd World War there has been a mass movement of people which has led to a growth of Muslim communities outside the traditional Muslim countries . One only has to look at rapid growth of the Muslim population in the United Kingdom[vii] where 3rd and 4th generations are now established who view their beliefs as being important[viii], as well seeing a growth in Sharia finance[ix]. When one factors in the digital revolution then it can be seen how people of different views and faiths can be brought together to conduct business and in this new global world how can one remain Sharia complaint if their faith is important to them? To address this issue there has been the rise of Sharia advisory committees[x], these committees seeking to advise on contracts that to ensure they are compliant with Sharia, but these are not available to all.

An Islamic contract is based upon Sharia, Foster’s[xi] views this as a being the Qur’an and the Sunnah supported by other facets. The Sunnah does include the hadiths and it is noted that there are other sources as well[xii].  The Quran is not always the primary source as the Sunnah can abrogate the verses of the Qur’an by way of Naskh[xiii], thus, making the two interchangeable[xiv].  It should be also noted that Sharia as a system of laws is not practised across the Muslim world, nor is it a law of a particular land. Sharia often sits alongside secular law[xv], something which has caused issues, which will be addressed later on.

English laws foundation stem from the common law where Judges have over a period of centuries developed the law. The origins of the common law are loose but were given a footing in the 13th century by the Magna Carta[xvi] which has led to development of functioning judicial system which is independent of the executive through its own supervisory powers[xvii]. The common law has been supported by the rise of Parliamentary law as well as being supplemented by the former membership of the European Economic Area[xviii] where the laws of the European Union (as it become to be known as) were transposed into English law.

An overview of the two Contract systems

The Sharia view on contracts is set out in verses 2:282; 2:173, 280 to 282 and verse 4:2 of the Qur’an, but these verses did not cover all aspects of contracts, so they were supplemented by the hadiths[xix] as well as jurists[xx]. Foster[xxi] notes that the jurist developed systems to accommodate the needs of the Islamic world, but all this changed in 1850 when the Ottoman Empire abandoned[xxii] Sharia and moved towards the secular systems. This would also explain as noted by Alhowaimil that there was a lack of a definition for term contract until the 19th century[xxiii].

Contracts in English law are subject to the common law and there is also supporting English legislations[xxiv] and in terms of Sharia based contracts the is the 1980 Rome Convention on The Law Applicable to Contractual Obligations (consolidated version) (the Convention) which allows for a choice of laws (Article 1) and allows for freedom to choose (Article 3) is relevant. The Convention was transposed into UK national law by the Contracts (Applicable Law) Act 1990[xxv] as well as Regulation EC No 593/2008, which includes Article 13 which allows for a non-state body laws to be applied in contracts, something which the Convention does not allow for.  In terms of enforcement of a contract the starting point under English law is that a Court needs know what the purpose of the contract, its background, where it will operate so not to render it vague[xxvi].

Sharia and English contracts are similar in broad terms, they follow the same platforms there has to be an offer (ijab), an acceptance (qabul)[xxvii] which can be in writing or orally[xxviii]; there has to be consideration [xxix] which can be made up of goods, services or monies but the subject matter should not be illegal, from a Sharia point this extends to items such as such as a pork or alcohol [xxx]. Both systems require there is to be no duress, the parties must have capacity (ahliyyah)[xxxi], there should be no misrepresentation[xxxii] and products to be free of defects and with rights to rescind etc. In essence the pillars of a Sharia contract[xxxiii] are similar as a non-Islamic contracts.

The differences between the two contract systems is that a Sharia contract is created under the auspice of God and the laws of social justice/fairness so there is a spiritual and a moral obligation to do right as it is God who creates wealth[xxxiv] and gives.  Whereas the non-Islamic contract is underpinned by a secular system which focusses on the needs of parties to the contract only.  The spiritual auspices mean that a contract cannot be interest (Riba)[xxxv] based. Riba from the Sharia’s point of view is not just based upon interest being applied to monies, it goes further and will cover any transaction which causes an unequal return to arise[xxxvi]  or which places a person at a disadvantage[xxxvii]. The rationale behind the principles of Riba is such activities are likely to cause an imbalance in wealth distribution, as well as having a negative effect upon the economy as a whole[xxxviii] which in turn affects society at large. This is why contracts which are speculative in nature (Maysir), involve gambling (Qimar), or where the subject matter (mubah)[xxxix] or the cause is not legal (sabab)[xl] or where duress has occurred[xli]  are not permitted. Contracts have to be conducted in just and honest manner[xlii]  which means that there cannot offend the principles of Gharar[xliii].  Gharar can be regarded as deceptive conduct which Saleem notes as a “potential deceptive ambiguity”[xliv] and can occur where information has been withheld exposing a party to a needless risk[xlv]  or where the contract creates an imbalance favouring one over another [xlvi]. Where Gharar arises, it will invalidate any contract unless it is minor in nature[xlvii] but should be avoided. Therefore, there is no doctrine of freedom to contract in a Sharia-based contract as it involves the will of God, so the contract has to be mutually beneficial to all and where losses and profits are to be shared[xlviii]. One can see how the auspices of God weave through and why, so where Sharia is not adhered to then it will result in the contract being viewed as being void (batil) as it defeats the objective of Gods social justice system. These are in essence are terms which have to be adhered to.

The Sharia’s Place in the English Courts

Sharia in part has already been recognised in the English Courts for a number of years now, one of the earliest cases being of Alhaji Mohammed v Knott[xlix]  which recognised an Islamic marriage involving an underage child, which eventually led to a change in the Immigration Rules as to what age was deemed appropriate for marriage[l].  However, this recognition does not extend to other aspects of Sharia and where an Islamic marriage has taken place in the United Kingdom then Sharia will not be recognised in the absence of the marriage be registered as highlighted by the Khan v Akhtar saga[li]. So, how are Sharia based contacts viewed with the English legal system? In order to answer this one has to look at the case law that has developed over the years, the starting point being Beximico Pharmaceuticals Ltd & Ors v Shamil Bank of Bahrain EC [2004] EWCA Civ 19. The facts being that Bank had loaned monies to Beximico via a Morhaba contract which was governed by Sharia by way of a statement only. Beximico sought to have the contract invalidated on the basis of Riba, the Court rejected argument on the basis that Sharia was not recognised by the Convention as a law of any country, so was not enforceable. This issue was addressed by Ercanbrack[lii], but the point was missed as to the relevance of Sharia, yes the Court had rejected it on the basis that it was not a recognised law as per  the Convention and having chosen English law, then Sharia could not apply in any event[liii]. However, this was not the end of the matter as the Judge properly noted that the Sharia terms had not been properly identified[liv] which was the correct position, but this paragraph had to read in light of paragraph 55 to fully grasp what the Court had actually said and how Beximico could have been successful. In other words, if the terms of the Sharia had been set out within the contract then there were merits in the case, but by simply making a general statement that Sharia applied was not enough to be construed as a term. Therefore, there was no need to convince the Courts that Sharia was a body of laws, all that needed to be shown was that that there was an enforceable term which was also Sharia compliant. Ercanbrack[lv] notes that this ruling was perceived as a “slight “ by some,  but it was not given the application of the Convention and when read in context of the real world scenario then it would have been noted the Court actually gave guidance as to how ensure a contract could be Sharia compliant and how to circumvent the Convention. Instead seeking to making the contract Sharia compliant by seeking to argue Sharia is a law, make the terms of the contract Sharia compliant. What Beximico highlighted was that Sharia is not a law of a specific country which is what is required by  the Convention, but this  did not stop the terms of a contract containing Sharia compliant terms being used in the contract and as noted by Foster’s this  decision was to be welcomed[lvi].

The issue of Sharia being a system as opposed to a law of a particular nation was further addressed in Musawi v RE International (UK) Ltd & Ors [2007] EWHC 2981 (Ch) (14 December 2007). The Court rejected argument that Sharia as a system of laws could be applied as an alternative to the law of a land[lvii].  There may be more to the rationale of this particular decision than just rejecting the issue of Sharia. When one looks at the facts, the borrowers were seeking to avoid repaying a loan by complaining that Riba was involved but had not raised this an issue at the time of the contract being formed. The inference that I draw from this ruling is that the Court had also applied the principles of fairness to come to its decision as the Bank had lent the money in good faith[lviii]. This is of relevance as any judge has to act in the interest of justice when coming to a decision (Lord Neuberger[lix]) and the defendants were seeking to avoid the contract when they had never raised Riba as an issue which suggests there was never the intention to be Sharia complaint.

The application of religious laws when they conflicted with the English law was taken up by the Court in Halpern & Ors v Halpern & Anor [2007] EWCA Civ 291 which related to Jewish law.  The Court found it was up to the parties to agree on what rules or laws, they wished to follow[lx] and the application of a law did not render a contract unenforceable[lxi]. The implication for Sharia contracts was it did not stop the usage of Sharia as part of the contract and it would be up to the governing law to determine the extent of the application of the “relevant religious law as part of the contract[lxii]. This showed that there was a willingness by the Courts to accept religious laws could be termed as contractual terms. The position of Sharia-based terms was further strengthened with the advent of Article 13 of Regulation 593/2008 coming into force[lxiii] which allowed for the usage of non-state bodies of law to be used as part of a contract, moving away from the stricter interpretation of the Convention.

The tacit acceptance of a Sharia term in a contract occurred in the case of  The Investment Dar Company KSCC and Blom Development Bank SAL [2009] [lxiv] here the Court was looking at a wakala contract[lxv] which was governed by English Law, the contract required that the objectives to be carried out in a Sharia compliant manner  and recognising  the existence of a Sharia committee[lxvi]. Here it seems that the lessons from the previous cases had been learnt and adopted which resulted in the Court noting that the contract may not be Sharia complaint[lxvii] and that the contract may not stand due to the fact that interest had been used making it non complaint under Sharia and allowed the matter to proceed to trial. Although this was not a full ruling it highlighted that there was a willingness by the Courts to look at such contracts; interpret a Sharia-based clause and make an assessment to determine if the contractual term was Sharia compliant, or not.

Matters came to a head in the case of Dana Gas PJSC v Dana Gas Sukuk Ltd & Ors [2017] EWCH 2928) Comm where the Court rejected all the arguments raised by Dana Gas to invalidate a Sharia contract. The Court taking the view that a contract governed by English Law can override a contract which is not Sharia complaint. Despite the Mudarabah agreement being covered by the law of the UAE it was English law which would then determine validity[lxviii] . In other words, the contract remained enforceable in the English Courts based upon the governance clause and even if the contract was deemed not to comply with Sharia in the UAE, it did not stop the English Courts from looking at the contract. Thus, where there was a conflict between a Sharia contract and English law, English law would be given precedent if the contract was governed by English law. In essence there was a supremacy of laws when it came to conflicts. The doctrine of Mistake[lxix] could not be relied upon if the Mudarabah was entered into belief it was lawful under UAE law, but it was not anymore if the mistake is not fundamental to the performance to the contract[lxx], so even if mistake could be shown in the UAE under Sharia, it did not automatically apply in the UK  if it was not fatal to the contract. The fact that the contract may be unlawful is not enough to invoke the principles of Ralli Brothers v Cia Naviera Sota y Aznar [1920] 1 KB 614 [lxxi]and the Convention and in event the contract was to be performed in England[lxxii]. What Dana Gas showed is that the English Courts had moved on and now were willing to deal with Sharia contracts provided they contained Sharia term and where governed by the English Law, even where there were Sharia compliance issues, provided those issues did not infringe upon English law.

Conclusion

A contract which is drafted with the terms of the Sharia being incorporated within it can be enforced in the English Courts provided there is a governance clause allowing this. However, one cannot simply say that Sharia applies, the Sharia terms have to be set out in the contract as part of the contract. The English Courts over a period time developed guidance as to how to draft enforceable Sharia contract. Where such a contract does exist, the English Courts will not shy away from dealing with it. Hence any Sharia advisory committee and any draftspersons need to take heed of what the English Courts have said and set out the Sharia terms clearly and fully so that they are enforceable terms which align with the requirements of Gods social justice as well as giving rise enforcement through the English Courts. There is an important caveat  which is if parties do choose the governance of the English law, then it should be remembered just because the law of the Islamic country, or Sharia itself  may potentially deem the contract not to be complaint, it does not mean the English Courts will necessarily follow suit, therefore those advising and drafting such contracts  will need to have a grasp of the English law as it stands and seek to mitigate any  effects of such a situation arising. Therefore, there one needs not only an understanding of Sharia, but also of the law as it stands in the England and Wales.

The views expressed in this article are the personal views of Yasin M Din- Barrister at Law

References

[i] Contract for the Sale of a Slave, Reign of Rim-Sin, c. 2300 B.C Fordham University - https://sourcebooks.fordham.edu/ancient/mesopotamia-contracts.asp

[ii] McKendrick, Ewan (2015), Contract Law, CPI Group (UK), page 2

[iii] McKendrick, Ewan (2015), Contract Law, CPI Group (UK), page 3

[iv] Verse 49:10

[v] Verse 57:7

[vi] Foster, Nicolas, (2006) Islamic Commercial Law (I) an Overview, InDret (Barcelona) Page 12

[vii] 3,372, 966 Muslims – Office for National Statistics 2nd August 2018

[viii]Ipsos Mori (2018): A review of survey Research of Muslims in Britain Page 18 and Professor Coulson noting this as per HHJ D Pearl (1995) Noel Coulson Memorial Lecture re The Application of Islamic law in the English Courts – Cornell University Library 2017

[ix] The Economist 20th October 2018 Why non-Muslims are converting to sharia finance

[x] Known as Sharia advisory councils in Malaysia - https://www.sacbnm.org/?page_id=3351

[xi] Foster, Nicolas, (2006) Islamic Commercial Law (I) an Overview, InDret, (Barcelona) Page 5

[xii] Ur Rehman, Zia (ND) Law Giving Verses of Quran & Sunnah, Addl: District & Sessions Judge, Page 12

[xiii] Burton, John (1977) The Collection of the Qur’ān, Edinburgh University Press (UK), Pages 56-60

[xiv] Imam al-Shafi - Risālah of al-Shāfi ‘

[xv] The Constitution of the Islamic Republic of Pakistan 1973, Article 2A and Article 227

[xvi] 15th June 1215 Clauses 39 & 40.

[xvii] Barraclough v Brown [1897] AC 615 (HL)

[xviii] 1st January 1973

[xix] Sahih Muslim Book of Transactions Hadith 3661

[xx]  Jonathan, G (2011) The Law of Islamic Finance in the United Kingdom: Legal Pluralism and Financial Competition, Page 62

[xxi]Foster, Nicolas, (2006) Islamic Commercial Law (I) an Overview, InDret, (Barcelona) Page 7

[xxii] Ibid 22

[xxiii] I S Alhowaimil (2013) Frustration of Performance of Contracts: A comparative and Analytic Study in Islamic Law and English Law, Page 69

[xxiv] The Unfair Contract Terms Act 1977; Sale of Goods Act 1979/2015, as well as Consumer Regulations.

[xxv] Chapter 36 1990

[xxvi] Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 996

[xxvii] Zysow, Aron (1985) The Problem of Offer and Acceptance: A Study of Implied in Fact Contracts in Islamic Law and the Common Law – Cleveland State University Law Journal, Page 69

[xxviii] Venardos, A (2006) Islamic Banking & Finance in South East Asia- World Scientific Publishing (Singapore), Page 50

[xxix] Dr Md Abdul Jalil (2010) Islamic Law of Contract is Getting Momentum; International Journal of Business and Social Sciences Vol 1, No 2 2010, Page 180

[xxx] Venardos, A (2006) Islamic Banking & Finance in South East Asia- World Scientific Publishing (Singapore), Page 84

[xxxi]Jamal J Nazir (1986) The Islamic Law of Personal Status; Kluwer Academic Publishers (UK), Page 47

[xxxii] Misrepresentations Act 1968; Theft Act 1968, Fraud Act 2006 or the Common Law see Ivey v Genting Casinos (UK) Ltd (t/a Crockfords) [2017] UKSC 67 (25 October 2017)

[xxxiii] Ali, Mohsin & Zada, Najeeb (2019) The Islamic Finance Trading Framework: Legitimizing Profit Making; Palgrave Macmillan (UK), Page 11

[xxxiv] Verse 6:151

[xxxv]  Verses 2:277-81; 3:130; 4:161; 30:39; 5:62; 6:146 - Sahih Bukhari Volume 4, Book 51, Number 28

[xxxvi] Sahih Bukhari Book of Sales & Trade Hadith 379

[xxxvii] M Ejjaoui (2019) The Wisdom & Rationale of the Prohibition of Riba, Sidi Ben Abdellah University, Page 24 Unfair Contract Terms Act 1977; Sale of Goods act1979 & 2015

[xxxviii]  Youssef, MB (UD) Riba & Real Economy Article provided as part of the notes

[xxxix] A proposal for the formal role for Mu’amalat in Indonesian Banking - Islamic Law in Practice Volume III, Mashood A. Baserin Ashgate Publishing 2016, Section II:

[xl] Page 113 Intent in Islamic Contract Law - Paul R Powers, Brill 2006

[xli]  El Hassan, Abd, (1986) The Doctrine of Duress in Sharia, Sudan and English Law, Arab Law Quarterly Vol 1, No 2 Feb, Page 231

[xlii] Sahih Muslim Book of Transactions Hadith 3661

[xliii]  Saleem, M Y (2013) - Islamic Commercial Law –Wiley Publications, (Singapore) Introduction & Rohi Baalbaki. Al-Mawrid Al-Quareeb. Arabic-English Dictionary. 16th Edition. Dar El-Ilm Lilmalayin. 2005. Beirut, Lebanon. Page 292. Akin to Misrepresentation

[xliv] Saleem, M Y (2013) - Islamic Commercial Law –Wiley Publications, (Singapore) Introduction

[xlv]Al- Suwailem, Sami (2000) Islamic Economic Studies Vol 7, 1 & 2 Oct 99 & Apr 2000, Page 64

[xlvi] Kahf, Monzer, Islamic Finance Contracts, Create Space (US), Page 53

[xlvii] Bhala, Raj (2011) Understanding Islamic Law Carolina Academic Pr, (US) page 656 -see Google Books

[xlviii] An Introduction to Islamic Finance, -CIMA 2018, Page 11 & Ibid 40

[xlix] 1969 1 QB 1

[l] Appendix FM Rule E-ECP.2.3 – Immigration Rules

[li] Akhter v Khan [2018] EWFC 54 which was overturned by the Court of Appeal in Her Majesty's Attorney General v Akhter & Anor [2020] EWCA Civ 122 (14 February 2020) 

[lii]  Ercanbrack, Jonathan (2011) The Law of Islamic Finance in the United Kingdom: Legal Pluralism and Financial Competition. PhD Thesis, SOAS (School of Oriental and African Studies), Page 427

[liii] Para 54 of the Judgement

[liv] Para 56 of the Judgement

[lv] Ercanbrack, Jonathan (2011) - The Law of Islamic Finance in the United Kingdom: Legal Pluralism and Financial Competition. PhD Thesis, SOAS (School of Oriental and African Studies), Page 398

[lvi]  Foster, Nicholas (2006) Encounters between legals systems: recent cases concerning Islamic commercial law in secular Courts –Amicus Curiae Issue 68- 1.1.2006 University of London

[lvii] Para 19 of the judgement

[lviii] Para 10 - Beximico Pharmaceuticals

[lix] The Role of the Judge: Umpire in a Contest, Seeker of the Truth or Something in Between? Singapore Panel on Judicial Ethics and Dilemmas on the Bench: Opening Remarks Lord Neuberger 19 August 2016 citing Lord Wilberforce 

[lx] Para 38 of the judgement

[lxi] Para 36 of the judgement

[lxii] Butterworths Journal of International Banking and Finance Law Journal - October 2014-Lexis Nexis (UK)

[lxiii] This Regulation does not preclude parties from incorporating by reference into their contract a non-State body of law or an international convention.

[lxiv] [2009] EWHC 3545(Ch)

[lxv] The comparable English version being one of Agency

[lxvi] Para 11 of the judgement

[lxvii] Para 17 of the judgement

[lxviii] Para 46 - Kleinwort, Sons & Co v Ungarische Baumwolle Industrie AG [1939] 2 KB 678”

[lxix] Bell v Lever Bros [1932] AC 161 at 225,

[lxx] Para 68 of the judgement  

[lxxi] The English Courts will not force a party to do something which is unlawful in another country

[lxxii] Para 90 of the judgement