Article

Note: To raise additional working capital for commercial activities, two Bangladeshi companies, Beximco Pharmaceuticals Ltd. and Bangladesh Export Import Co. Ltd., entered into two financing agreements with Shamil Bank of Bahrain.

Initially the two financing agreements were in the form of sales contracts recognized by the Sharia'a, or Islamic Law, known as "Moharaba" agreements. In order to avoid prohibited interest transactions, known as "Riba" by Islamic Law, Moharaba agreements involve a financial institution's agreement to purchase goods for a Borrower and sell them to the Borrower for a deferred price at an agreed profit. The agreements in question contained a governing law clause that read "[s]ubject to the principles of the Glorious Sharia'a, this Agreement shall be governed by and construed in accordance with the laws of England."

When Borrowers failed to pay the amounts due under the Moharaba agreements, Bank entered into new agreements to discharge the obligations under the Moharaba agreements in exchange for alternative obligations guaranteed by two of the directors of Borrowers and their parent company, Beximco (Holdings) Ltd. Under the new agreements, Bank acquired ownership of certain assets of Borrowers and permitted Borrowers to retain and use the assets in exchange for regular payment of user fees. This is a form of financing recognized by Islamic Law and known as "Ijarah", the giving of something in rent.

When Borrowers defaulted in repayment under the terms of the agreements, Bank sent two default letters to Borrowers and subsequently made claims on the agreements totaling US$49,711,510.51. Bank commenced proceedings in England. On Bank's application for summary judgment the High Court of Justice, Queen's Bench Division, Morison, J., granted summary judgment for Bank. On appeal the Supreme Court of Judicature, Court of Appeal (Civil Division), Potter, Laws, and Arden, JJ., affirmed.

Borrowers argued that the governing law clause made the agreements valid only insofar as they were in accordance with both English Law and the Sharia'a and that the agreements were invalid and unenforceable disguised interest bearing loans under the Sharia'a. The trial court granted summary judgment for Bank, ruling that there could not be two systems of law governing a contract and that the Rome Convention on the Law Applicable to Contractual Obligations 1980 did not provide for the choice of non-national systems of law such as the Sharia'a.

Borrowers appealed, contending that the agreements, while governed by English law, were only enforceable if consistent with the Sharia'a. The appellate court ruled that the agreements were governed only by English law. The appellate court stated that it was never "intended in relation of any of the agreements made that they should be other than binding on the parties. In those circumstances ... the court ... should lean against a construction which would or might defeat the commercial purpose of the agreements." The appellate court stated that the inclusion of the Sharia'a in the governing law clause was:

"intended simply to reflect the Islamic religious principles according to which the Bank holds itself out as doing business rather than a system of law intended to 'trump' the application of English law as the law to be applied in ascertaining the liability of the parties under the terms of the agreement."

[JEB/lhd]

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