This is the final piece of a three part discussion, examining the resolution of disputes in Islamic banking and finance through commercial arbitration and the KLRCA’s new i-Arbitration Rules (the Rules).
The first paper, published in the Islamic Finance
news Asia Supplement (October), contains a breakdown of the Rules and examines the problems faced by Islamic finance users. The second, published in the Islamic Finance
news Capital Markets Supplements (November), looks at the selection of governing law and how parties are able to ensure the application of the correct and desired system of law. This final part will look firstly at the recently released and translated second edition of the i-Arbitration Rules, and secondly compare the Rules with Islamic arbitration options presently available in the Islamic banking industry.
Revised rules: The 2013 KLRCA i-Arbitration Rules
On the 24th of October 2013 the KLRCA launched the revised and translated editions of its core rules, including the second edition of the KLRCA i-Arbitration Rules. The Rules were translated into six languages – Arabic, Spanish, Korean, Mandarin, Bahasa Malaysia and Bahasa Indonesia – cementing the internationalization of KLRCA’s Rules and services. The new edition of the i-Arbitration Rules brings into effect several revisions and additions, building on the theme of global application. The most notable changes are the removal of any reference to a specific jurisdiction, and the incorporation of an optional late payment charge mechanism permitting the arbitral tribunal to deal with the issue of default.
Revised reference procedure – Going global
Rule 11 (previously Rule 8) contains the procedure for reference of Shariah issues to a Shariah advisory council or expert. In the revised edition, there is no reference to a specific jurisdiction or authority. Rather, the appropriate council or expert is determined according to the characteristics of the agreement and any underlying transaction, as well as the will of the parties. This reflects both the mandatory nature of banking and finance regulation and the consensual and flexible nature of international commercial arbitration.
In the Islamic Finance
news Capital Markets Supplement we examined how the appropriate authority might be determined. Where there is governing legislation, as exists in Malaysia or Indonesia, there may be a statutory authority that can be called upon. Otherwise, it may be the bank or financial institution involved that maintains a Shariah advisory board, or ultimately the parties may agree on a Shariah expert to deal with such issues.
It bears remembering that a ruling obtained under Rule 11 will be treated as expert evidence and not interfere with the decision making powers of the tribunal. This preserves the international enforceability of any award rendered under the New York Convention, applicable in 149 countries.
Late payment charges – Dealing with default
Disputes containing issues of a Shariah nature conventionally have no mechanism of redress where there is default by the party against whom a decision has been made. This deprives the successful party of the benefit of his award and fails to deter the delay of payment, indirectly affecting the competitiveness of Islamic finance users compared to users of conventional finance.
To rectify this disparity, the Shariah Advisory Councils of the central bank of Malaysia (Bank Negara) and the Malaysian Securities Commission jointly formulated a mechanism known as the late payment charge, based on the Shariah principles of Ta’widh, corresponding to compensation on actual loss, and Gharamah, referring to late payment.
The late payment charge is calculated pursuant to a formula based on the overnight Islamic Interbank Rate of the Islamic money market, with the Ta’widh portion recoverable by the party to whom the payment is owed and the Gharamah portion going to charity. The mechanism is outlined in guidelines issued by the Shariah Advisory Council of Bank Negara titled ‘Shariah Resolutions in Islamic Finance’ and available on their website.
Rule 12 of the Rules includes the late payment charge as an optional mechanism that the tribunal may use in the case of default. The decision whether or not to apply the mechanism will depend on the principles applicable to the matter and the choice of the parties. Nevertheless, the option exists as a way of ensuring full compensation and preserving competitive standing.
Existing forums for Islamic arbitration
Arbitration has been present in Islam since its inception. Prophet Muhammad himself acted as an arbitrator in various disputes. Islamic arbitration is practiced both on an ad hoc and institutional basis, and is offered through a variety of institutes such as the International Islamic Center for Reconciliation and Arbitration (IICRA), Islamic Institute of Civil Justice, Independent Shariah Tribunals (in Nigeria, among other countries) and the Muslim Arbitration Tribunal (UK). AAOIFI likewise offers international accounting and banking standards, including for the conduct of Islamic arbitration.
There are limitations in this approach to arbitration. Islamic arbitration as practiced throughout history has involved a mix of what we know now as mediation, conciliation and arbitration, and as a result there is very little in the way of an accepted uniform practice when it comes to Islamic arbitration. Issues such as confidentiality, qualification of arbitrators and the role of arbitrators are not necessarily dealt with in any coherent uniform manner.
The IIRCA, as a dedicated Islamic arbitration institution, offers arbitration services and expertise similar to conventional commercial arbitral institutions like the KLRCA. There are significant differences, however, in how those services are carried out. Following is a breakdown of the main differences.
Scope
The most important difference lies in the scope of service offered by the different institutions. For the reasons explored above, the KLRCA does not attempt to offer blanket Islamic arbitration in line with what has been traditionally offered. Rather, the KLRCA seeks to augment its already established and internationally recognized commercial arbitration services by making them accessible to parties utilizing Islamic banking in their business. The i-Arbitration Rules build on existing UNCITRAL Model Law principles by adding scope for determination of issues relating to Shariah principles through reference to the relevant Shariah council or expert, and allowing the remainder of the dispute to be resolved on commercial basis according to the governing legal principles agreed upon.
The IICRA by contrast, provides a forum for arbitration of disputes wholly in accordance with Shariah law. Under the IICRA, an arbitral panel is to disregard any applicable legal provisions selected by the parties where the application of same is not compatible with Islamic Shariah principles. In addition, the arbitral panel “may invoke for the disputed issue whatever it deems appropriate from among the viewpoints of various schools of Islamic thought, rulings of Islamic Fiqh academies, and opinions of Shariah supervisory boards at Islamic financial institutions. The Panel may choose to be guided by local or international commercial rules or conventions that are not at variance with the provisions of Islamic Shariah”. The IICRA maintains a specialized Shariah Advisory Committee to whom a draft award may be referred for review. The role of the Advisory Committee is to bring the attention of the arbitral panel to “any violation of the principles and provisions of Islamic Shariah”. This review of the Advisory Committee is applied to the whole of the award, and not only to specific issues. It should be noted that such recommendation is not binding on the arbitral panel.
Scope is where the main difference lies, and the differences in scope as applied by the two institutions are readily apparent. While the i-Arbitration Rules seek to isolate Islamic finance issues to which Shariah principles are to be applied, the IICRA uses Shariah principles to define the entire procedure.
Venue and language of arbitrations
Other differences lie in the logistical details of how arbitrations are administered. Under the IICRA, the official language is Arabic, and while other languages may be agreed between the parties all written submissions and statements must attach an Arabic translation and all awards must be rendered in Arabic. Under the KLRCA, international arbitrations are carried out in English. In relation to venue, under the IICRA the executive committee reserves the right to reject any agreement for proceedings to be held outside the UAE. The KLRCA provides for proceedings to be held in any venue agreed by the parties.
Who are these services most suited to, prospective parties and arbitrators
This is a direct consequence of the issues raised above. The holistic application of Shariah principles is by its nature more suited to local transactions, limited to parties within the Islamic finance community and preferably parties within the same jurisdiction (for the purpose of finding common ground regarding the appropriate Islamic authority and applicable interpretation of Islamic jurisprudence). This is reflected in the IICRA’s provisions regarding language and venue. Furthermore, the scope exercised by IICRA necessitates a narrow range of available arbitrators. Arbitrators included in the IICRA panel will need knowledge and experience in Shariah principles and likely a working knowledge of the Arabic language.
A global solution
The i-Arbitration Rules are by design suitable for parties of all nationality. They are well suited to both domestic and international transactions and agreements and in line with leading international commercial arbitration standards. The KLRCA maintains a broad and extensive panel of arbitrators, including arbitrators with Shariah and Islamic finance expertise but also arbitrators of varying industry, jurisdictional and commercial experience. The result is the ability to provide parties utilizing Islamic finance transactions with the same resources in resolving disputes that are available to other commercial entities around the world.
Kuala Lumpur Regional Centre for Arbitration
No.12, Jalan Conlay,
50450 Kuala Lumpur, Malaysia
Tel: +603 2142 0103