Sukuk & Capital Market - Islamic Finance News

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In a bid to create an effective and internationally enforceable set
of rules for Islamic commercial transactions, and to increase the
fluidity of cross-border transactions, the KLRCA’s i-Arbitration
rules were launched as a set of procedural rules which cover
all aspects of the arbitration process, allowing for the resolution
of disputes from any contract or agreement containing Shariah
issues.
The rules, which are the first in the world to adopt the United
Nations Commission on International Trade Law (UNCITRAL)
Arbitration Rules, ensures international recognition, while
taking into account Shariah principles. Essentially, it is the
first set of arbitration rules that cater to both conventional and
Shariah compliant transactions and contracts.
The rules are also based on the 1958 United Nations
Convention on the Recognition and Enforcement of Arbitral
Awards, or the New York convention – the defining element
within the i-Arbitration rules, according to Sundra. “The New
York convention is a convention in which countries enter into
and they agree to enforce foreign arbitral awards. This makes
arbitration different from litigation, where the foreign court ruling
of one country cannot be enforced in another country. It is so far
the most successful convention in the history of mankind, and
on the last count, involved 146 participating nations. Basically,
if you are a serious business nation, you are already part of
it. Our main challenge in structuring the rules was how to
make it compliant with the New York convention to ensure its
enforceability on a global level.”
“The most elegant ideas are usually the most simple,” Sundra
revealed; referring to the additional component- Rule 8, which is
activated in the event of a dispute involving a Shariah compliant
transaction. “The approach that the center has taken is that we
have to provide an avenue when an item of such significance
comes along, and see how it will be resolved in the arbitration.
Rule 8 comes into effect when there is a Shariah dispute. The
Shariah component is submitted to a Shariah Advisory Council
or expert for an opinion, and when the opinion comes back, it
is applied. For example, in a dispute involving Islamic financial
instruments, parties and the arbitral tribunal may agree to refer
the matter to Bank Negara Malaysia’s Shariah Advisory Council
or the Malaysian Securities Commission’s Capital Markets Actwhichever
is deemed relevant. In the instance of a situation
involving a Shii’te dispute for example, the parties and the
tribunal can appoint their own Shariah expert, as provided in
the UNCITRAL Rule, under article 26. Therefore, parties will
always be able to choose which Islamic school of thought
(madhab) to apply to their dispute. ”
Long-term view
It is the internationalization of the Islamic finance market which
spurred Sundra and his team at the KLRCA to formulate a
dispute resolution mechanism based on international laws and
acceptability before incorporating the Shariah element. “It is a
cutting-edge product. It took us two years to come up with this,
to deal with expert opinion and how it all ties together. A lot of
people will start with Shariah as a base, but we decided to work
from the New York convention and then incorporate the Shariah
element.”
“These rules can be used even when there is no Shariah
component involved. Rule 8 only gets activated when a Shariah
component comes into play. In Item 6 of Rule 8, it states that
the ruling of the relevant council or the Shariah expert may
only relate to the issue or question so submitted by the arbitral
tribunal; and the relevant council or Shariah expert shall not
have any jurisdiction in making discovery of facts or applying
the ruling or formulating the decision relating to any fact of
the matter which is solely for the arbitral tribunal to decide.
Therefore, they (the Shariah council) can only decide on the
Shariah component. It is the arbitral tribunal, not the Shariah
Advisory Council or expert, who is the final determinant on
the matter as the tribunal cannot delegate its powers to make
decisions.” he added.
“In the recent International Bar Association (IBA) Conference
in Dublin, the question of how people are dealing with Shariah
issues was raised, and to be honest, there is no experience
outside of Malaysia except in limited pockets such as Dubai
and Bahrain. The Malaysian system is so far the most
comprehensive,” Sundra explained.
Sundra believes that the best way to resolve disputes,
particularly from a business point of view is through arbitration:
“From my understanding, what is not forbidden is allowed in
Shariah. Most of these Shariah compliant products are the
ones that are allowed and not forbidden. And when you have
those products, you are marketing to the world at large and
therefore, there needs to be a dispute resolution mechanism
because people will have disagreements. And for business
people, resolution of those disagreements or disputes is best
done through arbitration.”
“For the first time, there is a viable dispute resolution mechanism
for Shariah-compliant products. The Islamic world has not
really explored international commercial arbitration, and after
a certain point, there is a dichotomy between a religious and
secular dispute system. In all honesty, business people do
not want to go to the Shariah court, and prefer a legal secular
system. A great deal of thought and care would have gone
into putting together the complex and sophisticated Shariahcompliant
deals and products, but if a business dispute arose,
they would have to go to conventional arbitration. With the
KLRCA i-Arbitration Rules, there is now an option for a dispute
resolution mechanism that is Shariah-compliant, thereby
putting the last block in place for a complete Shariah compliant
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transaction,” he concluded.
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Sundra Rajoo
Director
Kuala Lumpur Regional Centre for Arbitration
No.12, Jalan Conlay, 50450 Kuala Lumpur
Tel: +603 2142 0103
Email: sundra@klrca.org.my
Web: www.klrca.org.my
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