1 Shariah as the governing law of Islamic finance contracts in the UK: The impact of Rome I Regulation and the position in arbitration By: Abdullah Abdul Rahman 1 In Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd and others ,2 the English Court of Appeal did not accept Shariah as the governing law of a contract. This was notwithstanding that the contracts in question were Islamic banking contracts based on the Murabahah and Ijarah principles. The Court of Appeal made that decision on the basis of the Rome Convention on the Law Applicable to Contractual Obligations 1980 (‘Rome Convention’) which had the force of law in the United Kingdom. However, the position in Beximco is no longer applicable after the Rome Convention was replaced by the Regulation (EC) No. 593/2008 of the European Parliament and of the Council on the Law Applicable to Contractual Obligations, known as the Rome I Regulation (‘Rome I Regulation’) and the coming into force of that regulation in the UK on 17 December 2009. Rome I Regulation permits the Shariah as the governing law of a contract. In any event, the position in Beximco had been confined to litigation. It has never been applicable to arbitration. This is due to s. 46(1)(b) of the English Arbitration Act 1996 which permits the application of Shariah as the governing law of a dispute in an arbitration. This position on arbitration has been confirmed by the decision in Musawi v R.E. International. 3 Beximco and the Rome Convention In Beximco , the defendant was a customer of the plaintiff which was an Islamic bank incorporated in Bahrain. The defendant defaulted on the repayment of the Murabahah and Ijarah based banking facilities granted to them and the bank sued in the English court. The governing law clause provided as follows: “ Subject to the principles of the Glorious Sharia’a, this Agreement shall be governed by and construed in accordance with the laws of England .” The defence was that the agreements had to comply with both the English law as well as the Shariah and since the Murabahah and Ijarah based agreements were not in compliance with the Shariah, they were not enforceable. It was common ground between counsel that there could not be two governing laws in respect of the agreements. This point of law was accepted by the court. As between the English law and the Shariah, the court applied the Rome Convention on the basis of article 3(1) of the convention which provides ‘ A contract shall be governed by the law chosen by the parties ’ (emphasis by the Court of Appeal). The court came to the conclusion that the phrase ‘the law’ permitted the choice of only the law of a country and not a non-national system of law such as the lex mercatoria , general principles of law or the Shariah. The court found that article 1(1) of the Rome Convention which provided that ‘ The rules of this convention shall apply to contractual obligations in any situation involving a choice of laws of different countries ’ as well as the reference to a choice of ‘ foreign law ’ in article 3(3) to be clear indication that the convention as a whole contemplated and sanctioned only the choice of the law of a country and therefore, ‘the law’ in article 3(1) did not permit the choice of non-national law such as Shariah. As such, the court rejected the Shariah as the governing law of the contracts and applied the English law only. 2 Rome I Regulation The Rome Convention was replaced by the Rome I Regulation. 4. It came into force in England on 17 December 2009 by virtue of. 5 Article 3(1) of the Rome I Regulation reads ‘ A contract shall be governed by the law chosen by the parties ’ thus, maintaining the wording of the corresponding article in the Rome Convention. However, it made significant changes elsewhere which permit the application of non-national law as the governing law of a contract. Article 1(1) of the Rome I Regulation leaves out the phrase ‘ a choice between the laws of different countries ’ found in article 1(1) of the Rome Convention which had been the crucial basis of the decision in Beximco . Article 1(1) of the Rome I Regulation reads: “This Regulation shall apply, in situations involving a conflict of laws, to contractual obligations in civil and commercial matters .” The change in the wording of article 3(1) reflects the desire to permit the application of non-national laws in contracts. Any doubt as to whether the phrase ‘ conflict of laws ’ in Article 1(1) of the Rome I Regulation includes a conflict involving a non-national law is removed by Preamble 13 to the Rome I Regulation. Preamble 13 reads “This Regulation does not preclude parties from incorporating by reference into their contract a non-State body of law or an international convention .” Thus, it is clear that the Rome I Regulation permits the parties to apply non-national law as the law governing their contracts. This, in turn, permits the application of the Shariah as the governing law of contracts enforceable by the English courts. The governing law where the parties refer to arbitration Where a dispute is referred to an arbitration governed by the English Arbitration Act 1996, s. 46(1) of the said Act provides “ The arbitral tribunal shall decide the dispute - (a) in accordance with the law chosen by the parties as applicable to the substance of the dispute or; (b) if the parties so agree, in accordance with such other considerations as agreed by them or determined by the tribunal. ” Thus, in Musawi v RE International ,6 the English High Court held that under s. 46(1)(a) the applicable law must the law of a country. Then, on S. 46(1)(b) the High Court relied on Dicey, Morris and Collins on the Conflict of Laws (14 th edn) which states that the provision “allows the parties the freedom to apply a set of rules or principles which do not in themselves constitute a legal system. Such a choice may thus include a non-national set of legal principles (such as the 1994 UNIDROIT Principles of International Commercial Contracts) or, more broadly, general principles of commercial law or the lex mercatoria .” Thus, prior to the coming into force of the Rome I Regulation, where parties have agreed to apply a non-national law as the governing law of their contract, the applicability of the non- national law as the governing law depended on whether the dispute was resolved in court or by arbitration. If the dispute was referred to court for resolution, then the non-national law did not apply. However, the position was different where the parties referred their dispute to arbitration. In such a situation, the arbitral tribunal shall decide the dispute in accordance with the non- national law agreed by the parties. The non-national law includes Shariah. This was the case in Musawi v RE International . In that case, the parties agreed to refer their dispute about an interest in land in Wembley to arbitration by an Ayatollah in accordance with the Shia Shariah law. The High Court held that this was an agreement that the parties were entitled to make under s. 46(1)(b) of the Arbitration Act 1996. 3 The position that the phrase ‘ such other considerations ’ in s. 46(1)(b) applies to religious laws in an arbitration has been confirmed by the Court of Appeal in Halpern v Halpern ,7 which is a case concerning the application of the Jewish law to an agreement to compromise claims. Finally, parties wishing their arbitration to be governed by the Arbitration Act 1996 must be aware that under s. 2(1) of the Act, it will apply only if the seat of arbitration is in England and Wales or Northern Ireland. The seat may be expressly provided in the arbitration agreement. The seat may also be indicated by the arbitration agreement providing that the arbitration will be anywhere in England and Wales or Northern Ireland. Failure to expressly provide for or indicate the seat may result in a decision that the seat is not in England and Wales or Northern Ireland and therefore the Act does not apply. Conclusion With the Rome I Regulation superseding the Rome Convention, the courts should no longer reject the Shariah as the governing law agreed by the parties in their Islamic finance contracts. However, perhaps it is better for parties to refer their disputes to arbitration as there is greater certainty in that situation that the Shariah is applicable as the governing law for Islamic finance contracts where parties have agreed as such. The parties would also be able to appoint arbitrators who are experts in Shariah to decide on the dispute as conducted in Musawi v RE International . With this, there will be greater assurance that the decision on the dispute will be in compliance with the Shariah in accordance with their intention as indicated by the choice for Islamic finance. 1 The writer is a legal practitioner in Kuala Lumpur, Malaysia. Comments on this article may be sent to [email protected] 2 [2004] 4 All ER 1072 3 [2008] 1 All ER (Comm) 607 4 Article 24(1) of the Rome I Regulation states that it replaced the Rome Convention. 5 However, Rome Convention continues to apply to contracts made after 1991 and before 17 December 2009: Lawlor v Sandvik Mining and Construction Mobile Crushers and Screens Ltd [2013] EWCA Civ 365 6 [2008] 1 All ER (Comm) 607 7 [2007] 2 All ER (Comm) 330 .