| Date | 8 December 2004 |
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| Judgment | The Shamil Bank of Bahrain v Beximco Pharmaceuticals Ltd, CA 28 January 2004 |
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| The Issue | Interpreting conflicting "choice of law" clauses. |
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| Implication |
A choice of law clause should identify one national system of law. Where other principles of foreign law are to be applied additionally, these must be specifically incorporated within the terms of the agreement. |
printCompanies involved in exporting or trading overseas have to take particular care over the drafting of their contracts, including precisely clarifying the law under which the contract will be operated. In the recent case of The Shamil Bank of Bahrain v Beximco Pharmaceuticals, Beximco sought to avoid liability under financing agreements it had entered into with the bank by arguing that the choice of the law clause rendered the contracts void and unenforceable. The Shamil Bank is incorporated in the Kingdom of Bahrain, which is a constitutional monarchy in which 95% of the population are Muslims. Like many banking institutions in Muslim countries, the bank holds itself out as applying Islamic principles in the course of its business and appoints a religious supervisory board to confirm that the bank's investments and activities conform with the principles of Islamic or Sharia law. To this end the financing agreements concluded between the bank and Beximco contained a choice of law clause which read: "Subject to the principles of the Glorious Sharia'a, this agreement shall be governed by and construed in accordance of the laws of England". How that clause should be applied was examined both in the High Court and in the Appeal Court in England. Evidence was put to the court that the "principles of the Glorious Sharia'a" referred to the law laid down by the Qur'an, which is the holy book of Islam, and the Sunnah, which are the sayings, teachings and actions of the prophet Mohammed. The court also heard that it was a principle expressly stated in the Qur'an and Sunnah that the charging of interest upon a loan in whatever form is contrary to Sharia law. The bank had obtained certificates from its religious supervisory board confirming that its operations were being carried out in accordance with Islamic law. It was clear however that to meet these objectives the bank had to operate with certain financial instruments that would not offend the basic Sharia principle with regard to the charging of interest. One such device was a "Morabaha agreement". This was adopted by the bank in its dealings with Beximco. Beximco was a Bangladeshi company involved in the manufacture, import and export of pharmaceuticals. It required to borrow money from the bank to fund the purchase of goods. The Morabaha agreement was an arrangement whereby the bank would purchase the goods itself and then resell them to Beximco at an enhanced price. In order to avoid the characteristics of a loan carrying interest, the bank was required to purchase the goods in its own name such that the goods came into its possession, remaining at its risk until the goods were sold to the client. Accompanying the Morabaha agreement was a "Market Rate agreement" which identified a schedule of payments which the client, Beximco, would consequently pay the bank. This agreement also fixed the level of compensation payable in the event that any payment was unpaid after its due date. Beximco were unable to pay the sums due under the Morabaha agreements and in due course these arrangements were modified such that Beximco effectively entered into leasing arrangements in respect of the goods which had been purchased by the bank. Despite these further arrangements, Beximco defaulted in its payments and the bank commenced proceedings for recovery of the sums due to it in the amount of approximately US$49.7 million. In defending itself, Beximco argued that the choice of a law clause required the validity of the agreements to be tested against both English law and Sharia law and that the agreements were invalid under Sharia law as they were simply loans charging interest, dressed up as leases. The Court of Appeal commented that until their defences had been filed, Beximco had never given any indication to the bank that it was dissatisfied on religious grounds with the arrangements agreed between the parties or that they sought to challenge them on the grounds that they did not comply with the principles of Sharia law. The court concluded that in interpreting the applicable law clause, the principles of Sharia law should not be taken into account. The Court of Appeal agreed with that finding. Firstly it was held that there could not be two separate systems of law governing the contract. Reference to the 1980 Rome Convention indicated that there should be one law of a country chosen by the parties. The judge noted that the principles of Sharia were not uniquely principles of law, but religious principles which applied to other aspects of life and behaviour. In consequence, he concluded, it was highly improbable that the parties to the agreements intended an English court to determine any dispute as to the nature or application of such religious principles. The reference to the governing law being "subject to the principles of Glorious Sharia'a" was no more than a reference to the fact that the bank purported to conduct all its affairs according to Sharia law. In agreeing with these findings in the Appeal Court, Lord Justice Potter noted that in approaching its task the court should lean against an interpretation of the contract which might defeat the commercial purpose of the agreements. It was not possible to incorporate within the terms of the agreement any specific principles of Sharia law, such as the unlawful nature of charging interest upon a loan, as no specific reference to that provision of Sharia law had been made within the agreement itself. A general reference to Sharia law within the choice of law clause was insufficient.
CJ-0449
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