Murabaha Monthly, Episode 5: Shariah clauses in Murabaha Agreements

For this month's instalment of Murabaha Monthly, we'll discuss the rationale and importance of an oft-overlooked clause in commodity murabaha facilities – namely, Shariah-compliance clauses.  I recently reviewed a commodity murabaha agreement which contained the following clause:  

"This Agreement shall be governed by and construed in accordance with the prevailing laws of England in so far as are in compliance with the principles of the Islamic Shariah (as interpreted by the Shariah Supervisory Board of the Investor)."

A key case

Practitioners familiar with Islamic finance will agree that the above clause is not fit for purpose given the ruling in Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain (2004) ("Beximco")

The brief facts of the case were that:

  1. Beximco had entered into a Murabaha Facility with Shamil Bank;
  2. Shamil Bank claimed that sums were outstanding pursuant to the facility;
  3. The Murabaha Facility contained a governing law clause stating that “subject to the principles of the glorious Shariah”, the Agreement would be governed by and construed in accordance with English law; and
  4. Beximco argued that the Agreement was contrary to Islamic law and therefore was not enforceable.

The Court of Appeal held, perhaps unsurprisingly, that:

  1. a contract can only have one governing law and parties to a contract can only agree to adopt the law of a country as the governing law of a contract; and
  2. as Islamic law is a non-national system of law it is not capable of being the governing law of a contract under English law.

Beximco's counsel did raise the argument that the governing law of the Agreement was English law and therefore that it could incorporate general Islamic principles as terms of the Agreement, however, this was rejected because it was held that "principles of Glorious Shariah" was too vague to be given effect.

As readers who are au-fait with the nuances of Islamic finance will be aware, there is no codification of Islamic law. This was recognised by the Court of Appeal in its judgment.

What did this mean for Murabaha Agreements?

In essence, two things:

1. Governing law clauses now tend to make no reference to Islamic law or Shariah.

A typical governing law clause in a Murabaha Agreement which relates to UK real estate would ordinarily only state that:

  1. the Agreement is governed by English law; and
  2. only the English courts have jurisdiction to settle disputes and no party can argue to the contrary.

2. A typical, post-Beximco, Shariah clause is likely to read something similar to this:

“The Customer has not relied on any representation made by the Bank as to the Shariah compliance of the Facility Documents and has independently made its own assessment as to whether such Facility Documents are compliant with the Shariah. The Customer has no objection, and will not raise any objections, as to matters of Shariah compliance in respect of or otherwise in relation to the provisions of the Facility Documents.”

This clause therefore, in simple terms, mitigates (despite the fact that such an argument would be unlikely to be successful in English Courts on the basis of Beximco) against the likelihood that Shariah non-compliance could be used to deem the agreement or any of its clauses frustrated, invalid or inapplicable for any reason because no objections on Shariah grounds can be used.

We hope that you found the above interesting and insightful and if you have any questions please don't hesitate to contact Aziz.

Stay tuned for the next episode of Murabaha Monthly where we will take a detailed look at commodity trade logistics and powers of attorney.

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