Islamic Trade Finance in English Courts

15.50        Now that the theory behind the murabaha agreement and its potential application in a trade-finance transaction has been discussed, it is worth examining what happens when such an agreement breaks down and is subject to litigation.

A. 'The Symphony Gems Case

15.51        Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems NV and others^[1719] was the first instance of an English court ruling on a murabaha transaction used for trade­finance purposes,^[1720] and, although it is not an authoritative judgment, it is a useful case study on how English courts approach such transactions.^[1721]

15.52        According to the facts of the case, Islamic Investment Company of the Gulf (Bahamas) Ltd ThIICGTh and Symphony Gems had entered into an agreement on 27 January 2000, the structure of which was very similar to that described above. IICG was defined as the ‘Seller’ and Symphony Gems as the ‘Purchaser’, and the intent was to grant Symphony Gems ‘a revolving purchase and sale facility whereunder the Seller shall purchase supplies and im­mediately sell them on to the purchaser on deferred payment terms subject to conditions contained within the agreement’.^[1722] The other defendants in the case signed as guarantors of Symphony Gems’ obligations under the agreement.^[1723]

15.53        To make use of this revolving facility, the Purchaser was to request through an irrevocable offer that the Seller buy supplies from a specified supplier.

15.54        Under this agreement, two offers were made by the Purchaser, which involved the purchase of a total of US$15 million worth of rough diamonds from a supplier based in Hong Kong and trading as Precious (HK) Ltd. The initial cost price of the diamonds was US$7.5 million per transaction, which—after the agreed profit margin was applied—meant that Symphony Gems owed IICG US$7,917,450 per transaction. This was to be paid in three instalments, due in July, September, and November of 20 00.^[1725] For some reason, the diamonds were never delivered to Symphony Gems, so they were unable to pay any of the money owed. Following a lengthy correspondence between both parties, IICG brought the matter to court to recover the money owed, plus interest pursuant to a liquidated damages clause in the murabaha agreement, and damages, minus US$7.5million that had already been re­covered from a bank guarantee that had been realised.^[1726]

Various defences to IICGs claim were raised, the most important being the non-delivery of 15.55 the goods, since that strikes at the heart of the difference between a murabaha and a letter of credit arrangement. Under a conventional arrangement, payment obligations are autonomous, meaning that the risk of non-delivery is borne by the purchaser alone.^[1727] The murabaha agree­ment attempted to imitate such a risk profile by stating that title to the supplies would pass immediately from the Seller to the Purchaser as soon as the Seller gained title.^[1728] Similarly, clause 4.4 provided that the instalments due were payable notwithstanding the Seller breaching any of its obligations—which, per Tomlinson J, must include a failure to deliver.^[1729] Ultimately, Tomlinson J noted that the defendants had failed to raise the defence of non-delivery at any point before the trial and had in fact taken up the issue of non-delivery with the supplier of the goods and not IICG.^[1730] This aided him in deciding that the defendants were responsible for arranging the delivery of the goods in question, and that the murabaha agreement was in fact ‘a financing agreement facilitating or apparently facilitating the purchase of supplies by the purchaser’.^[1731]

A second defence raised by the defendants was the illegality of the murabaha agreement, both 15.56 because its inclusion of a liquidated damages clause was in breach of the principle of riba and because the contract was to be performed in Saudi Arabia, where it would be illegal. Tomlinson J held that the contract did not require performance in Saudi Arabia and was able to avoid pro­nouncing on the legality of the murabaha agreement itself because clauses 25.1 and 26 of the agreement made reference to English law being the sole governing law of the agreement.^[1732] Thus, this case became a case requiring the interpretation of a contract under English law,^[1733] and as such expert evidence stating that the murabaha agreement was not a true murabaha agreement could be ignored.^[1734]

B.

Although it is not a trade-finance case, it is worth briefly discussing the later case of Beximco 15.57 Pharmaceuticals Ltd & Others v Shamil Bank of Bahrain EC due to its authority in rela­tion to the use of non-national legal systems as the governing law of a contract.^[1735] Here it was argued that a contractual clause stating that ‘Subject to the principles of the Glorious Sharia’a, this Agreement shall be governed by and construed in accordance with the laws of England’^[1736] should incorporate Sharia principles such as the prohibition of riba and the proper nature of a murabaha contract into agreements between the parties.^[1737] In re­sponse to this argument the Court of Appeal stated that mere reference to the Sharia was not enough to incorporate such specific provisions.^[1738] However, had the parties specifically incorporated such provisions into their agreements the defendants would have been likely to succeed.^[1739]

15.58        A further, and perhaps unintended, consequence of the Beximco decision was its definition of the murabaha as a sales contract.^[1740] Potter LJ states that both parties were content to ‘dress up' the transaction as a murabaha ‘sale [... ] whilst taking no interest in whether the proper formalities [... ] were actually complied with’.^[1741] Thus, with respect to Islamic nominate contractual agreements, English courts will look to their substance and purpose through the lens of English contractual principles, absent any expressly incorporated Islamic legal principles to the contrary, rather than looking to the nominate contract system’s rules.^[1742] This provides legal certainty to Islamic financial institutions contracting under English law that their bargains will be enforced even if they depart from the rules of the murabaha discussed above, but it also reduces the Sharia element of such contracts from a matter of law to being merely a private matter of compliance where parties are free to structure their transaction in accordance with sharia or not.^[1743] This has been criticised by those who see the murabaha transaction as having converged excessively with its conventional finance alternatives, differing only in form but not in effect.^[1744] Perhaps the case law cited above evidences their view that Islamic trade finance is based on mimicry, or perhaps it simply reflects the modern commercial reality that trade finance is trade finance, regardless of the religion of the parties involved.

VI.