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Shariah Advisory Council ruling binding on civil courts?

In a landmark decision with a historic nine-member panel of judges, the Federal Court in the case of JRI Resources Sdn Bhd v Kuwait Finance House (M) Bhd (President of Association of Islamic Banking Institutions Malaysia & Anor, interveners)
[1] held that any decision by the Central Bank of Malaysia’s (Bank Negara Malaysia) Shariah Advisory Council (SAC) on Islamic finance is constitutional and binding on civil courts.

In this article, we examine the facts, issues and ruling of the case.

FACTS The Applicant, JRI Resources Sdn Bhd was given by the Respondent, Kuwait Finance House (Malaysia) Berhad, various Islamic credit Facilities (“the Facilities”) to facilitate the leasing of shipping vessels. The Applicant defaulted in making monthly lease payments under the Facilities, resulting in the Respondent applying for and succeeding in the summary judgment application at the High Court.

The Applicant then appealed to the Court of Appeal and argued that there was a failure to derive income from the charter proceeds due to the Respondent’s failure to carry out major maintenance works on the shipping vessels as owner of the vessels. Such contention is also contrary to the express wordings in clause 2.8
[2] of the ljarah Agreements.

The Applicant further submitted that the High Court should have referred this issue to the SAC pursuant to section 56
[3] of the Central Bank of Malaysia Act 2009 (CBMA). The Court of Appeal set aside the summary judgment and remitted the case to the High Court for trial with an order to the High Court that a reference be made to the SAC on the following question: “Whether clause 2.8 of the Ijarah Agreements (which makes it the obligation of the Customer, to bear all the costs of maintaining the leased vessels including major maintenance), is Shariah compliant”. The Applicant fi led an application for a reference to the Federal Court.

THE ISSUE The main issue was whether a ruling made by the SAC established under sections 56 and 57
[4] of the CBMA is ultra vires Article 121[5] of the Federal Constitution (FC) which, inter alia, vests judicial power over civil matters in the High Court.
 

Section 56 – Reference to Shariah Advisory Council for ruling from court or arbitrator
(1)     Where in any proceedings relating to Islamic financial business before any court or arbitrator any question arises concerning a Shariah matter, the court or the arbitrator, as the case may be, shall-
(a)     take into consideration any published rulings of the Shariah Advisory Council; or
(b)     refer such question to the Shariah Advisory Council for its ruling

Section 57 – Effect of Shariah rulings
Any ruling made by the Shariah Advisory Council pursuant to a reference made under this Part shall be binding on the Islamic financial institutions under section 55 and the court or arbitrator making a reference under section 56.


THE DECISION The majority judgment of the Federal Court found that the SAC in ascertaining the Islamic law for Islamic banking, does not conclusively and finally determine the right between the parties. The contest between parties remain with the adjudicating judge. Therefore, a ruling by the SAC was held to not be in breach of Article 121 of the FC and is thus not unconstitutional.

COMMENTS Much of the argument brought forth was on the binding effect of the SAC’s ruling, mainly on the claim that it precludes the court from deciding the law applicable and as such usurps the courts power to interpret and apply the law in the case before the court.

The Federal Court disagreed on this point and drew a distinction between the word “ascertainment” and “determination”. It held that an “ascertainment” is an exercise which results in a “ruling”, while “determination” results in a final decision. Thus, the function of the SAC here is merely to ascertain the Islamic law for Islamic banking, and upon such ascertainment, is left to the court to apply the ascertained Islamic law for banking to the facts of the case. Essentially, the SAC is merely the legislature’s machinery to assist in resolving disputes in Islamic banking and does not exercise judicial power.

 

“We are of the firm opinion that it is for a body of eminent jurists, properly qualified in Islamic jurisprudence and/or Islamic finance, to be the ones dealing with questions of validity of a contract under Islamic law and in Malaysia that special body would be the SAC.”


CONCLUSION The landmark case proves significant to the future development of Islamic banking and finance industry as diversity of opinion on Islamic legal principles often lead to uncertainty which would thus affect the stability of the Islamic financial system, to the detriment of the economy. The Federal Court acknowledged that there is a need for a single authority to ascertain Islamic law for the purpose of Islamic financial business as the civil courts are not sufficiently equipped to make findings on Islamic law. Further, it was opined that the use of expert evidence would not be helpful to a civil court judge as ultimately, the civil court judge would still have to make a decision and would end up having to choose which expert evidence to rely, which is further complicated in the instance each expert based their opinion on different schools of jurisprudence.

For further insight in this area of law, please contact our Partners:
Natalia Izra Nasaruddin 
Idza Hajar Ahmad Idzam 
Farah Shuhadah Razali
 
[1] [2019] 3 MLJ 561, Federal Court
[2] …the Parties hereby agree that the Customer (meaning the Applicant here) shall undertake all of the Major Maintenance as mentioned herein and the Customer will bear all the costs, charges and expenses in carrying out the same”.
[3] Reference to Shariah Advisory Council for ruling from court or arbitrator
[4] Effect of Shariah rulings
[5] Judicial power of the Federation

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