Beximco Pharmaceuticals Ltd & Ors v Shamil Bank of Bahrain EC

Where a commercial agreement expressly chooses English law, a general reference to the principles of Sharia does not introduce a second governing law or qualify the parties’ contractual liabilities. Incorporation under English law requires sufficiently identified and ascertainable rules, such as specified provisions of a foreign code or international rules. A broad reference to Sharia principles does not meet that requirement.

Such words may instead describe the religious principles according to which an Islamic bank holds itself out as conducting its business. A defence of common mistake also fails unless the alleged mistake was a common and fundamental assumption which made the contractual subject matter essentially different.

The Bank obtained summary judgment against two corporate borrowers for sums due under Islamic-finance agreements, and against the individual and corporate guarantors. The agreements stated that they were governed by and construed according to English law, subject to the principles of the Glorious Sharia’a.

The borrowers contended that the transactions were disguised interest-bearing loans and therefore invalid under Sharia. They argued that the clause made enforceability conditional upon compliance with Sharia principles. The guarantors also relied on common mistake. Morison J gave summary judgment for the Bank. The appeal concerned the construction and effect of the governing-law clause and the consequent liability of the guarantors.

Decision

1. The Court of Appeal unanimously dismissed the appeal. Potter LJ gave the reasons, with Laws and Arden LJJ agreeing.

2. Construction of the governing-law clause had to reflect the commercial purpose of the agreements. The parties had chosen English law and accepted that there could not be two governing laws. The court should therefore resist a construction which would defeat the agreements’ evident purpose of creating binding repayment obligations.

3. The Rome Convention contemplates a choice of the law of a country. It did not permit Sharia, as a non-national system of law, to operate as an additional governing law. English law can incorporate foreign or international rules as contractual terms, but only where the contract sufficiently identifies specific and ascertainable rules. The unqualified reference to the principles of Sharia identified neither particular rules nor their terms. It could not incorporate only those rules about interest, Morabaha or Ijarah which the borrowers wished to invoke.

4. The reference to Sharia was instead properly construed as reflecting the religious principles by which the Bank represented that it conducted its business. It did not require an English court to determine the Sharia validity of the parties’ obligations. English law consequently governed enforceability, and the principal borrowers’ liability was conceded on that basis.

5. The guarantors were correspondingly liable. In any event, the asserted common mistake was not fundamental. The parties’ own account showed that their shared commercial object was working capital and that they were indifferent to the Islamic form or Sharia validity of the transactions. The alleged mistake did not make the guarantees or their subject matter essentially or radically different.

• Court of Appeal (Civil Division): Dismissed the borrowers’ and guarantors’ appeal: [2004] EWCA Civ 19 .
• High Court of Justice, Queen’s Bench Division (Morison J): On 1 August 2003, granted summary judgment to the Bank for sums due under the financing agreements and guarantees.