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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Beximco Pharmaceuticals Ltd & Ors v Shamil Bank of Bahrain EC  EWCA Civ 19 (28 January 2004)
Cite as:  EWCA Civ 19,  WLR 1784,  1 WLR 1784
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (MORISON J)
London, WC2A 2LL
B e f o r e :
LORD JUSTICE LAWS
LADY JUSTICE ARDEN
| (1) BEXIMCO PHARMACEUTICALS LTD
(2) BANGLADESH EXPORT IMPORT CO LTD
(3) MR AHMAD SOHAIL FASIUHUR RAHMAN
(4) MR AHMED SALMAN FAZLUR RAHMAN
(5) BEXIMCO (HOLDINGS) LTD
|- and -
|SHAMIL BANK OF BAHRAIN E.C.
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr B Doctor QC and Miss S Partington (instructed by Norton Rose) for the Respondent
Crown Copyright ©
Lord Justice Potter:
"Subject to the principles of the Glorious Sharia'a, this Agreement shall be governed by and construed in accordance with the laws of England."
"the law laid down by the Qur'an, which is the holy book of Islam, and the Sunnah (the sayings, teachings and actions of Prophet Mohammad (pbuh) ). These are the principal sources of the Sharia. The Sunnah is the most important source of the Islamic faith after the Qur'an and refers essentially to the Prophet's example as indicated by the practice of the faith. The only way to know the Sunnah is through the collection of Ahadith, which consists of reports about the sayings, deeds and reactions of the Prophet "
" Allah has made buying and selling lawful and has made the taking of interest unlawful. Remember, therefore, that he who desists because of the admonition that has come to him from his Lord, may retain what he has received in the past; and his affair is committed to Allah. But those who revert to the practice, they are the inmates of the fire; therein shall they abide. O Ye who believe, be mindful of your duty to Allah and relinquish your claim to what remains of interest, if you are truly believers. But if you do not, then beware of war from the side of Allah and his Messenger. If, however, you desist, you will still have your capital sums; thus you will commit no wrong, nor suffer any wrong yourself."
Sura III 130 states that:
"O Ye who believe, devour not interest, for it goes on multiplying itself; and be mindful of your obligation to Allah that you may prosper.": The Quran, translated by Muhammad Zafrulla Khan, Curzon Press, 1971.
The Factual Background
"In our other jurisdictions, banking interest is, in practice, tolerated (Saudi Arabia) and even sanctioned by banking laws (Bahrain, Qatar and Oman), while any theoretical or hypothetical conflicts have been largely ignored." W M Ballantyne: Commercial Law in the Arab Middle East: the Gulf States (1986) p.133
"The matter of interest is regulated as far as commercial transactions are concerned by the provisions of Article 81 of the Commercial Code of 1987. The latest amendment of Article 81, affected by Law no.4 of 1992, gives the following instructions to courts: (1) interest on overdue payments of commercial debts becomes due by the mere occurrence of maturity dates unless otherwise provided for by law or agreement. (2) Under no circumstances, and with regard to debts whose settlement does not exceed a period of seven years, may the aggregate amount of interest paid to the creditor exceed the initial indebtedness. (3) The provisions of the preceding (2) do not apply to debts which were contracted in foreign currencies. (4) The creditor is entitled to claim complementary damages in addition to interest on overdue payments with no need to prove that the additional damage was caused by the debtor's fraud or his serious fault."
"3.Notwithstanding the provisions of this Article, the company shall undertake at all times to comply with the Bahrain Monetary Agency Law and any circulars, rules or regulations issued by the BMA from time to time According to the above, the company will carry on all banking, investment, financial activities, offshore units and all services relating thereto of various commercial, industrial, agricultural, real estate, tourism, housing and other services in the State of Bahrain and outside it."
However, clause 34 of the Articles of Association provide for the Ordinary General Meeting to elect and appoint a Religious Supervisory Board "which shall comprise at least three persons who are recognised specialists and qualified in Islamic jurisprudence, religious provisions and Islamic economy".
"35.a. The Religious Supervisory Board shall ascertain that the Company's investments and activities (and the activities of its subsidiary and affiliated companies) conform with the principles and provisions of Islamic Sharia'a. It shall, in particular, discuss with the members of the Board of Directors, managers of the Company or of any subsidiary or affiliated company under its control, such conformity and the business carried out by them and shall request any information it deems necessary. In particular, the Religious Supervisory Board shall adopt all the crucial decisions for applying the provisions of Islamic Sharia'a to ensure the realisation of the objects for which the company was incorporated. Also to ensure that the members of the Board of Directors, managers and employees are co-ordinating their activities according to such decisions which will be binding on all the shareholders. The Religious Supervisory Board shall within 6 months from the end of the Company's financial year, submit a written report stating that it fulfilled the obligations indicated herein and ascertained that the Company's investments and business activities (including its subsidiary companies) conform with the provisions of Islamic Sharia'a.
36. The Board of Directors shall take the necessary actions to ensure that all the investments and other business transactions have been referred to the Religious Supervisory Board for approval before carrying out any other business transactions by the Company or by any subsidiary or affiliate company under its control."
"The Board believes that all the bank's business throughout the said year, including investment activities and banking services, were in full compliance with Glorious Islamic Sharia'a."
The Bank's claims against the first and second defendants
"(1) US $ 25,207,000 being the amount due under the first ESUA relating to the 1995 Morabaha Agreement;
(2) US $ 21,472,800 being the amount due under the second ESUA relating to the 1996 Morabaha Agreement;
(3) US $ 1,147,540.76 being accrued compensation due under clause 4.2.4 of the first ESUA;
(4) US $ 1,884,169.75 being accrued compensation due under clause 4.2.4 of the second ESUA."
The Bank's claims against the guarantors
"2.1 Covenant to pay
In consideration of Shamil agreeing to discharge the Outstanding Amount in return for being granted the right to acquire title to the Assets and Shamil permitting Beximco and BEIC to use the Assets in return for the User Fee pursuant to the Exchange Agreement [i.e. the ESUA] the Guarantor hereby guarantees to Shamil Beximco and BEIC's obligation to transfer title to the Assets to Shamil and guarantee to pay to Shamil, on demand by Shamil, the User Fee and all monies and discharge all obligations and liabilities now or hereafter due, owing or incurred by Beximco and BEIC (or either of them as the case may be) to Shamil under or pursuant to the Exchange Agreement and the other New Transaction Documents when the same become due for payment or discharge whether by acceleration or otherwise, and whether such monies, obligations or liabilities are express or implied, present, future or contingent, joint or several, incurred as principal or surety, originally owing to Shamil or purchased or otherwise acquired by it, denominated in Dollars or in any other currency, or incurred on a banking account or any other manner whatsoever
2.2 Guarantor as principal debtor; indemnity
As a separate and independent stipulation, the Guarantor agrees that if any purported obligation or liability of Beximco and/or BEIC (as the case may be) which would have been the subject of this Guarantee had it been valid and enforceable is not or ceases to be valid or enforceable against Beximco and/or BEIC (as the case may be) on any ground whatsoever whether or not known to Shamil (including, without limitation, any irregular exercise or absence of any corporate power or lack of authority of, or breach of duty by, any person purporting to act on behalf of Beximco and/or BEIC (as the case may be) or any legal or other limitation the Guarantor shall nevertheless be liable to Shamil in respect of that purported obligation or liability as if the same were fully valid and enforceable and the Guarantor were the principal debtor in respect thereof ".
The issues on this appeal
" it is not uncommon for banks, in their enthusiasm to make profitable loans, to use a Morabaha Agreement to disguise what is, as a matter of commercial reality, an interest-bearing loan. That is precisely what happened in the present case and both the Claimant and the Defendants were quite content that this should happen. Neither was under any illusion as to the commercial realities of the transactions, and the claimant was happy to dress the loan transactions up as Morabaha sales (or Ijarah leases), whilst taking no interest in whether the proper formalities of such a sale or lease were actually complied with."
"In my opinion for the Morabaha Agreements to be in accordance with Islamic law all that is required is that they are certified as such by Shamil Bank's Religious Supervisory Board and the principal amounts are dispensed in accordance with the terms of the 1995 and 1996 Morabaha Agreements."
The decision of Morison J
"54. Whilst in one sense this court will answer any question posed to it, however difficult, it is improbable in the extreme, that the parties were truly asking this court to get into matters of Islamic religion and orthodoxy. This is especially so when the bank has its own religious Board to monitor the compliance of the bank with the Board's own perception of Islamic principles of law in an international banking context.
55. So far as the bank was concerned, that is likely to have been sufficient for its own regulatory purposes but there is no suggestion that the defendants were in any way concerned about the principles of Sharia'a law either at the time the agreement was made or at any time before the proceedings were started. The Sharia'a law defence is, I think, a lawyer's construct, but for the reasons I have given, in my view it does not work."
The submissions of the appellants
The Governing Law Clause
"In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating." (per Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen-Tangen  1 WLR 989 at 996.)
" it is open to the parties to an English contract to agree e.g. that the liability of an agent to his principal shall be determined in accordance with the relevant articles of the French Civil Code. In such a case the foreign law becomes a source of law upon which the governing law may draw. The effect is not to make French law the governing law of the contract but rather to incorporate the French articles as contractual terms into an English contract. This is a convenient 'shorthand' alternative to setting out the French articles verbatim. The court will then have to construe the English contract, 'reading into it as if they were written into it the words' of the French statute.
32-087 It often happens that statutes governing the liability of a sea carrier, such as the former Harter Act in the United States, or statutes implementing the Hague Rules are thus 'incorporated' in a contract governed by a law other than that of which the statute forms part. The statute then operates not as a statute but as a set of contractual terms agreed upon between the parties. The parties may make an express choice of one law (e.g. English law) and then incorporate the terms of a foreign statute. In such a case the incorporation of the foreign statute would only have effect as a matter of contract."
"It brings the Hague Rules into the charterparty so as to render the voyage or voyages, subject to the Hague Rules, so far as applicable thereto; and it makes those rules prevail over any of the exceptions in the charterparty. The judge, however, took a different view. He said that there are many different paramount clauses and he could not say which of them was applicable
I do not share the judge's view. It seems to me that when the 'Paramount clause' is incorporated, without any words of qualification, it means that all the Hague Rules are incorporated. If the parties intend only to incorporate part of the Rules (for example Article IV), or only so far as compulsorily applicable, they say so. In the absence of any such qualification, it seems to me that a 'Clause Paramount' is a clause which incorporates all the Hague Rules." (per Lord Denning MR at 943G 944A)
The Guarantors' Liability
Lord Justice Laws:
Lady Justice Arden: