Federal Court leans once more towards BNM’s Shariah Advisory Council

In a landmark decision on April 10, the court meted out a decision in favour of the SAC, shoring up SAC’s presence and role

By HABHAJAN SINGH

The nation’s highest court has leaned once more towards the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM), partly in the name of providing certainty to the Islamic finance industry which has developed tremendously in the last few decades.

In a landmark decision on April 10, the Federal Court meted out a 5-4 majority decision in favour of the SAC, shoring up the central bank council’s presence and role in light of the Federal Constitution.

However, this does not mean the SAC’s powerful role in the industry is settled once and for all as future challenges may still come around.

In the case of JRI Resources Sdn Bhd vs Kuwait Finance House (Malaysia) Bhd (KFH), the issue before the Federal Court was whether Sections 56 and 57 of the Central Bank of Malaysia Act 2009 (CBMA) — the legislation piece which gives SAC its powers — were in breach of the Federal Constitution.

The importance of the case could be seen by the fact that it was decided by a nine-man Federal Court Bench, a first for the apex court, as opposed to a maximum seven in the past. 

The majority judgement noted that the questions raised were of “great public importance, especially to the Islamic banking and finance industry in Malaysia”.

In the written majority judgement, Federal Court judge Justice Datuk Mohd Zawawi Mohd Salleh (picture) said the ruling under the two sections does not conclude or settle the dispute between the parties arising from the Islamic financing facility at hand.

“It does not ‘determine’ the liability of the borrower under the Islamic facility. The determination of a borrower’s liability under any banking facility is decided by the presiding judge and not the SAC,” he said in the 89-page judgement.

This was in response to JRI counsel’s submission that it was impermissible for the legislature to divest the core judicial functions traditionally vested with the High Court and to confer or vest the same in the SAC which lacks the basic characteristics of a superior court like the High Court. It was argued that the two sections impugned the doctrine of separation of powers.

The majority judgement was supported by Court of Appeal president Justice Tan Sri Ahmad Maarop and Federal Court judges Justices Tan Sri Ramly Ali, Tan Sri Azahar Mohamed and Datuk Alizatul Khair Othman Khairuddin.

The dissenting judges were Chief Justice Tan Sri Richard Malanjum, Chief Judge of Malaya Justice Tan Sri Zaharah Ibrahim, Chief Judge of Sabah and Sarawak Justice Datuk David Wong Dak Wah and Federal Court judge Justice Tan Sri Idrus Harun.

The Association of Islamic Banking Institutions Malaysia and BNM appeared as interveners in the case.

In the case, the nation’s top court also deliberated on the binding nature of the SAC rulings and expert evidence.

Mixed Response

As expected, the judgement received mixed response.

A lawyer who has dabbled in the Islamic finance sector said the decision augured well for the legal and Shariah framework for the Islamic banking sector in terms of certainty and predictability.

“This is the third time a case disputed on the validity and constitutionality of the two sections. Hence, this decision does not mean that there cannot be further challenges in the future or that the issue is put to rest forever. However, the angle on which these sections can be questioned have become narrower,” Madzlan Hussain, a senior partner at law firm The Chambers of Shamsul Qamar told The Malaysian Reserve.

Given the vagaries of Islamic law, CIMB Islamic Bank Bhd CEO Mohamed Rafe Mohamed Haneef said you would always find differences of opinion among those expert witnesses, which might make the process of ascertaining the right interpretation rather complex for the civil courts.

“Hence, this mischief was addressed by making the SAC decision binding on the civil courts,” he said when asked to comment on the latest judgement.

On the flip side, some lawyers have raised concerns. Two senior lawyers, who declined to be named, differed with the essence of the Federal Court majority judgement.

“At first blush, the majority judgement is perverse and dangerous. The courts cannot abdicate the final decision to outsiders, even to so-called experts,” said one lawyer.

A fellow lawyer said: “Quite an unsettling judgement. It seems like the Federal Court has ceded part of its judicial jurisdiction and powers to the SAC albeit with regard to Islamic law. Unprecedented.”

Case Background

The case involves vessels, financing facilities and the role of the SAC. Here are some details based on Justice Mohd Zawawi’s written judgement.

In this case, KFH granted JRI Islamic facilities, including an ijarah facility, in 2008 and 2009.

KFH had purchased the vessels at JRI’s request. The Islamic bank funded the purchase and became the owner of the vessels which were then leased to JRI. At the heart of the earlier matter was the issue as to who should foot the bill for the vessel’s major maintenance works.

On Sept 2, 2013, KFH filed a civil action against JRI and its guarantors to recover amounts due under the facilities. In October 2014, the High Court granted KFH a summary judgement for RM118.3 million which was outstanding as at November 2013, together with compensation fees.

JRI appealed to the Court of Appeal against the summary judgement. At the hearing in September 2015, JRI argued that its failure to derive income from the charter proceeds from leasing of the vessels was due to KFH’s failure to carry out major maintenance works on the vessels. It alleged that the carrying out of the major maintenance works on the vessels was the responsibility of the respondent, as owner of the vessels.

JRI also submitted that the High Court had erred in not seeking a ruling on a Shariah issue in relation to the Shariah compliance of a clause in the facility agreement which states that the customer (JRI) shall undertake all of the major maintenance and bear all the costs, charges and expenses.

On the direction of the Court of Appeal, the Shariah compliance position of the ijarah agreement clause was referred to the SAC. On June 30, 2016, the SAC reverted to the High Court that negotiation to determine the party that will bear the maintenance cost of the asset was allowed, as long as it has been agreed by the contracting parties.

At this juncture, JRI decided to challenge the constitutionality of Sections 56 and 57 of CBMA which empowers the SAC to give its ruling.

Judgement

In the judgement, Justice Mohd Zawawi noted that the issue that formed the axis of the dispute was whether Sections 56 and 57 of CBMA were unconstitutional as they contravened Part IX of the Federal Constitution (Article 121) on the judicial power, and that “the said sections have the effect of vesting judicial power in the SAC”.

Section 57 of CBMA provides: “Any ruling made by the SAC pursuant to a reference made under this Part shall be binding on the Islamic financial institutions under Section 55 and court or arbitrator making a reference under Section 56.”

On its part, Section 56 states: “Where in any proceedings relating to Islamic financial business before any court or arbitrator any question arises concerning a Shariah matter, the court or the arbitrator, as the case may be, shall: (a) take into consideration any published rulings of the SAC; or (b) refer such question to the SAC for its ruling.”

On the supposed binding effect of the SAC’s rulings, the justices agreed that the duty to ascertain of Islamic law was conferred on the legislature and the SAC was the legislature’s machinery to assist in resolving disputes in Islamic banking.

“It does not exercise judicial power at all,” wrote Justice Mohd Zawawi.

He added that the justices agreed that the SAC has been harmonising the proliferation of Shariah opinions in the industry since its inception.

“It has already accustomed to the practical considerations at hand and the need for certainty in the industry on Islamic banking principles. Therefore, the binding nature of the ruling of the SAC is justified as Section 56 of the 2009 Act was enacted on the reason of conserving and protecting the public interest,” he wrote.

On the issue of expert evidence, Justice Mohd Zawawi said its use would not be helpful to a civil court judge.

Ultimately, he said the civil court judge would still have to make a decision and he or she would end up having to choose which expert opinion to rely on, and this could be further complicated if each expert based his or her opinion on different schools of jurisprudence.

“We are of the firm opinion that it is for a body of eminent jurists, properly qualified in Islamic jurisprudence and/or Islamic finance, to be the ones dealing with questions of validity of a contract under Islamic law and in Malaysia that special body would be the SAC,” he added.

Datuk Malik Imtiaz Sarwar appeared as counsel for the JRI as the applicant along with Pradeep Nandrajog, Chan Wei June, Dinesh Nandrajog, Clinton Tan and Aliff Benjamin. Yoong Sin Min from Tetuan Shook Lin Bok Advocates & Solicitors, along with Samuel Tan Lih Yau and Sanjiv Naddan, appeared for KFH as the respondents.