Ignorance of Islam in European Approach to Contract Law

Grace Brody

Vol. 42 Executive Editor

Much has been made of the recent rise of Islamophobia in Europe, and rightly so.[1] In February of this year, nine people were killed in Hanau, Germany, in what has widely been described as an Islamophobic attack.[2] According to a study conducted by Bertelsmann Stiftung’s Religion Monitor, 50% of respondents in Germany and Switzerland said they considered Islam a threat.[3] It is clear that there is a fundamental ignorance and distrust of the religion among Europeans.[4] Unfortunately, it appears that there exists a similar misconception of the religion and its principles within the world of European contract law as well. Specifically, the problem has manifested in a historic refusal among European courts to enforce choice of law provisions which select Islamic law. Although this issue poses less of a day-to-day threat to European Muslims, it reflects a similar fundamental problem of misunderstanding of the religion. The most recent manifestation of this issue was in the 2004 English Court of Appeal case, Beximco Pharm. Ltd. v. Shamil Bank of Bahrain.[5] Shamil Bank is incorporated in Bahrain while Beximco Pharmaceuticals is based in Bangladesh.[6] In 1995, Beximco wanted to raise capital, but in a manner that respected Islamic precepts, so it agreed to a Murabaha Financing Agreement with Shamil Bank.[7] By December 1999, Beximco had not paid the amount due according to the agreement, so Shamil Bank sued for breach of contract.[8] Beximco countered that the agreements had “disguised” interest and were unenforceable under Islamic law and thus they should not have to pay.[9] The English Court of Appeal, then, was tasked with determining “the construction and effect” of the choice of law clause of the original agreement, which stated that “subject to the principles of the glorious Sharia’a, this Agreement shall be governed by and construed in accordance with the laws of England.”[10] The Court determined that it would not apply the Islamic law portion of this choice of law clause.[11] This was primarily due to three reasons. First, Article 3.1 of the Rome I Convention only “contemplates” that a contract can be governed by the “law of a country,” and there is no mention of the application of a “non-national system of law such as Sharia law.”[12] Second, Islamic law does not consist of “principles of law” but instead of a system of principles which “apply to other aspects of life and behaviour.”[13] Third, even if Islamic law was interpreted to include principles of law, there is no consensus among the Islamic legal community as to what they would be when applied to a transactional situation.[14] None of these arguments reflect an accurate understanding of either the implications of the most recent EU conflict of law regulatory framework (which had not been updated at the time of the case—but has implications for future cases of the same sort), or the nature of Islamic law. In 2008, the European Parliament passed an update to the Rome I Convention in the form of a Regulation.[15] Among other changes, the Rome I Regulation included in Recital 13 the following text which was not in the original: “this Regulation does not preclude parties from incorporating into their contract a non-State body of law or an international convention.”[16] The addition of Recital 13 invalidates the argument that the Rome I Convention did not “contemplate” the validity of non-state law, which the Court of Appeal based its 2004 decision on.[17] The fact that the text is included in a recital and not in a more legally binding article does not indicate the drafters’ lack of commitment to the issue. The European Parliament originally introduced the inclusion of non-state law as an article, which read “the parties may also choose as the applicable law the principles and rules of the substantive law of contract recognized internationally and in the community.”[18] However, many delegations “expressed doubts about this provision”—specifically concerning the legal certainty of the phrase “recognized internationally.”[19] Because of the disagreements, the Parliament scrapped the article, but not the concept of the freedom to choose non-state law.[20] Instead, they presented that concept in Recital 13.[21] Thus it is clear from the legislative history that the Parliament’s intention was to preserve parties’ ability to choose non-state bodies of law in their contracts.[22] The Court’s interpretation of Islamic law as non-specific and not consisting of legal principles[23] is misguided. Islamic law has a system of general principles which apply directly to trade contracts.[24] Among these is the fundamental respect of the freedom to contract, so long as the subject matter and conditions of the contract are not forbidden.[25] Specifically, a contract that includes riba (interest), gharar (uncertainty), or maysir (gambling) is invalid on its face.[26] Although these principles originate from the earliest centuries of Islam, it is only in the last few decades or so that they have been applied to the modern financial world.[27] One of the products of this movement was the very instrument at issue in the Shamil Bank case—the murabaha. A murabaha is a standardized product offered by most Islamic banks.[28] Essentially, a murabaha is a structure whereby the bank buys an item for the customer, the bank then sells the item to the customer at a marked-up price, and the customer pays the sales price back to the bank in installments on a deferred basis.[29] Thus, contrary to the Court of Appeals interpretation, Islamic law is quite specific when it comes to transactional requirements and has manifested a solution to the problems those requirements might cause in the form of the extremely common and well-defined murabaha agreement. This specificity is emphasized by the fact that in arbitral proceedings, when the tribunal is specifically chosen for its knowledge of Islamic law, there has been no issue in enforcing a choice of law provision which selected Islamic law—even in the Western context.[30] For example, in an ICC arbitration between Sanghi Polysters Ltd. and International Investor KCSC, the choice of law clause read: “this dispute shall be governed by the Laws of England except to the extent it may conflict with the Islamic Shari’ah, which shall prevail.”[31] The arbitrator, who was an expert in Islamic law, had no trouble enforcing this provision.[32] He simply awarded the principal and profit claims, but denied additional damages claims that would have been compliant with English law but prohibited by Islamic law.[33] Thus, we can only hope that the future will hold better understanding of the religion of Islam and the millions of people who practice the faith, both for their safety and security and for their contractual rights.

[1] See generally, Patrycja Sasna and Yasemin El Menouar, There’s a Social Pandemic Poisoning Europe: Hatred of Muslims, The Guardian (Sep. 28, 2020), https://www.theguardian.com/commentisfree/2020/sep/28/europe-social-pandemic-hatred-muslims-blm. [2] Germany Shooting: What We Know About the Hanau Attack, BBC (Feb. 20, 2020), https://www.bbc.com/news/world-europe-51571649. [3] Dr. Yasemin El-Menouar, Religious Tolerance is Widespread—But It Does Not Extend to Islam, Bertelsmann Stiftung: Religion Monitor (July 7, 2019), https://www.bertelsmann-stiftung.de/en/topics/latest-news/2019/july/religious-tolerance-is-widespread-but-it-does-not-extend-to-islam/. [4] See generally Annual Report on ECRI’s Activities: Covering the Period from 1 January to 31 December 2019, Council of Europe (Mar. 2020), https://rm.coe.int/ecri-annual-report-2019/16809ca3e1. [5] See Beximco Pharm. Ltd. v. Shamil Bank of Bahrain [2004] EWCA (Civ) 19 (Lord Justice Potter) (U.K.). [6] Id. at 4. [7] Id. at 4. A murabaha is a type of Islamic financial instrument intended to circumvent the Islamic prohibition on riba (interest). See infra, text accompanying note 35 for further discussion. [8] Beximco Pharm. Ltd. v. Shamil Bank of Bahrain [2004] EWCA (Civ) 19, 5 (Lord Justice Potter) (U.K.). [9] Anowar Zahid & Hasani Mohd Alid, Shariah as a Choice of Law in International Islamic Financial Contracts: Shamil Bank of Bahrain Case Revisited, 10 U.S.-China L. Rev. 27, 28 (2013) [10] Beximco Pharm. Ltd. v. Shamil Bank of Bahrain [2004] EWCA (Civ) 19, 1 (Lord Justice Potter) (U.K.). [11] Id. at 9. [12] Id. at 10. [13] Id. [14] Id. [15] Regulation 593/2008, of the European Parliament and of the Council of 17 June 2008 on the Law Applicable to Contractual Obligations, 2008 O.J. (L 177) 6 [hereinafter Rome I Regulation]. [16] Id. ¶ 13. [17] Beximco Pharm. Ltd. v. Shamil Bank of Bahrain [2004] EWCA (Civ) 19, 10 (Lord Justice Potter) (U.K.). [18] Michael McParland, The Rome I Regulation on the Law Applicable to Contractual Obligations, 149 (2015). [19] Meeting of 3-4 July 2006, Council Document 111451/06 (12 July 2006). [20] McParland, supra note 23, at 151. [21] Id. at 153. See supra note 18 for full quote. [22] Id. at 154. [23] Beximco Pharm. Ltd. v. Shamil Bank of Bahrain [2004] EWCA (Civ) 19, 10 (Lord Justice Potter) (U.K.). [24] Zahid & Ali, supra note 10, at 31. [25] Id. at 32. [26]Id. Gharar is a much more discrete concept than it appears on its face. Essentially, it is best explained as “the sale of an object which is not yet in existence is unenforceable…and the sale of an object which is not under the control of the seller is also unenforceable.” Babback Sabahi, Islamic Financial Structures as Alternatives to International Loan Agreements: Challenges for U.S. Financial Institutions, 24 Ann. Rev. Banking & Fin. L. 487, 491 (2005). [27] Yusuf Talal Delorenzo & Michale J.T. McMillen, Law and Islamic Finance: An Interactive Analysis, in Islamic Finance: The Regulatory Challenge Islamic finance the regulatory framework, 132, 138 (Simon Archer & Rifaat Ahmed Abdel Karim eds., 2007). The combination of the Islamic world’s overthrow of colonialist powers in the 1950s and 60s and the influx of oil money in the 70s and 80s led to a boom among Muslims who had a lot of money to spend but wanted to do so in non-Western and Islam-compliant ways. Sabahi, supra note 32, at 495. [28] Sabahi, supra note 32, at 495. [29] Id. at 495. [30] Aisha Nadar, Islamic Finance and Dispute Resolution: Part 1, 23 Arab L. Q. 1, 5 (2009). [31] Sanghi Polyesters Ltd. (India) v. International Investor KCSC [2001] C.L.C. at 750. [32] Id. at 749. [33] Id. The views expressed in this post represent the views of the post’s author only.