Arbitration can be seen as the big sister to litigation; placing private dispute resolution above aggressive court proceedings. Yet historically it has found little place in the Islamic finance industry due to a number of issues including the difficulty of reconciling
International Centre for Dispute Resolution arbitration rules with both domestic and Shariah law. Recently however a number of regions have taken steps towards integration, and the popularity of Shariah compliant dispute resolution is growing. As the ruler of Dubai Sheikh Mohammed Rashid Al Maktoum announces his intention to develop the emirate into a global hub for Islamic contract arbitration, we take a look at the current options available and how they have developed.
What is arbitration?
Arbitration is a form of private dispute resolution by an independent and impartial third party tribunal, which acts as a binding alternative to court action (unlike mediation, negotiation and conciliation, which are non-binding). While it is a private method of resolution it is governed by law, and most jurisdictions have civil practice provisions covering arbitration providing a basic template as well as procedures for confirmation of the arbitration award, giving the final resolution the same authority as a court judgement.
International arbitration proceedings are in general governed by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, which has been adopted by the United Nations Commission on International Trade Law (UNCITRAL) and as of December 2012 was enforced by 148 member states, giving arbitration its key benefit of international recognition and enforceability.
Globally, arbitration is an extremely popular form of cross-border dispute resolution to avoid court proceedings. However Craig Shepherd, the head of disputes at Herbert Smith in Dubai, warns that it is not always a solve-all solution, as the use of arbitration must be specified in advance in order to be used.
“The point is that the arbitration clause needs to be written into the contract of a transaction. If the use of a dispute resolution center is not agreed at the outset, then there is no means of resorting to it. The specific arbitration rules or arbitration center to be used should also be specified.”
Often in the past, especially in the Middle East, banks have written in a clause that says they can either use an arbitration center or go to the courts. However as arbitration becomes more popular and its benefits become more obvious, institutions are increasingly becoming more specific in their contracts.
Why arbitration?
Litigation has long been the most popular and well-known method of determining disputes in Islamic finance. In fact, at the Asia Pacific Regional Arbitration Group Conference in 2011 HakimahYaakob of the International Shariah Research Academy for Islamic Finance (ISRA) stated that following a survey of 10 Islamic banks and 12 Takaful operators in Malaysia, she had found that there was a trend in many of these institutions to specifically opt for litigation clauses rather than arbitration clauses in their contracts, in order to avoid credit risk for legal uncertainty.
However, litigation has its disadvantages. Shariah disputes in recent years have seen a number of high profile court cases which have resulted in unfavorable or negative judgements for the industry, leaving regulators keen to see the sector adopt alternative dispute resolution methods. For example in the landmark 2004 high court case between Beximco Pharmaceuticals and the Shamil Bank of Bahrain in the UK, the judgement explicitly ruled that Shariah law was not recognizable in the UK and could not be used to settle an Islamic finance transaction even where specified in the contract.
Advantages
So what are the benefits of arbitration over litigation? The single most important advantage is its international and cross-border appeal. With the expansion of transnational commerce and the globalization of trade, there is an increasing recognition that the international enforceability of an arbitration award is preferable to lengthy, expensive and often unenforceable court proceedings.
Shepherd notes that: “The whole point of arbitration is that it is recognized internationally, while courts tend to be seen as not only giving a home advantage, but also court judgements are not necessarily recognized across borders. Arbitration centers will grow in importance as the Islamic finance industry grows and cross-border deals become more common.”
However, there are drawbacks to arbitration as well, and he clarifies that: “Nevertheless this generally applies to international issues. With domestic disputes it can actually be cheaper to use the courts. The main point of arbitration is that it is internationally accepted.”
Another issue, explains Sundra Rajoo, the director of the Kuala Lumpur Regional Centre for Arbitration (KLRCA), is that: “You can choose the tribunal. You may want a tribunal with specialist expertise – for example if it is a very complex banking dispute you may want an accountant on the panel, or a corporate lawyer, or an ex-judge. There is so much choice and so many advantages. I think this is a major benefit of arbitration for all commercial purposes, not just for Islamic. This is why international arbitration is so popular.”
Shepherd also notes that arbitration centers are positive not only from a lawyer’s perspective, through providing dispute resolution work; but also for the customer as it means they have access to a wider pool of better qualified lawyers.
And there is definite interest from practitioners. “In general I like arbitration better,” explains Alex Saleh, a partner at Al Tamimi in Kuwait, “because especially for the larger transactions where you have a lot of large and complicated documents, often in a foreign language, I think arbitrators are usually better suited and better qualified to handle that as opposed to litigators in a local court.”
Shariah conflict?
However, arbitration does allow for some conflict, specific to Shariah compliance, which may be a concern to some parties. At the Dubai-based International Islamic Center for Reconciliation and Arbitration (IICRA), for example, the rules specifically state that in rendering a decision: “The panel shall exclude any provisions in the law that should be applied if such provisions are not in conformity with the rules of Islamic Shariah,” meaning that Shariah law takes precedence over whichever law is stated in the contract.
In its purest form, this would allow for a review of the banks’ original Shariah board ruling, and give the arbitrator final judgement of the correct Shariah compliant interpretation. Although in many cases they may share the same interpretation, scholarly views over many Islamic products are divided, such as with commodity Murabahah, with market practice often conflicting with orthodox interpretation, which could lead to potential conflict.
Where does it happen?
According to Shepherd, the two most popular arbitration seats are the International Chamber of Commerce (ICC) and the London Court of International Arbitration (LCIA). Others include the International Centre for Dispute Resolution (ICDR) with offices in New York, Dublin and Mexico City; the Singapore International Arbitration Centre and the Hong Kong International Arbitration Centre. In the Middle East, the LCIA in 2008 joined forces with the Dubai International Financial Centre (DIFC) to create the DIFC LCIA Arbitration Centre following the introduction of the 2008 DIFC Arbitration Law.
However, Shepherd emphasizes that the point of arbitration is its international reach. “Anyone anywhere can use these rules, as long as they are enshrined in the contract at the outset,” he explains.
And although the ICC and LCIA do not currently have specific Shariah provision, they are still used in Islamic dispute resolution. For example Commerzbank, Royal Bank of Scotland and Standard Bank Group in September 2012 instigated legal action against Dubai Group through the LCIA over its controversial US$10 billion debt restructuring, after several years of unsuccessful negotiation. The arbitration option was the legal recourse specified in the original contract, and was specified on the loan documents as the chosen forum for dispute resolution.
Islamic arbitration
Specific Islamic arbitration centers up until now have been both rare and little-used. In fact, many players appear unaware of the specific provisions available for Islamic dispute resolution. Saleh comments that: “I am not aware of any arbitration tribunals solely handling Shariah matters. I tend to use DIFC-LCIA rules. And while there are not specific Shariah components to it, I can make sure that the arbitrators chosen have a Shariah compliant background or qualification.”
However, a number of specialist Islamic centers do in fact exist, while increasingly conventional centers are also incorporating Islamic provisions. Kuala Lumpur and Hong Kong are the oldest and most established of these, while Dubai and Qatar have also seen some activity.
“There is no actual need for specialized Islamic centers,” explains Shepherd. “Current international arbitration law is adequate. But it’s always good to have more, and to have better specialization, as it will increase efficiency and speed of dispute resolution.”
KLRCA — a world leader
The leading global center for Islamic arbitration is widely accepted to be the KLRCA, which Shepherd calls: “The current place of choice for Islamic arbitration, although the field is still wide open and this could change as the industry develops.”
Malaysia first introduced its Rules for Islamic Banking and Financial Services Arbitration in 2007, and has seen around 12-15 Islamic cases since. Rajoo notes that: “We have a lot of experience in complex Islamic arbitration just using our own rules. And none of the awards have been set aside — all the awards have been enforced.”
However, in September 2012 the KLRCA published a new set of arbitration rules specifically aimed at resolving disputes arising under contracts with Shariah elements, and claiming to be the first set of Shariah compliant arbitration rules to adopt UNCITRAL and the New York Convention. However, they contain several modifications, including a provision that the arbitration tribunals must outsource Shariah issues to a Shariah Advisory Council or Shariah expert.
“With the advent of globalization and increasing cross-border transactions, the center decided to come up with a set of rules that provide for international commercial arbitration that is suitable for commercial transactions premised on Islamic principles, and that would be recognized and enforceable internationally, “ says Rajoo.
The center has used the existing Malaysian legal infrastructure including its Shariah Advisory Council (SAC) and specialized courts system on which to set the rules, which are based on the most recent 2010 version of the UNCITRAL rules. Therefore if there is a Shariah issue that requires an expert opinion, the arbitral tribunal can refer it to the SAC.
However: “I think we have gone beyond that,” claims Rajoo. “Because we are using the UNCITRAL rules we can accommodate all the Islamic schools of thought. We are trying to allow flexibility within this set of international rules so that Shariah can be accommodated within the accepted international standards. We took the 2010 UNCITRAL rules and modified them for i-arbitration. And the great thing is that you can take our rules and use them anywhere in the world.”
Other Islamic centers
There are a few other arbitration centers that do have an Islamic element. Surprisingly given its lack of any real Islamic finance activities, Hong Kong is home to the International Islamic Mediation & Arbitration Center (IMAC), an independent international institution established by The Arab Chamber of Commerce & Industry in July 2008 in collaboration with the ICC.
In addition, the IICRA in Dubai claims to be: “An international, independent, non-profitable organization, and one of the major infrastructure institutions of the Islamic finance industry.” However, awareness of these offerings appears to be low and Rajoo believes that neither of these institutions offer a viable solution.
“They do not have any specific Islamic arbitration rules. Our survey suggests that we are the only center that has a viable set of Islamic rules for arbitration. The other centers are tied to the local chambers of commerce. So they will have a facility for Islamic arbitration but they are not truly promoting specific Islamic rules for Shariah compliant arbitration.”
The rise of the Middle East
However, this may soon change. The fastest-growing region for arbitration is unsurprisingly the Middle East, which has seen considerable activity over the past few years. Historically foreign investors have been reluctant to seat arbitrations in the region due to complicated enforcement schemes and a multitude of conflicting Shariah-based local laws. However, many countries have since begun to reform their arbitration provisions.
For example, several Middle East states including Bahrain, Oman, Saudi Arabia, Jordan, Kuwait, Qatar and the UAE recently acceded to the New York Convention. This has led to an increasing openness to accessible, transparent and standardized arbitration rules, as the convention enforces the international acceptance of arbitration awards. However, it also contains an exception allowing courts to repudiate foreign awards that are “contrary to the public policy of that country”, meaning that where necessary arbitration awards that do not comply with Shariah can be rejected.
In addition, the establishment of increasing numbers of regional arbitration institutions such as the Cairo Regional Center for International Commercial Arbitration, the Abu Dhabi Commercial Conciliation and Arbitration Centre, the Bahrain Arbitration Center, the DIFC-LCIA and the Dubai International Arbitration Centre (DIAC) have done much to bring this method of dispute resolution to the fore and make it more universally accepted.
Recent developments
In January 2010 Bahrain partnered with the American Arbitration Association to launch the Bahrain Chamber of Dispute Resolution, which exists as an arbitration ‘free zone’ in which disputes are automatically guaranteed and bound by mandatory arbitration.
In June 2012 Saudi Arabia, hitherto regarded as having one of the least sophisticated arbitration systems in the region, introduced its New Arbitration Law based on UNCITRAL and removing the distinction between local and international arbitration, allowing the enforcement of foreign awards provided they are in compliance with Shariah law.
And in July 2012 the Qatar International Court and Dispute Resolution Center (QICDRC) announced plans to expand its commercial court jurisdiction by resolving Islamic finance disputes through a model framework.
Robert Musgrove, CEO of QICDRC, stated that: “We are currently looking at the possibility of resolving Islamic finance disputes by setting up a dispute resolution mechanism. To this objective we started a joint feasibility study with QICCA (Qatar International Chamber of Commerce Arbitration) last month.With the increasing popularity of Islamic finance funds and schemes globally and specifically in the GCC, it would be ideal to have a mechanism in place to resolve disputes.”
The UAE pushes forward
However, the undisputed leader of the drive towards arbitration in the region is the UAE. In 2006 it became one of the first states to adopt the New York Convention, while in 2008 it drafted a new federal arbitration law, adopted a comprehensive DIFC arbitration law, and created the DIFC-LCIA partnership.
This partnership has sprung Dubai into a position as the leading regional seat of international dispute resolution, and in 2012 the DIFC-LCIA confirmed that the number of arbitration cases had risen by 30% in the past year. The center benefits not only from international support but from a more cost-effective fee structure based on hourly costs (unlike a percentage structure such as that used by the KLRCA).
In addition, in 2012 the ruler of Dubai extended the jurisdiction of the DIFC courts so that now anyone, whether UAE-based or international, can opt in their contracts to be subject to DIFC law and select either the DIFC courts or arbitration center as a venue for dispute resolution.
Dubai in the driving seat
However, the DIFC-LCIA is not the only arbitration option available in the emirate. The emirate is home to a number of other resolution centers including DIAC, which was first established in 1994 and according to Shepherd is the busiest center in Dubai and “will have many more cases than the more recently established DIFC center”.
However, Dubai also has specific plans to develop as an Islamic commercial hub, and as such has announced its intention not only to create an Islamic finance council to regulate Islamic finance products but also to develop its role as an arbitration center for Islamic contracts, according Sami Al Qamzi, the director general of the Dubai Department of Economic Development, in a recent announcement.
A viable need
Ibrahim Qasim, the head of Islamic finance structuring at Deutsche Bank in Dubai, in a recent interview confirmed that: “Having a well-defined, acceptable and investor-friendly arbitration process for Shariah compliant transactions is an excellent idea. At present, investors in or creditors to Islamic instruments tend to take more comfort when the choice of law and places for arbitration is set as either London or New York.
“Dubai can certainly build on the current DIFC arbitration frameworks, which already apply internationally accepted arbitration standards which can be fine-tuned to accommodate Shariah requirements.”
However, there is at the moment no specialized international commercial arbitration center in the Arab region to settle the Islamic financial transactions, leaving the KLRCA as the only global center offering the service. “What we don’t have in the Gulf yet — and it’s probably a great idea for the future — is an Islamic version of LCIA,” says Saleh.
“Arbitration in general in the Gulf is on the rise — we are using the DIFC and LCIA a lot more, whether for conventional or Shariah. A specific Shariah compliant arbitration tribunal would be a great idea but at least in my experience it doesn’t exist yet. It should be something that the industry as a whole should work on.” — LM