Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems NV andnothers

QUEEN'S BENCH DIVISION (COMMERCIAL COURT) 13 Feb 2002

FACTS OF THE CASE

Everything started with murabahah agreement executed between the parties consists of IICG as the claimant or the seller or the plaintiff. the defendant 1st the symphonty gems co, 2nd def act as a guarantor to the contract so as the second def which is known as others in the title of the case. The purchaser wishes to request the seller to purchase the supplies and sell them to the purchaser through a morabaha arrangement and the seller is willing to make such purchases and sell the supplies to the purchaser on the terms and subject to the conditions set out herein."The brief of the case can be seen from the table below;

ISSUES DISCUSSED BY THE COURT

1) MOA AND AOA

of the claimant co (bahamian) does not allow any contract which is against the islamic rules and principles. bahamas is a common law jurisdiction in which the english law is deemed to apply whenever local legislation is silent.

Answer from the court : the court followed views from dr samaan that the contract does not reflect murabaha contract. company act of bahams law gives a co full legal capacity to contract so as to remove any limitatiion on corporate capacity.

2) COUNTERCLAIM AS DEFENCE

Answer from the court: It seems to the judge that in fact cl 12.3 of the financing agreement precludes reliance upon a counterclaim in answer to a claim for payment made pursuant to the agreement. the judge further held that the counterclaim has any significant or indeed any prospect of success. even if the claimant has failed to effect delivery of diamonds or supplies to the first defendant, that can only be because the first defendant is itself in breach of its obligation to make the necessary arrangements which would have brought that delivery about. even if that be wrong, which i do not think it is, the fact remains that the counterclaim which the first defendant seeks to bring would appear, on its face, to be excluded by cl 5.7 of the agreement. Therefore the judge failed to see how the existence of this counterclaim can be any impediment to the claimant recovering judgment on its claim.

3) THE LAWYER ASKED THE COURT THE DECLARAE THE CONTYRACT AS ILLEGALITY COZ AGAINST THE LAW OF SAUDI IE SHARIAH LAW

Answer from the court: not relevant

4) MISREPRESENTATION MADE TO THE 2 GUARANTORS AS TO THE REAL NATURE OF THE TRANSACTION OF MURABAHA.

Answer from the court: Not relevant

5) QUANTUM V THE PRINCIPAL OF SHARIAH

this is a claim brought not by a Saudi company but by a Bahamas company and it is a claim brought under an English law contract. As I have already pointed out, it involves no illegality such as would be recognised by the law of England as being a bar to performance and in those circumstances there is simply no basis on which it can be suggested that the relevant liquidated damages are irrecoverable in this action.

6) NO DELIVERY OF GOODS THEREFORE NO PAY

Answer from the court : the claims flaws. Clause 4.3,4.4,5.1,5.6,, that delivery of goods is not a prerequisite to recover by the sellers of the relevant instalments of the sale price from the purchaser. Refer to the clauses in the murabahah agreement as below;

HELD: the claimant won the case. Ie, IICG. The total amount due up until 13 Feb 2002 , inclusive of both principal and the compensation for late payment, the latter calculated on a basis more favourable to the Defendants than the contract requires, is, as I understand it, US$ 10,060,354.28,

Observation:

The court applying English law held that the contract was valid. This is due to the express terms in the contract saying tat even without delivery the goods, it was not a prerequisite of recovery by the sellers. The choice of parties to be adjudicated by a non-islamic court in a non Islamic jurisdiction may not being given a due recognition as to the validity and the principles of Shariah law. Even the contract is non compliant with syariah law, the court still validate the transaction on the basis of normal contract and still enforceable. The decision may hurt the Islamic finance fraternity where the aim is to comply with syariah will be defeated.

Since the expert called in this case held that this is not a murabahah transaction, then what is the real feature of murabaha transaction?

The case reflects the concept of murabaha to order the bank will purchase the goods upon request of the client and then resell that good to the client in a murabaha[1]. This contract is viewed as an alternative to teh lending practices on conventional banks. The transcation involved two types of promises. A promise by the client to purchase the object (wa’ad) and a promise by the bank to sell him the goods in murabaha.. the payment may be in cash or deferred[2]. It is a sale where two parties negotiate and promise each other to execute agreement according to which the orderer asks the opurchaser to purchase the assets of which the latter will take possession. The ordereer promises the purchaser to purchase the asset from him and promit a promit thereon. The two parties will conclude the sale after the purchaser has the goods in his possession. However, the purchase order may or may not be obliged to conclude the sale. However, some modern scholars have allowed the promise in this type of sale to be binding for the purchase orderer, ie Murabahah sale with obligation to purchase upon possession made by the purchaserknown as wa’ad[3]. Imam al-Shafie[4] heldcthat this transaction is valid provided that the bank receives the purchased items[5].

The validity of wa’ad is based on the Maliki school held by Ibn Syabramah that any promise that does not results in permitting that which is forbidden or forbidding that which is permitted is binding. This applies whenever the promise led another person or entity to undertake a financial obligation[6]. The rulings made in 1983[7] held that mutual promises involved in murabha sales to the one who orders the initial purchase is permitted only after the bank owns the goods and gainjs possession of the sold object. And the sells it to the one who ordered to purchase with the promised and known profit margin between the two (the seller and the buyer). The bank also must hold the risk of destruction of the goods prior to deliver it to the final buyers well as the obligation to accept the return of the goods if a concealed defect were found. Why was it held that the case is not murabaha transaction?

Because due to the following reasons;

i) The delivery is not a prerequisite for payment. In murabaha contract the payment to purchase the goods ordered after the delivery of goods takes place. Here the possession of goods never takes place and the goods never being delivered

ii) The risk is borne by the bank and pose it in insurance. In this case, the risk is solely borne by the purchaser. Cl 5.4 and 5.8.

[1] AAOFII, ART ½ P125-144

[2] Bay’ al-murabahah lil amri bi al-syira’ Yusof Qurdawi, p36

[3] Refer to AAIOFII standard, p134 and Ahmad Ali Abdallah, Murabaha, p195

[4] Al-Shafie, al-umm, vol 3, p33

[5] The case Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems NV and

Others does not speaks about any Hamish diyyah or orboun.

[6] The talfiq of two rulings from two different schools of jurisprudence is not a forbidden type of talfiq since the two rulings pertain to two different issues. Refer to Wahbah Zuhaili (2003), translated by Mahmoud Al-Gemal, vol 1,p 361, Darul Fikr,: Damascus, Syria,.

[7] The second conference in Kuwait on Islamic baking