The dispute resolution conundrum of the Islamic finance industry

The industry cannot survive without solid and uniform regulation, a unique and independent dispute resolution framework and a bankruptcy court

Camille Paldi

December 12, 2014: As we hear news of the rapid growth of the Islamic finance industry with billion dollar banks, huge dollar sums of Islamic assets, sukuk issuances and the expansion of Islamic insurance or takaful, one must be realistic and realise that the industry cannot survive without solid and uniform regulation, a unique and independent dispute resolution framework and a bankruptcy court. This article aims to introduce the Dubai World Islamic Finance Arbitration Center (DWIFAC), the Dubai World Islamic Finance Arbitration Center Jurisprudence Office (DWIFACJO) and an Islamic Finance Bankruptcy Court (IFBC) to address the Islamic finance industry dispute resolution conundrum.

Islamic finance contracts should include an additional standardised dispute resolution contract issued by DWIFACJO with a built-in dispute resolution procedure, similar to the International Federation of Consulting Engineers (FIDIC), designating the DWIFAC as the arbitration center. If the contractual dispute resolution procedure is exhausted, then the dispute may be referred to DWIFAC, which may utilise the Model Islamic Banking Law, created by DWIFACJO, as the substantive law of the arbitration, the procedural law of the seat of the arbitration, and the DWIFAC arbitration rules, which includes shari’ah and lex mercatoria. The arbitration center may be staffed with the world’s top shari’ah scholars and Islamic finance lawyers, judges, and experts who can provide input about the shari’ah aspects of the dispute through the use of an Islamic form of ex aqueo et bono, which allows disputes to be settled using commercial practice rather than purely legal devices. Sukuk transactions should also include a standardised dispute resolution contract designating the IFBC as the governing jurisdiction and body of any dispute or default.

DWIFAC and DWIFAJCO

DWIFAC along with the DWIFAJCO shall be the central command station for Islamic finance dispute resolution in the UAE, GCC and the world, providing a standardised contract with built-in dispute resolution, a uniform Islamic banking law, an arbitration center and a centralized shari’ah authority in the form of the Supreme Shari’ah Council.

It is clear that state courts in common and civil law jurisdictions are inadequate to adjudicate Islamic finance disputes due to the lack of recognition of shari’ah law, lack of independent shari’ah advisory committees, and/or the inability of court staff to apply effectively Islamic finance and shari’ah concepts in dispute resolution. In addition, the currently existing arbitration centers are insufficient to handle Islamic finance matters due to lack of properly trained staff, inadequate procedure and rules, misapplication and non-application of shari’ah and preference for national law, legal uncertainty, and lack of popularity as a mode of dispute resolution.

DWIFAC may offer the Islamic finance industry a globally recognised arbitration center complete with the DWIFAJCO, which may issue a uniform Islamic banking law and a standardised DWIFAC dispute resolution contract, creating harmony, legal certainty, and investor confidence in and across the Islamic finance industry. The DWIFAC standardised dispute resolution contract contains a built-in dispute resolution mechanism, facilitating early dispute settlement and completion of contracts. This contract may be attached to all Islamic finance contracts industry-wide, making DWIFAC the central dispute resolution authority for the industry.

DWIFACJO Uniform Banking Law

As it stands now, the UAE does not have an Islamic banking law. However, it has a law allowing Islamic banks to exist (UAE Federal Law No. 6 of 1985 Regarding Islamic Banks, Financial Institutions, and Investment Companies). In 1985, there was a proposal for laws to govern Islamic banks, but it had not been backed up by a decree and therefore, that is why the law is not in existence now. However, Federal Law No. 6 of 1985 was promulgated to legalise Islamic banking in the UAE. Article 5 provides that a Supreme Shari’ah Council should be established and approved through a cabinet decision, but it never materialised. The Supreme Shari’ah Council would oversee Islamic banks, financial institutions and investment companies, and its opinion would be binding. However, Article 6 was implemented, which requires that each Islamic firm establish its own Shari’ah Supervisory Authority (SSA) consisting of three members, to be approved by the Shari’ah Supervisory Council (ISRA 2013:656) and inserted into the articles of association (ISRA 2013: 656). The SSA is obligated to apply shari’ah to the company operations and contracts (Thani, Abdullah, Hasan 2004: 256).

DWIFACJO may take the opportunity to formulate and issue a Uniform Islamic Banking Law based upon the draft of the UAE 1985 Islamic Banking Law, UAE Federal Law No. 6 of 1985 Regarding Islamic Banks, Financial Institutions and Investment Companies, the Law Regulating Islamic Financial Business DIFC Law No. 13 of 2004, and AAOIFI standards. The new law may then be utilised as the substantive law in DWIFAC arbitrations and submitted to the UAE government for approval and gazetting, as this law would be necessary for the UAE in order to fulfil its mandate of becoming the capital of the Islamic economy. In addition, DWIFAC may establish a central Shari’ah Supervisory Authority or Supreme Shari’ah Council for the UAE, which may be utilised by all existing UAE dispute resolution bodies, including the Central Bank of the UAE, the Dubai courts and the DIFC/DFSA, which lacks such a board. The Supreme Shari’ah Council may fulfil its original purpose of approving the shari’ah boards of all Islamic financial institutions in the UAE, including in the DIFC.

The DWIFAC Standardised Dispute Resolution Contract

I propose that DWIFACJO issue a standardised dispute resolution contract, which may be attached to the main contract. It may contain a similar built-in dispute resolution mechanism as the FIDIC contract containing three stages, including (1) the Dispute Resolution Board (DAB), (2) amicable settlement, and (3) final referral to DWIFAC arbitration. Within 30 days of the occurrence of the subject matter of a dispute, any party to the contract may submit a claim to the DAB, addressed to the chairman and with a copy to all parties of the contract. However, if any of the parties considers that there are circumstances, which justify the late submission, she may submit the details to the DAB for a ruling. If the DAB considers that it, in all the circumstances, is fair and reasonable that the late submission be accepted, the DAB shall have the authority to override the relevant 30 day limit and if it so decides, it shall advise both the parties accordingly.

The DAB shall have 60 days to issue a binding ruling, which must be implemented immediately. If either party is not satisfied with the DAB ruling, either party can give notice of dissatisfaction to the other before the 30 days after the day on which she received the decision on or before the 30 days after the day on which the said period of 60 days expired. If there is no dissatisfaction within 30 days after the day on which she received the decision, the DAB’s decision shall become final and binding upon both parties. The DAB’s decision may then only be overturned by settlement or arbitration.

The DAB shall consist of three people who must be suitably qualified in law, Islamic finance, and shari’ah. Each party shall nominate one member for the approval of the other party. The parties shall consult both these members and shall agree upon the third member, who shall be appointed to act as chairman. However, if a list of potential members is included in the contract, the members shall be selected from those on the list, other than anyone who is unable or unwilling to accept appointment to the DAB.

The agreement between the parties and either a sole member (adjudicator) or each of the three members shall incorporate by reference the General Conditions as written by DWIFACJO, with such amendments as agreed between them. The composition of the DAB shall be by nomination and then joint-selection. DAB members are to be remunerated jointly by the parties with each paying half of any fees. DAB members may only be replaced by mutual agreement. The appointment of any member may be terminated by mutual agreement of both parties, but not by any party acting alone. Unless otherwise agreed by both parties, the appointment of the DAB shall expire when the discharge of the matter shall have become effective. Where the parties fail or are otherwise unable to agree upon the appointment, nomination or replacement of any member of the DAB, then the appointing official so named in the contract shall make the appointment.

DWIFAC may establish an Ambassadors List similar to the FIDIC President’s List, from which arbitrators and DAB members may be selected, if not specified in the contract. Persons who have successfully completed a DWIFAC Adjudication Assessment Workshop and International Arbitrator’s Islamic Finance Contracts Course and applied for entry to the DWIFAC Ambassadors List of Approved Dispute Adjudicators are entered on the List for five years. Successful attendees at an Adjudication Assessment Workshop are required to be fluent in English and to be thoroughly familiar with Islamic finance, law, and shari’ah.

There may be situations where a party fails to comply with a DAB decision. In such cases, the other party may refer the failure to DWIFAC arbitration. Where notice of dissatisfaction has been given, both Parties shall attempt to settle the dispute amicably before the commencement of arbitration. However, unless both Parties agree otherwise, arbitration may be commenced on or after the 50th day after the day on which notice of dissatisfaction was given. The attempt to obtain an amicable settlement during this prescribed period of 50 days is a condition precedent to a referral to arbitration. There is no given timeframe to refer a dispute to arbitration. However, it should be without undue delay. Once the procedure has been initiated, the arbitration shall commence according to the DWIFAC arbitration rules.

The arbitrator(s) shall have full power to open up, review, and revise any decision of the DAB relevant to the dispute. Neither party shall be limited, in the proceedings before the arbitrator(s), to the evidence or arguments previously put before the DAB to obtain its decision nor to the reasons for dissatisfaction given in its notice of dissatisfaction. Any decision of the DAB shall be admissible in evidence in the arbitration. Arbitration may be commenced prior to or after completion of the contract. The obligations of the Parties and the DAB shall not be altered by reason of any arbitration being conducted during the progress of the contract.

All of the DWIFAC decisions (see Appendix B) are to be published in English, French, and Arabic and the arbitration itself to be conducted in English. Any arbitral decision shall be final and binding. In the event of a conflict of laws, the shari’ah shall prevail. A valid arbitration decision should lead to a verdict that conforms to the rules of the shari’ah (AAOIFI 2004:559). The shari’ah and legal basis of the arbitration decision shall be mentioned in the decision (AAOIFI 2004:559).

In the context of DWIFAC, the Center may make arrangements with the Dubai and DIFC courts for enforceability of DWIFAC arbitration awards. However, parties to the dispute must realise that the arbitration award issued by DWIFAC may be overturned or enforced in other jurisdictions (International Bechtel Co. Ltd. v. Department of Civil Aviation of the Government of Dubai 300 F. Supp. 2d 112 (DDC. 2004)) or challenged in UAE courts based on Article 216 of the Civil Procedure Law. Shari’ah Supreme Council decisions shall act as a source of precedent and shall be binding, thus providing legal certainty to Islamic finance dispute adjudication. The Shari’ah Supreme Council established by DWIFAC shall act as the highest Shari’ah authority for DWIFAC arbitration, the UAE, and the DIFC.

DWIFAC Relationships Courts and Tribunals

A special component of the DWIFAC dispute resolution mechanism is the special relationship between DWIFAC, the Central Bank of the UAE, the Dubai courts, the DIFC, DIFC-LCIA and DIAC. The Central Bank of the UAE (CBUAE) was formed in 1980 and is primarily responsible for overseeing banks in the UAE, except in the DIFC, where the regulatory authority is the Dubai Financial Services Authority (DFSA). The DFSA is a Shari’ah Systems Regulator, requiring that any Islamic firm must have a SSB. The DFSA is, unfortunately, not itself a shari’ah regulator and has not constituted its own Shari’ah Board to oversee the regimes in Islamic firms (DFSA: 2010). Under the Shari’ah Systems Regulator requirements, the firm must have systems and controls to implement the SSB’s rulings and must conduct annual shari’ah reviews and audits and produce disclosures based on AAOIFI standards (DFSA: 2010).

In general, most of the disclosures recommended by the IFSB are already mandated in the DFSA rules (DFSA: 2011) and the DFSA currently requires the use of AAOIFI standards for Islamic financial business (DFSA: 2011). In addition, the DFSA utilises the IFSB standards in determining its capital adequacy regulations and there are also special rules for Islamic funds and for sukuk (DFSA: 2010).

The DIFC has been actively promoting Islamic finance with the Law Regulating Islamic Financial Business DIFC Law No. 13 of 2004, the establishment of the Islamic Finance Advisory Council in 2005, the presence of the Islamic International Rating Agency (IIRA) from 2006, and an MOU between the DFSA and the Securities Commission of Malaysia facilitating cross-border flows of Islamic finance between the DIFC and Malaysia in 2006. There appears to be a substantial amount of Islamic finance business being conducted in the DIFC, under the regulation of the DFSA. However, the DIFC lacks an adequate Islamic finance dispute resolution mechanism and centralized shari’ah authority.

DWIFAC, which shall be funded by Sheikh Mohammed bin Rashid Al Maktoum (Arabic???? ?? ???? ?? ?????), may act as the independent central dispute resolution authority and shari’ah regulator connecting all of the adjudication apparatus of Dubai, the UAE, and the DIFC into one consolidated framework for the adjudication of Islamic finance disputes with a centralised shari’ah authority in the form of the Shari’ah Supreme Council. The decisions of the Shari’ah Supreme Council shall be binding and available to the public for review, thereby giving certainty to legal decisions and promoting confidence amongst investors. The DIFC, Dubai courts, Central Bank of the UAE, and the IICRCA may refer arbitration to DWIFAC and/or utilise the DWIFAC Ambassador’s List and facilities. In addition, DWIFAC may utilise the expert determination, mediation, and other services of the Dubai and DIFC courts and the arbitrators of the IICRCA, DIFC-LCIA, DIAC, and the Central Bank of the UAE governance unit. DWIFAC awards may be enforceable in the Dubai and DIFC courts through a special protocol.

Islamic Finance Bankruptcy Court

Ernst and Young predicts sukuk issuances to inflate to $900 billion in 2017. It would be wise for the Islamic finance industry to set up an Islamic finance bankruptcy court for the world’s sukuk defaults as many people are experimenting with sukuk structures and, due to unforeseen circumstances, many sukuk go into default. A bankruptcy court for the Islamic finance industry may increase investor confidence and strengthen and add certainty to the overall global sukuk market. This may be better than the current situation where in sukuk defaults are currently being sent to common law courts or even worse, major law firms create special tribunals with their own laws for each individual sukuk default. A special component of the IFBC is that it would issue a standardised dispute resolution contract to be attached to all sukuk transactions worldwide designating the IFBC as the governing jurisdiction and body for any disputes or defaults.

Conclusion

The DWIFAC arbitration center along with the DWIFAC jurisprudence office provides the best solution of the dispute resolution conundrum of the Islamic finance industry, providing a globally recognised center for dispute resolution located in one of the world’s major financial centers and adjudicates disputes using arbitration incorporating lex mercatoria and shari’ah, the DWIFACJO uniform banking law, the DWIFAC arbitration rules, and the procedural law of Dubai as well as uses highly qualified shari’ah and Islamic finance/law arbitrators. DWIFAC may also organise and utilise the existing dispute resolution framework in Dubai, the DIFC, and the UAE, consolidating the centers into one hierarchical system, which includes the Shari’ah Supreme Council for the efficient adjudication and regulation of Islamic finance disputes. The IFBC is advisable for adjudicating the world’s sukuk defaults and maintaining the dispute resolution for and reputation of the global sukuk industry.

Camille Paldi