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Perpustakaan Negara Malaysia Cataloguing-in-Publication Data

ALTERNATIVE DISPUTE RESOLUTION : Law & Practice / Edited by:Adnan Yaakob, Ashgar Ali Ali Mohamed, Arun Kasi, Mohammad NaqibIshan Jan, Muhamad Hassan Ahmad.ISBN 978-967-457-144-31. Dispute resolution (Law).2. Dispute resolution (Islamic law).I. Adnan Yaakob.II. Ashgar Ali Ali Mohamed.III. Arun Kasi.IV. Mohammad Naqib Ishan Jan.V. Muhamad Hassan Ahmad.347.09

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The Malaysian Current Law Journal Sdn BhdUnit E1-2, BLK E, Jln Selaman 1

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Contents

CONTENTS

Foreword iPreface iiiContributors’ Profile viiTable Of Cases xixTable Of Legislation xlvii

CHAPTER 1 DISPUTE RESOLUTION: ADVERSARIAL SYSTEM

AND INQUISITORIAL SYSTEM

Civil Law System 1Common Law System 3Adversarial System v. Inquisitorial System 6Adversarial Procedure Of Civil Cases With Reference To The Rules Of Court 2012 10 Pleading 11 Service Of Documents 11 Discovery And Interrogation 12 Case Management 13 Hearing In Open Court 14 Evidence 15 Examination Of Witness 16 Judgment 17 Written Judgment 17 Costs 20 Decision Is Subsequently Open To Appeal 21 Stay Of Execution 21 Enforcement Of Judgment 24

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CHAPTER 2ALTERNATIVE DISPUTE RESOLUTION: DEFINITION AND ITS DEVELOPMENT

Introduction 27Why ADR? 29Conceptual Delineation 32Historical Development 36 Religious Aspects 37 Past Traditions Still In Use 42Conclusion 48

CHAPTER 3 ALTERNATIVE DISPUTE RESOLUTION IN ISLAM

Introduction 49Clarification Of Terms 53ADR Processes In Islam 60 Sulh (Negotiation, Mediation/Conciliation And Compromise Of Action) 60 Formula 66 Parties 66 The Substitute 66 The Subject-Matter 67 Tahkim (Arbitration) 69 Med-Arb 72 Muhtasib 73 Informal Justice By Wali Al-Mazalim Or Chancellor 75 Fatawa Of Mufti Or Expert Determination 76Overview Of The Practice Of ADR In The Formative Period Of Islam 76Conclusion 78

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CHAPTER 4 CONFIDENTIALITY AND PUBLIC POLICY IN ALTERNATIVE DISPUTE RESOLUTION

Introduction 79Confidentiality: Privilege 80Why Confidentiality? 84Law And Court 86 Position In India 87 Position In The United Kingdom 88 Position In Singapore 89 Position In Other Countries 92 Position In International ADR Institutions 96Conclusion 100

CHAPTER 5 NEGOTIATION: TYPES AND ETHICAL ISSUES

Introduction 101Types Of Negotiation 101 Competitive Negotiation 102 Accommodative Negotiation 103 Collaborative Negotiation 105Ethics In Negotiation 106 Self-Determination Of The Parties (Party Autonomy) 107 Negotiation Skills 107 Confidentiality Of Information 107 Impartiality Of Negotiator 108 Conflicts Of Interest 108 Process Of Negotiation 108 Fees For Negotiation 109Conclusion 110

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CHAPTER 6WITHOUT PREJUDICE NEGOTIATIONS

Introduction 111Policy Behind The Rule 118Setting Aside The Veil Of ‘Without Prejudice Negotiations’ 121Conclusion 122

CHAPTER 7MEDIATION: DEFINITION, ORIGINS AND PROCESSESS

Introduction 123Definition Of Mediation 124Traditional Mediation 125Modern Mediation 130Historical Background Of Mediation In Malaysia 136Cornerstone Of Mediation 139 Voluntariness 139 Impartiality 140 Confidentiality 140 Flexibility 141Process Of Mediation 142 Pre-Mediation Process 142 Preliminary Stage 143 Joint Session 143 Caucus (Separate Meeting) And Further Joint Meeting 144 Agreement Stage 145Types Of Mediation 145 Facilitative Mediation 145 Evaluative Mediation 145 Transformative Mediation 146Western Culture v. Asian Culture 146 Prevalence Of Face-Saving 147 Mediators Should Be Authoritative Figures 148 Mediators Should Assume Leadership Role 148 Communication Should Be At An Appropriate Level Of Formality 149 Base Of Trust In The Asian Context 149Conclusion 151

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CHAPTER 8 MEDIATORS: ACCREDITATION AND TRAINING REQUIREMENTS

Introduction 153Accreditation Of Mediators 155Accreditation Of Mediators In Selected Jurisdictions 161 Australia 161 United States 172 Canada 173 Singapore 174 United Kingdom 175International Mediation Institute 176Accreditation Of Mediators: Optional Or Obligatory? 180Conclusion 182

CHAPTER 9 MEDIATION: STANDARDS OF CONDUCT

Introduction 183Self-Determination 184Competence 185Confidentiality 187Impartiality 189Conflicts Of Interest 190Quality Of Process 192Fees For Service 195Advertising And Solicitation 196Advancement Of Mediation Practice 197Conclusion 198

CHAPTER 10MEDIATION: COURT ANNEXED

Introduction 199Mediation Act 2012 200Practice Direction No. 5 Of 2010 200Practice Direction No. 2 Of 2013 203Practice Direction No. 4 Of 2016 204

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Referrals To Mediation 205 Judge-led Mediation 205 Mediation By The AIAC 206 Mediator Chosen By Parties 207Mediation Agreement 209Confidentiality 210Period And Results Of Mediation 210Settlement Agreement 211Practice Direction To Be Followed Closely 212Conclusion 213

Arahan Amalan Bil. 2 Tahun 2013 214Practice Direction No. 4 Of 2016 219

CHAPTER 11 MEDIATION: COMMUNITY DISPUTES

Introduction 226Position In Malaysia 229Position In India 236Position In Singapore 240Conclusion 244

CHAPTER 12 MEDIATION: RELIGIOUS AND CULTURAL DISPUTES

Religious And Cultural Conflicts 245Tolerance Of Other Religious And Cultural Practices 261Mediation Of Religious And Cultural Conflicts 265Conclusion 270

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CHAPTER 13 MEDIATION: NATIVE DISPUTES

Introduction 271A Brief History Of Sabah And Sarawak 272Natives Of Sabah And Sarawak 273Native Courts In Sabah 276 Native Court Of Appeal 277 District Native Court 278 Native Court 278 Representation In Native Courts Of Sabah 281Native Courts In Sarawak 282 Native Court Of Appeal 284 Resident’s Native Court 284 District Native Court 286 Chief ’s Superior Court 286 Chief ’s Court 288 Headman’s Court 289 Power Of Sarawak Native Courts To Impose Penalties 289 Imprisonment In Default Of Penalty 289Mediation In Native Courts 290Interview Of Respondents 292 Sabah 293 Sarawak 294Conclusion 297

CHAPTER 14 MEDIATION: MEDICAL DISPUTES

Introduction 299The Importance Of Communication After The Occurrence Of Adverse Events 300Mediation As The Most Feasible Method Of Alternative Dispute Resolution 301Promoting The Use Of Apologies During Mediation 304Conclusion 309

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CHAPTER 15 MEDIATION: REAL ESTATE AND LAND DISPUTES

Introduction 311Types Of Real Estate Disputes 312Existing Dispute Resolution Mechanism 316 Homebuyers Tribunal 317 ADR Processes 318 Arbitration 320 Mediation 321 Med-Arb 321 Mini Trial 321 Negotiation 322 Facilitation 322Rationale For Proposing Alternative Dispute Resolution For Resolving Real Estate Disputes 323 Cost Saving 326 Speedier 327 Representation Of Lawyers In Mediation 327 Making A Binding Decision 327 Able To Preserve Relationship Between Disputing Parties 328Benefiting From The Valuable Procedural Characteristics Of Mediation 328Important Roles Of A Mediator Unavailable To A Judge In Court Of Law 331 Establishing Communication Between Parties 332 Transmitter Of Information 332 Distinguisher Between Wants From Needs Of Parties 332 Generator Of Options 332 Organiser And Guide 333 Reality Check 333 Absorbing Negativity 333 Experienced And Ability To Drive The Discussion 334 Predictor Of Future Issues 334Challenges In Promoting Mediation 334 Appointment Of A Suitable Mediator 334 Incorporation Of Clauses To Mediate Disputes In Agreements 336

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Liberty To Find Other Means Of Dispute Resolution If Mediation Does Not Resolve The Dispute 336 Authority To Make Decisions 336 Settlement Is Not Binding Unless Parties Reach An Agreement 337 Communications During Mediation Are Confidential 337 Preparing A Mediation Brief 337 Finalise Settlement Agreement At Mediation 338Limitations Of Mediation 338Conclusion 339

CHAPTER 16 MEDIATION: SPORTS DISPUTES

Introduction 341Sports Law And Mediation 341Trend In Mediating Sports Disputes 344Value Of Mediation In Sports Disputes 348Notion Of Mediation 349Common Misconceptions About Mediation 350Relevance And Application Of Mediation To Sport Disputes 352Conclusion 353

CHAPTER 17 MEDIATION: PLEA BARGAINING IN CRIMINAL CASES

Introduction 355Mediation: Meaning And Scope 356Power Of Public Prosecutor To Institute, Substitute And Discontinue Charge 357 Pre-Trial Conference 358 Case Management 359 Plea Bargaining 359 Sentencing Arising In Plea Bargaining 365Conclusion 368

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CHAPTER 18 MEDIATION INSTITUTIONS

Introduction 369Financial Mediation Bureau (FMB) 370Malaysian Mediation Centre (MMC) 372Asian International Arbitration Centre (AIAC) 376Legal Aid Bureau (LAB) 378Conclusion 380

CHAPTER 19 SINGAPORE MEDIATION CONVENTION:

WHETHER RULE OF LAW INTACT?

Introduction 381Bird’s Eye View Of The Convention 383Observations 386Conclusion 387Appendix 389

CHAPTER 20 CONCILIATION v. MEDIATION: SIMILARITIES AND DIFFERENCES

Introduction 401Conciliation: Meaning 402Conciliation And Mediation: Similarities And Differences 404Differences: An Analysis From The Definition 404

CHAPTER 21 CONCILIATION: LABOUR DISPUTES

Introduction 407Labour Disputes 409 Conciliation At Industrial Relations Department (IRD) 414 Enhancing Conciliator’s Skills And Knowledge On Negotiation Process 422Conclusion 424

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CHAPTER 22 CONCILIATION: MATRIMONIAL DISPUTES

Reconciliation In Matrimonial Disputes 425Reconciliation: A Prerequisite For Filing Of Divorce Petition 427Conclusion 438

CHAPTER 23 CONCILIATION: APPLICATION IN SYARIAH COURT

Introduction 439Sulh: Definition 440Sulh: In Qur’an And Sunnah 441Process Of Conciliation (Sulh) 444Conciliation: Practice In Syariah Courts 446Process Of Hakam For Dissolution Of Marriage 451Ensuring Effectiveness Of Sulh 455 Sulh Work Manual 455 Practice Direction Of JKSM On Practice Of Sulh 457 Continuous Training For Sulh Officers 459Conclusion 460

CHAPTER 24 ARBITRATION IN MALAYSIA: AN OVERVIEW

Introduction 461Arbitration Agreement 466Arbitrator 471Appointment Of Arbitrator 473Seat Of Arbitration And Choice Of Law 475Arbitral Procedure 478Conclusion 482

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CHAPTER 25 INTERNATIONAL ARBITRATION

Introduction 483The 1958 Convention 487Arbitral Proceedings, Model Law And The Arbitration Act 2005: A Bird’s Eye View 492 Appointment Of Arbitrator 493 Respondent’s Objection To Arbitration Proceedings 494 Preliminary Conference 495 Powers Of The Arbitrator 498 Determination Of Rules Of Procedure 499 Challenge And/Or Termination Of Arbitrator 500 Award 500 Challenges In Arbitral Proceedings And Award 501

CHAPTER 26 ARBITRATION AGREEMENT

Introduction 503Arbitration Agreement: Requirements As To Form 504Arbitration: Definition 515Permissive And Unilateral Arbitration Agreements 520

CHAPTER 27 ARBITRATOR: QUALIFICATION AND TRAINING

Introduction 523Legal Position 523Practical Position 524 CIArb London Fellowship 529 Other Grades Of CIArb Memberships 530

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CHAPTER 28 ARBITRATORS: APPOINTMENT AND REMOVAL

Arbitrator: An Overview 531Appointment Of Arbitrator 533Revoking Authority Of Arbitrator: Application By Disputants 535Revoking Authority Of Abitrator: Application By Co-Arbitrator 543Revoking Arbitrator’s Authority: Required Challenge Procedure 551Appointment Of Substitute Arbitrator 553Conclusion 554

CHAPTER 29 ARBITRATORS: IMPARTIALITY AND INDEPENDENCE

Introduction 555Impartiality And Independence 557Duty Of Disclosure 558Test For Apparent Bias 562IBA Guidelines On Conflict Of Interest In International Arbitration 572Conclusion 580

CHAPTER 30 STAY OF ARBITRAL PROCEEDINGS

Introduction 581The Arbitration Act 1952 582The Arbitration Act 2005 (Prior To The Amendment In 2011) 585The Arbitration Act 2005 (As Amended In 2011) 588Stay Under The Arbitration Act 2005: Arbitrability Of Subject Matter 591Requirements Under The Arbitration Act 2005 603Requirement As To The Seat Of Arbitration 604

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CHAPTER 31 ANTI-SUIT INJUNCTION

Introduction 615Anti-Suit Injunctions In Non-Contractual Context 618Anti-Suit Injunctions To Prevent Breach Of Contract 622 The Narrow Approach 624 The Wide Approach 626 Considerations In Granting Anti-Suit Injunction 630Conclusion 638

CHAPTER 32 ARBITRAL AWARD AND ENFORCEMENT

Arbitral Award 639Setting Aside Award 642Enforcement Of Award 650

CHAPTER 33 ARBITRAL AWARDS: GROUNDS FOR REVIEW

Introduction 655Jurisdiction Of Supervisory Courts 658 Preconditioned Grounds For Review 663 Provable Grounds For Review 663 Judicially Discoverable Grounds For Review 667Involvement Of Fraud Or Corruption 669Breach Of Rules Of Natural Justice 669Discretionary Power Of Courts And Its Criteria 672Jurisdiction Of Enforcement Courts 675 Judicial Review In Ex Parte Proceedings 677 Validity Of Agreement 680 Form Of Agreement 680 Parties To The Agreement 682 Judicial Review In Inter Partes Proceedings 683 Arbitrability Of Dispute 687 Determination Of The Applicable Law 687 Validity Of The Arbitration Agreement 688 The Award Has Not Yet Become Binding 689Conclusion 690

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CHAPTER 34 INTERNATIONAL ARBITRAL INSTITUTIONS

Introduction 691Evolution Of International Arbitration And Tribunals 693 Jay Treaty Arbitration 694 Alabama Claims Arbitration 695Permanent Court Of Arbitration 697Usage Of International Arbitration 701Investment Arbitration 702International Arbitration Rules 703Conclusion 704

CHAPTER 35 ALTERNATIVE DISPUTE RESOLUTION IN FINTECH

Introduction 706Blockchain Revolution 708 Blockchain In Financial Transactions 709 Blockchain In Law 710 Blockchain-Based Smart Contracts 711 Blockchain Platform For Dispute Resolution 712Cryptocurrency Debate 713Decentralised Dispute Resolution 719 Online Dispute Resolution 721 Private ODR Platforms 724 Codelegit — Blockchain Arbitration Library 724 Kleros — Crypto Dispute Arbitration 725 Blockchain Arbitration Forum (BAF) 727 Jury.Online 729 Public Solutions 730Conclusion 731

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CHAPTER 36 ALTERNATIVE DISPUTE RESOLUTION IN

ISLAMIC BANKING AND FINANCE

Introduction 735Arbitration 736 Arbitration From Western And Islamic Perspective 736 Arbitration For Islamic Banking And Finance Disputes 741 Challenges In Implementation Of Arbitration Laws 742 Choice Of Laws 745 Qualifications Of Arbitrators For Islamic Banking And Finance Disputes 747 Arbitral Awards 749 Harmonisation Of Syariah And Civil Law On Arbitration 752Mediation 754 Syariah Principles In Mediation Process 756 Mediation In Islamic Banking And Finance Disputes 757Ombudsman 758 Ombudsman In Islamic Banking And Finance Disputes 760 Scope Of Ombudsman 761 Ombudsman: A Case Study 763Conclusion 766

CHAPTER 37 ALTERNATIVE DISPUTE RESOLUTION

IN CONSTRUCTION DISPUTES

Introduction 767Nature Of Construction Dispute 767Emergence Of Construction Dispute Resolution 769Dispute Avoidance Mechanisms In Construction Industry 771Major Processes Of Construction Dispute Resolution 773 On-Site Dispute Resolution and Avoidance Mechanisms 773 Dispute Review Board 774 Roles Of The Dispute Review Board 776 Dispute Adjudication Board 778 Other Dispute Resolution Mechanisms 780

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Off-Site Dispute Resolution And Avoidance Mechanisms 782 Expert Determination 783 Enforcement Of Expert Determination Decision 784 Statutory Adjudication 787 Construction Court 789Conclusion 790

CHAPTER 38 STATUTORY ADJUDICATION UNDER CIPAA 2012

Statutory Adjudication 791Appointment Of Adjudicator 796Adjudication Process 798 Setting Aside Adjudication Decision 803 Enforcing Adjudication Decision 806

CHAPTER 39 BIRD’S EYE VIEW OF CIPAA 2012

Introduction 807CIPAA 2012 809

CHAPTER 40 EARLY NEUTRAL EVALUATION IN INDUSTRIAL COURT

Introduction 815Industrial Court Of Malaysia 817Industrial Court’s Early Evaluation Process 819Early Evaluation Of Cases: Illustrations From Industrial Court Awards 825Conclusion 829

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CHAPTER 41 OMBUDSMAN

Introduction 831Origin And Evolution Of Ombudsman 832 Ombudsman In Chinese Legal Tradition 833 The Greek/Roman Agoranomos 835 Ombudsman In Islamic Legal Tradition 837 Scandinavian Ombudsman 844 Contemporary Ombudsman And The Ottoman Turks 848Modern Ombudsman: Definitions And Institutionalisation 849 Ombudsman, Ombudswoman, Ombudsperson, Ombudet And Others 854 Ombudsman: ADR Institution Or Mechanism 856Trends In Ombudsman Classification 857 Classical/Traditional Ombudsman 860 Legislative Or Parliamentary Ombudsman 860 Executive Ombudsman 862 Organisational Ombudsman 863Public Sector And Private Sector Ombudsman 865Essential Characteristics Of Ombudsman Institutions 866 Establishment 869 Accessibility 869 Independence 870 Confidentiality/Reporting 871 Effect Of Decision/Enforcement 872 Jurisdiction And Scope 872 Reporting And Accountability 873 Review Process 873Role Of Ombudsman In Modern Business Regulation 874Conclusion 876

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CHAPTER 42 EXPERT DETERMINATION: CONVENTIONAL

AND ISLAMIC APPROACH

Introduction 877Expert Determination: Conventional Approach 878 Qualifications Of The Expert 879 A Named Individual, Firm Or Company 880 An Individual, Firm Or Company Holding A Particular Position 881 Qualification By Profession Or Experience 881 Criteria For The Expert’s Suitability 882 The Expert Clause 883 Appointing The Expert 885 Absence Of Effective Appointment Mechanism 886 Challenging Decision Of The Experts 888 Bringing A Claim Against Expert 889 Limitation 890 Grounds Of Challenge 890 Lack Of Independence 891 Unfairness In The Decision Procedure 892 Unfairness In The Decision 894Expert Determination: Islamic Approach 896 Fatwa And Its Significance 898 Principles of Fatwa Issuance 899 Fatwa Issuance 900 Scholarly Aptitude And Character 900 Single Juristic View 900 Multiple Juristic View 900 Reliance On Authentic Juristic Work 901 Prioritisation 901 Competing Juristic Views 901 Adopting The View Of Zahir Al-Riwayah 902 Mafhum-Mukhalif As Principle Of Interpretation Of Juristic Text 902 Similarities And Differences Between Al-Qadha’ And Al-Fatwa 902 Appointment Of Qadhi And Mufti 903 Application Of Fatwa 904

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Multiple Views 904 Approved Verdicts In Fatwa Sentence 905 The Preferred Verdict 905 The Verdict Which Is Equal To Another 906Conclusion 906

CHAPTER 43 ONLINE DISPUTE RESOLUTION AND ITS APPLICATION IN FINANCIAL DISPUTES

Introduction 907Concept Of ODR 908Permutations Of ODR 912 Online Ombudsman 914 Online Negotiation 914 Online Mediation 915 Online Arbitration 915 Online Hybrid Processes 915Best Practices Of ODR In Financial Dispute Resolution 916 eBay/Square Trade Experiment 917 Cybersettle.com, SettlementOnline and clickNsettle 919 ODR In Credit Reporting Disputes 920Conclusion 923

CHAPTER 44 UNIVERSITY ARBITRATION

Introduction 925Universities As Arbitration Centres 926Emergence Of Modern Commercial Arbitration 927Significance Of Arbitration 930Empowering Universities As Arbitration Centres 932 Implementing University Arbitration 933 Benefit To Stakeholders 934 The ‘Feeder’ To University Arbitration 935 Regimes Of Islamic Finance And One Belt, One Road (OBOR) 938Conclusion 939

Index 941

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CHAPTER 36

ALTERNATIVE DISPUTE RESOLUTION IN ISLAMIC BANKING AND FINANCE*

Introduction

Islamic banking and finance is relatively a new component in the contemporary financial industry and growing fast across the globe. Consequently, like in any other area of business, occurrence of disputes that arise among stakeholders is unavoidable and normal. However, resolution of such disputes without prejudice to the business relationship is imperative. The deficiencies that exist in the litigation process necessitate the industry players to find alternative ways of dispute resolution which is cheaper, protects privacy and is less formal. This chapter examines the possibility of application of various ways of Alternative Dispute Resolution (ADR) for Islamic banking and finance disputes.

A number of ADR mechanisms have been developed besides litigation across the globe. ADR includes a number of out-of-court conflict management and dispute resolution mechanisms such as negotiation, ombudsman, mediation, arbitration, fact-finding, dispute resolution boards, and other related dispute resolution processes. ADR is widely encouraged for Islamic banking and finance disputes in many countries such as Malaysia, United Arab Emirates, Bahrain, etc. where Islamic

* This chapter is contributed by Seeni Mohamed Mohamed Nafees and Muhamad Hassan Ahmad.

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736Alternative Dispute Resolution In Islamic Banking And Finance

banking is extensively practised.1 Hence, this chapter focuses on a few ADR mechanisms such as arbitration, mediation and ombudsman only as the scope does not allow covering all of them.

Arbitration

Arbitration is used to resolve all kinds of disputes2 and it is also a common and desired process of settling commercial and other disputes in Islamic countries.3 Kuwait, the United Arab Emirates and Bahrain have updated arbitrating laws based on the UNCITRAL Model Law on International Commercial Arbitration 1985 (the UNCITRAL Model Law) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention). In Bahrain, Islamic finance institutions have been instructed to resolve disputes through arbitration. Accordingly, arbitration may be utilised fully in Islamic banking and finance disputes as it is no longer considered as an ‘alternative’ but has become an established option to litigation.4

Arbitration From Western And Islamic Perspective

Arbitration is actually similar to litigation — the way its proceedings are conducted and that it is widely supported by Western legal and political institutions. It has been praised as a way of dispute settlement for

1 SMM Nafees, ZA Ayub ‘Resolution of Islamic Banking Disputes by Way of Arbitration in Sri Lanka’ Arab Law Quarterly Vol. 30(4) 2016 p. 335; SMM Nafees, MH Ahmad, A Masum, NHM Dahlan ‘Legal Aspect of Islamic Banking: A Case Study of Bahrain’ Journal of Islamic Law Review Vol. 14(1) 2018 pp. 109-129.

2 T Sourdin Alternative Dispute Resolution (2002) p. 34.

3 SA Saleh Commercial Arbitration in the Arab Middle East (1984) pp. 1-4 cited in Sundra Rajoo Law, Practice and Procedure of Arbitration (2003) p. 8.

4 R Charlton Dispute Resolution Guidebook (2000) p. 12.

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737

many centuries and it remains a favoured means of dispute resolution among other options.5 As far as the emergence of this concept is concerned, scholars have different opinions and some argue that the concept emerged in ancient Egypt first and then in Rome. Plato defined arbitration as:

If a man fails to fulfil an agreed contract, an action should be brought in the tribal courts if the parties have not previously been able to reconcile their differences before arbitrators.6

Aristotle’s view on arbitration was:

It bids us remember benefits rather than injuries, and benefits received rather than benefits conferred, to be patient when we are wronged; to settle a dispute by negotiation and by force; to prefer arbitration to litigation — for an arbitrator goes by equity of a case, a judge by the law, and arbitration was invented with the express purpose of securing full power for equity.7

However, modern arbitration is heavily influenced by the notion of English law. According to Sir Edward Coke, disputes were also settled through arbitration in the 15th century in England.8 The American Arbitration Association (AAA) defines arbitration as:

[A] submission of a dispute to one or more impartial persons for a final and binding decision. The arbitrators may be attorneys or business persons with expertise in a particular field. The parties control the range of issues to be resolved by arbitration, the scope of the relief to be

5 T Sourdin Alternative Dispute Resolution (2002) p. 33.

6 Plato The Laws (1980) p. 16 cited in Sundra Rajoo Law, Practice and Procedure of Arbitration (2003) p. 16.

7 Jonathan Barnes (Ed) The Complete Works of Aristotle (1984) ‘Rhetoric’ Vol. 2 Book I, Ch 13 p. 2189 cited in Sundra Rajoo Law, Practice and Procedure of Arbitration (2003) p. 16.

8 SS Wijeratne ‘Arbitration in Sri Lanka’ Arbitration Law in Sri Lanka (2011) pp. 1-2.

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awarded and many of the procedural aspects of the process. Arbitration is less formal than court trial. The hearing is private. The arbitrator’s decision or award is made in writing.9

Another definition derived from the Australian Guide to Prevention, Handling and Resolution of Disputes reads as follows:

A process in which the parties to a dispute present arguments and evidence to a neutral third party (arbitrator) who makes a determination.10

In Islam, arbitration is a fundamental part of Syariah. Ibn Qudama expresses it in detail under Kitab al-sulh and he defines it as follows:

Arbitration is an agreement by which the disputing parties reach settlement.

All the Muslim jurists have agreed on its legality.11 The term and concept are recognised by the Qur’an12 and Sunnah. Accordingly, the Qur’an states:

There is no blame on them both if they settle the dispute by arbitration. Arbitration is better.13

The Prophet (s.a.w.) said as reported by Abu Hurairah, recorded by Tirmithi that:

Arbitration is permitted between two Muslims provided that it does not permit what is prohibited and prohibits what is allowed in Islam.14

9 American Arbitration Association ‘Alternative Dispute Resolution Basic FAQ’ at http://www.aaauonline.org (accessed 28 July 2019).

10 The Australian Standard ‘Guide to the Prevention, Handling and Resolution of Disputes’ cited in T Sourdin Alternative Dispute Resolution (2002) p. 34.

11 Ibn Qudamah Al-Muqni Vol. 6 2004 pp. 236-294.

12 MA Alhajeri ‘A Critical Approach to the Kuwaiti Law of Judicial Arbitration No.11 of 1995 with reference to the UNCITRAL Model Law on International Commercial Arbitration’ Arab Law Quarterly Vol. 15(1) 2000 p. 48.

13 Surah Al Nisa 4:128.

14 Ibn Qudamah Al-Muqni Vol. 6 2004 p. 236.

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Hence, it is crystal clear that arbitration is not new to Islamic law and it is more suitable for the Islamic banking and finance industry for resolution of disputes. In addition, Caliph Umar instructed Abu Musa to implement arbitration in Iraq where he was the governor.15

In the history of Islam, it was even used to settle political disputes. The first ever recorded arbitration agreement was the agreement between Ali Ibn Abi Talib and Mu’wiyah Ibn Abi Sufiyan, the governor of Syria, over a dispute of the headship of the Caliphate. On this occasion, two arbitrators were selected to resolve the above dispute.16 Such an arbitration agreement was similar to an agreement written for modern commercial arbitration and it stipulated the place of arbitration, the applicable law and procedural rules accompanied by provisions for the appointment of a substitute arbitrator.17 This agreement reads in part as below:

In the name of Allah, the powerful, the merciful. This is what was agreed between Ali Ibn Abi Talib and Mu’wiah Ibn Abi Sufiyan, Ali for the people of Iraq and their Muslim and believing partisans and Mu’wiyah for the people from the country of Damascus and their Muslims and believing partisans: We shall comply with the decision of Allah by complying with the provisions of His Book with respect to our dispute and by applying them from the beginning up to the end, affirming what is affirmed therein and rejecting what is therein rejected. This dispute must be examined in the time period expiring during the month of Ramadan unless the arbitrators desire to settle the dispute earlier or later. If one of the arbitrators dies, the chief of each sect shall appoint, with the help of partisans a man to replace him and who shall be chosen amongst the wide and just. The place of arbitration shall be located between Kufa, Damascus and the Hijaz. Each of the arbitrators shall be entitled to appoint witnesses of his choice, but these witnesses’ statements must be written in this document ... .18

15 Ibid.

16 AH Al-Ahdab ‘Muslim Arbitration Law’ International Bar Association, First Arab Regional Conference, Cairo 15-19 February 1987 Vol. 1 p. 337 cited in Sundra Rajoo Law, Practice and Procedure of Arbitration (2003) p. 8.

17 Sundra Rajoo Law, Practice and Procedure of Arbitration (2003) p. 8.

18 Ibid.

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The Syariah administers arbitration in accordance with the Islamic context. The Qur’an, Sunnah, Ijma and Qiyas are the main sources of Syariah. An arbitration administered by Syariah must comply with substantive and procedural laws of Syariah wherever the arbitration takes place. The position of arbitrator in Syariah is similar to that of a qazi (judge) in relation to his power of making an award. Equally, he must possess the same qualifications as that of a qazi in terms of personal and religious character. In addition, he must be divine conscious and just. He must be eligible to be a witness in a court of law.19 Hence, the arbitration is entirely governed by Syariah. According to Syariah, the view of the majority jurists is the award of an arbitral tribunal, which has the same degree of binding effect as the judgment of a qazi. The award made in accordance with Syariah is enforceable under Syariah procedural rules. The award can be annulled if it contravenes the principles of Syariah.20

As the Islamic banking and finance industry is growing tremendously, the ever-growing number of transactions based on the principles of Syariah will predictably lead to a number of disputes arising from these transactions. It is natural that even though the transactions are based on religious rules, the contracting parties may dispute on any issue with regard to the transaction. Although the contracts are carried out with the utmost care and vigilance, conflicts are still inevitable. However, it is not necessary for the parties to seek the solution from the common law courts where the law, which is not relevant to the transaction, is applied. In addition, it is not necessary to find expensive methods of resolution while there is an option that is close to Syariah, economical, less susceptible to delays and more independent.

19 Ibid p. 9.

20 Ibid.

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Arbitration For Islamic Banking And Finance Disputes

There are a number of advantages and fruitful benefits when a dispute is resolved through arbitration rather than by means of litigation. Arbitration gives the parties an opportunity to influence the composition of the arbitral tribunal as it entitles the parties to choose their arbitrators and the method in which the proceedings are carried out.21 These privileges obviously are not recognised in court proceedings. Furthermore, parties can pre-determine the qualifications and experience of an arbitrator while entering into the contract and when a dispute arises, a mutually acceptable arbitrator is chosen.22 Another benefit is that arbitration proceedings are much speedier than court proceedings.23 A convenient place and time is also determined by the parties. Tight budgets and the appeal of cases create delays for years to reach a final result in the courts, whereas in arbitration, there is no ‘docket’ (no line in which to wait for one’s day in court). The factors governing speed are the willingness of the parties to conclude the dispute and the intricacy of the cases to be resolved professionally. Here, results could be reached within a few weeks or months of filing.24

Parties who resolve their disputes through arbitration may enjoy the assistance of neutrals who are expert in the subject matter of their disputes. For example, parties to a construction industry dispute may select an architect, a contractor or a lawyer with lifelong experience

21 ARB Amerasinghe ‘The Sri Lanka Arbitration Act No. 11 of 1995’ Arbitration Law in Sri Lanka (2011) p. 16.

22 American Arbitration Association ‘Alternative Dispute Resolution Basic FAQ’ at http://www.aaauonline.org (accessed 28 July 2019).


24 American Arbitration Association ‘Introductory Guide to AAA Arbitration and Mediation’ at http://www.adr.org.

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in construction law to serve as their arbitrator. The ‘subject matter expertise’ of the neutral lessens the time necessary to educate a judge or jury about the technical parts of a dispute.25 Informality and flexibility are the unique characteristics of arbitration. In addition, the parties are free to choose the law governing the arbitration agreement.

Arbitration proceedings are conducted in a manner that is more businesslike than litigation. Each party may tell its side of the story to the arbitrator in an environment that is less formal than a court proceeding. Testimony might be taken using new information technology, e.g. the telephone, teleconferencing, Skype, Whatsapp, etc. The hearing might take place at the place of dispute or during evening hours when the parties are free to attend. Through arbitration, privacy of the parties is ensured as proceedings are confidential and not open to the public like in court. The hearings and awards are kept private and confidential, which enables the parties to preserve a positive working relationship. One important aspect of arbitration is that it is less expensive and more economical. Time saved is money saved. Many of the costly procedures are ignored in the arbitration proceeding such as filing appeals and motions.26 Another benefit is that a foreign arbitral award could be enforceable in many jurisdictions as most of the countries have ratified the New York Convention.

Challenges In Implementation Of Arbitration Laws

A number of criticisms have been leveled against it. The main criticism is that arbitration proceedings have become similar to that of court proceedings. In order to overcome from this challenge, albeit arbitration laws were introduced in various jurisdictions, unfortunately,

25 Ibid.

26 Ibid.

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proceedings of arbitration are also often delayed and sometimes take much longer than the parties had expected when they incorporated an arbitration clause in their contract.27 In order to overcome this challenge the parties to arbitration shall choose their arbitrators who can fulfill their expectations.

In addition, the arbitration laws of many countries do not provide time limits within which the arbitral award has to be rendered and the absence of such provision might be an important reason for such delays and it places the arbitration in a parallel position to the court. Such provisions are found in a few jurisdictions to avoid delays. For example, art. 210(1) of the United Arab Emirates Civil Procedure Code provides that the award shall be given within six months from the date of commencement of the arbitral proceedings.28 This is actually in line with the guidelines of the International Court of Arbitration of the International Chamber of Commerce that mandates that a final award must be made within six months.29 More importantly, it has to be pointed out that as the parties to arbitration are free to choose the pre-determined time limits, they must exercise this right without fail in order to avoid such long delays. In fact, the time factor is an integral motive for the parties to seek arbitration.30

27 K Kanag-Isvaran ‘A comment of the operation of the Arbitration Act — Has it worked?’ Arbitration Law in Sri Lanka (2011) pp. 175-176.

28 A Dimitrakopoulos ‘Arbitration Practice in the UAE’ Arab Law Quarterly Vol. 16(4) 2001 p. 401.

29 The International Court of Arbitration of International Chamber of Commerce art. 31.

30 A Respondek ‘Minimising Delays in International Arbitration Proceedings’ SIArb Newsletter No. 10, June 2014 pp. 12-14.

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Another deficiency is the confrontational character of the proceedings as more stress is given to legal procedural technicalities. Due to this factor, the basic philosophy underlying arbitration is ignored.31 The issue again relates to the retired judges who serve as arbitrators. The disputing parties may avoid appointing retired judges and find industry experts who can be trained as arbitrators. For example, for Islamic banking and finance disputes, the arbitrators who are experts in Syariah, economics and banking law may be considered. They may be practicing lawyers or executives of Islamic financial institutions.

Another factor discouraging arbitration proceedings is that sittings are of short duration and there are many sittings. The parties have to pay for every sitting.32 This is actually similar to the payment made for lawyers appearing in court. The parties must be advised that the assistance of lawyers is not necessary for the proceedings. The disputing parties must be ready to tell their side of the story to the arbitrators who must listen to them and decide on the award.

Another frightening complaint concerns the integrity and honesty of arbitrators. It is observed that some of them seem biased.33 In order to circumvent this situation, the party considering the arbitrator who may be biased, shall object to his appointment and replace him with a more suitable person. The parties to a dispute should exercise this right, see for example s. 10(2) of the Sri Lanka’s Arbitration Act 1995:

An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence ... .

31 K Kanag-Isvaran ‘A comment of the operation of the Arbitration Act — Has it worked?’ Arbitration Law in Sri Lanka (2011) pp. 175-176.

32 Ibid.

33 Ibid.

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The party willing to express his dissatisfaction over the order of the tribunal must inform the arbitral tribunal of this and if such application is not successful, he may within thirty days of receipt of the decision appeal to the High Court.34 Similar provisions may be made available in arbitration laws of many countries.

Choice Of Laws

In Sri Lanka, in terms of the law applicable to the substance of dispute, the arbitral tribunal shall determine the dispute according to the substantive law chosen by the parties — failure to do so would result in the arbitral tribunal applying conflict of laws.35 In such a situation, a question arises as to whether Syariah principles are permitted to be adopted under this provision. However, one can presume that as the arbitration laws of many countries are comprehensive and the parties are free to determine the substantive law by which arbitration proceedings is to be carried out, Syariah principles could be absorbed. In addition, the Islamic banking and finance industry is governed by the principles of Syariah and disputes are also resolved based on the Syariah, subject to the provisions of the relevant Arbitration Act of a respective country. This presumption is confirmed by Kanag-Isvaran whose statement is given below:

A tribunal sitting in Colombo may be asked to apply the law of France to the merits of the dispute, but its own proceedings will be regulated by the law of Sri Lanka. However, the parties are also free to choose to have the proceedings governed by a law different from the law of the place of arbitration.36

34 Arbitration Act (No.11 of 1995) (Sri Lanka), s. 10(4).

35 Ibid s. 24.

36 K Kanag-Isvaran ‘International Commercial Arbitration: A Sri Lankan Perspective’ Arbitration Law in Sri Lanka (2011) p. 53.

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Hence, it is very clear that Syariah may be adopted as the governing law of arbitration for Islamic finance disputes. In addition, Alan Redfern and Martin Hunter argue that:

The parties are free to choose the applicable law to their dispute. When a clear choice is not made, the intention is to be inferred from the nature and terms of the contract and from the general circumstances of the case and such inferred intention determine the proper law governing the contract.37

It is affirmed further that Syariah can be the choice of laws for arbitration in Islamic finance and in case of an absence of such a choice, still Syariah must be applied considering the nature of the contract of Islamic banking and finance. However, in the absence of choice of law governing the dispute, the arbitral tribunal shall apply conflict of law rules. Hence, it is essential to know a bit about the conflict of laws (or private international law).

Conflict of laws is that part of private law of a country that deals with cases consisting of foreign elements that means a contract based on some legal system other than the law of Malaysia. This situation may arise, for instance, when a contract was entered into or to be carried out in a foreign jurisdiction, the property in relation to the contract is located outside Malaysia or the parties to the disputes are not Malaysians. The important sources of conflict of laws are statutes, the decisions of the court and the opinion of jurists.38 In Vita Food Products Inc v. Unus Shipping Co Ltd,39 it was held that:

37 A Redfern, M Hunter Law and Practice of International Commercial Arbitration (1999), p. 129 cited by U Egalahewa ‘International Commercial Jurisdiction and Forum Non-conveniens’ Arbitration Law in Sri Lanka (2011) p. 68; SMM Nafees, MH Ahmad, A Masum ‘Enhancement of Islamic Banking Industry in Sri Lanka: A View Point’ Journal of Islamic Law Review Vol. 14(1) 2018 pp. 131-153; SMM Nafees, MH Ahmad, A Masum, & MZM Nor ‘Legal and Regulatory Issues in Islamic Banking: A Sri Lankan Experience’ Journal of Islamic Law Review Vol. 14(2) 2018 pp. 379-397.

38 K Kanag-Isvaran ‘Conflict of Laws’ Arbitration Law in Sri Lanka (2011) p. 179.

39 [1939] AC 277, PC.

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... a distinction must be made between the parties’ express choice of the proper law of the contract and the incorporation of some provisions of a foreign law. The effect is not to encourage the foreign law to be proper law but to incorporate it as contractual terms into the contract governed by the proper law of the contract.

Likewise, in Compagnie Tunisienne de Navigation SA v. Compagnie d’ Armemant Maritime S.A.,40 it was held that:

... tribunals seem to be lenient in favour of applying a system of law on which the contract was based and valid rather than under which it would be void, on the grounds that the parties were very willing for their contract to be valid. From this case, it is clear that intention is to be inferred from the terms and nature of the contract when the law governing the contract is not expressed in words. In addition, when there is no law governing the contract in an expressed manner and the tribunal is unable to infer from the nature and the circumstances, the contract is governed by the law that is closest and the real link to the transaction.41

Therefore, an Islamic financial institution as a party to the dispute to be resolved through arbitration should be vigilant and not neglect to exercise the right provided by the relevant arbitration law when domestic and international commercial contracts are made.

Qualifications Of Arbitrators For Islamic Banking And Finance Disputes

The arbitration laws of many countries may not have set out any specific qualifications for arbitrators. Such responsibility has been left to the parties to the contract.42 At present, arbitration proceedings are generally carried out in collaboration with the arbitration centre of a respective country which employs most probably retired judges as

40 [1971] AC 572, HL.

41 K Kanag-Isvaran ‘Conflict of Laws’ Arbitration Law in Sri Lanka (2011) p. 179.

42 Arbitration Act (No.11 of 1995) (Sri Lanka), s. (4).

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arbitrators. Hence, the door is wide open for parties to appoint persons they deem fit to perform the duties of arbitrators. This liberal policy of arbitration law is more suitable and conducive to appoint arbitrators for Islamic banking and finance disputes.

It is relevant to follow the procedures that are adopted by the AAA when arbitrators are appointed for Islamic and finance disputes. The AAA requires that applicants must have a minimum of ten years of senior level business or professional expertise or legal practice. In addition to that, the following factors are taken into consideration such as, ‘a commitment to neutrality and objectivity; dispute management skills; judicious personality such as patience and courtesy; respect of bar or business community for integrity and strong academic background or professional or business credentials’.43 It is suggested, therefore, that an arbitral tribunal for Islamic banking and finance disputes may adopt these factors when arbitrators are appointed. In order to circumvent the problem in advance, the arbitral agreement should set out such qualifications in advance at the time of the contract. In addition, Islamic finance institutions may jointly establish an arbitration centre in a respective country.

It could be relevant to investigate a few countries where arbitration is encouraged for Islamic banking and finance disputes in order to learn from them. In Indonesia, for example, the Indonesian Ulema’ Council (IUC) has established the ‘Shariah Arbitration Board’ (SAB). The SAB has prepared guidelines to resolve disputes arising from Syariah based transactions. When the IUC issues any fatwa in relation to a transaction, the fatwa includes a clause that mentions that any dispute arising from the transaction, shall be resolved by the SAB. For example, in its fatwa in relation to Syariah bonds, it sets out as below:

Should any of the party fail to perform its obligation or in the event there is a conflict between the relevant parties and amicable solution failed the resolution of such matter shall be done through the Shari’ah Arbitration Board.


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This clause, indeed, is not binding from a legal perspective. However, if this clause is a part of an agreement or included in the agreement, it shall be binding on the parties in accordance with art. 1338 of the Indonesian Civil Code which provides that all legally executed agreements shall bind the parties by law.44

In Malaysia, for example, the arbitration process is being greatly encouraged. The Asian International Arbitration Center (AIAC) (formerly known as the Kuala Lumpur Regional Centre for Arbitration or KLRCA) is determined to resolve Islamic banking and financial disputes in accordance with Syariah. It has developed specific rules for this purpose. It could be relevant to cite the statement of the former governor of the Central Bank of Malaysia:

To complement the court system, disputes may also be referred to an arbitration centre for resolution. In this regard, the Kuala Lumpur Regional Centre for Arbitration will be enhanced to serve as a platform to deal with cases involving Islamic banking and finance and to extend these services beyond the borders.45

In addition, the arbitral tribunal has been advised during its proceeding to consult the Syariah Advisory Council (SAC) in relation to Syariah issues regarding cases involving Islamic banking and finance and the ruling of the SAC is binding on the arbitral tribunal.46

Arbitral Awards

The Arbitration Act of Sri Lanka provides that the arbitral award shall be in writing and shall be signed by the arbitrator or by the majority of its members. The award shall stipulate the reasons upon which it is based. Parties may also agree that no reason shall be given in the award.

44 I Rakhmat ‘Urgent Need to Improve Resolution of Disputes in Shariah Transactions’ Islamic Finance News Vol. 5(6) 15 February 2008 pp. 13-14.

45 ZA Aziz ‘Arbitration for Islamic Financial Business under the Auspices of Kuala Lumpur Regional Centre for Arbitration’ The Star 26 August 2004.

46 Central Bank of Malaysia Act 2009, ss. 51-58.

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Furthermore, the award shall specify its date and place of arbitration.47 It is better for parties to agree that no reason shall be given in the award because the purpose of the award is to solve the dispute finally and conclusively. It is achieved within the scope of the arbitration agreement. The AAA for example, does not request the arbitrators to write opinions explaining the reasons for their decisions unless the parties require so. As a general rule, the AAA commercial arbitral awards include a brief direction to the parties on a single sheet of paper. Written opinions may create attacks on the award because they identify targets for the losing party.48 This practice will be beneficial for both parties preserving the business relationship and forgetting the past. The other important aspect is that the arbitrators do not need to spend much time on rationalising the awards like court judgments.

According to s. 28 of the Arbitration Act of Sri Lanka, for example, the arbitral tribunal may in the award for payment of money, order a party to pay interest at the rate agreed upon by the parties or, in the absence of such agreement, at the rate of legal interest prevailing at the time of offering the award from the date of the initiation of the arbitral proceedings.49 This provision, indeed, contravenes Syariah. Hence, this shall be made optional by amending that provision of the Act in order to accommodate the Islamic finance businesses which shall be free from involvement of interest. Until then, the agreement of the parties to the arbitration must waive this right by inserting a clause in the agreement. Similar provisions may be available in other jurisdictions too. Furthermore, the parties may require the arbitral tribunal to make any correction, modification or to make an additional award within 14 days of receipt of the award.50

47 Subsections 25(1), (2), (3).



50 Arbitration Act (No.11 of 1995), s. 27.

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The enforcement of awards is more imperative than anything else. Proper enforcement will make claimants confident in the system of arbitration. Thus, the arbitration laws of many countries do not fail to encompass such a provision that makes the enforcement of an arbitral award mandatory. Accordingly, an award is final and binding on the parties to the agreement. Citing the example of the Arbitration Act of Sri Lanka, a party willing to enforce a domestic award shall apply to the High Court in this respect within 14 days of the making of the award.51 If there is no objection and the court finds no reason to refuse the enforcement, the court shall give the judgment in accordance with the award.52 Although the judgment, decree or order of the High Court is final, the parties are at liberty to appeal to the Supreme Court on a question of law for which leave to proceed must be given by the Supreme Court. However, such leave shall not be granted if the parties have agreed in advance in writing to exclude any right to appeal in relation to the award.53

Meanwhile, s. 34 of the Arbitration Act provides necessary arrangements for foreign arbitral awards to be recognised and enforced in Sri Lanka, that would be the position in many other jurisdictions too. Refusal of enforcement can only take place on the same grounds that are applicable for domestic awards, e.g. it has been set aside by a court. Furthermore, s. 32 of the Arbitration Act provides the grounds on which awards could be set aside or which can lead to invalidity. They are formal procedural

51 Every Application to the High Court shall be made by way of a petition along with an affidavit. All parties other than the petitioner will be named as respondents and notice will be given of the application to the respondents. Consequently, the respondent will be given an opportunity to express his objections in writing supported by an affidavit. Viva voce evidence may be required by the court if necessary: sub-ss. 40(1), (2), (3).

52 Arbitration Act (No.11 of 1995), s. 31(1).

53 Ibid ss. 37(1), (2), 38(1); see also ARB Amerasinghe ‘The Sri Lanka Arbitration Act No. 11 of 1995’ Arbitration Law in Sri Lanka (2011) p. 25.

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mistakes or errors, the invalidity of the arbitration agreement, subject matter not being arbitral and the award being against the public policy of a respective country.54 In case of the death of a party to an arbitration agreement, the agreement is still enforceable by or against the legal representative of the estate of the deceased unless there is a provision contrary to this intention in the agreement.55

Harmonisation Of Syariah And Civil Law On Arbitration

Syariah stands as one of the few non-Western legal systems that has normative, social or political significance. The degree of its application varies in different parts of the world. Muslims feel that they are obligated to regulate their personal and formal affairs subject to Syariah. The principles of Syariah have become transnational and its application is no longer limited to traditional Muslim countries. Syariah is recognised in international tribunals as well as decisions of many courts all over the world.56 For example, in Libyan American Oil Company v. The Government of the Libyan Arab Republic,57 the arbitral tribunal appointed by the President of the International Court of Justice (ICJ) concluded that the concession rights were regarded in Islamic law as incorporeal property that cannot be interfered with by any trend of nationalisation.58 Hence, the important point to be drawn here is that Syariah has been recognised as the governing law.


55 Arbitration Act (No.11 of 1995), s. 46.

56 A Ahmad ‘Educating Lawyers for Transnational Challenges: The Challenge of Islamic Law’ Journal of Legal Education Vol. 55(4) 2005 p. 475.

57 20 I.L.M. 151 (1981).


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Likewise, domestic application of Syariah is in force in the Province of Ontario in Canada where the courts are required to provide a mandatory session for Muslim litigants to settle their civil matters according to Syariah. In addition, the courts in the Unites States have resolved a number of Syariah issues favourably. For example, in O’Lone v. Estate of Shabazz,59 new prison policies that resulted in the restrictions to attend Jumah (Friday congregational prayer) were challenged by Muslims. Consequently, the Syariah view in this respect was analysed by the US Supreme Court.60

Furthermore, Syariah is taught in the universities around the globe including Harvard and Oxford. A survey on the Law Schools teaching Islamic law in the US was conducted by John Makdisi and he found that it has been taught in a number of universities since 1997. In his concluding remarks he states as follows:

The number and variety of courses offered in the Unites States are strong indication that Islamic law has entered the mainstream of American legal education.61

In commenting on the above survey, Lama Abu-Odeh states that:

We need to stop approaching the Islamic world through the prism of religion, culture and history and start approaching it as a modern product of the colonial experience, with all complexity. This may indeed require that we approach its contemporary law with the same tools, methodologies and conceptual structures that we use to understand American Law.62

59 482 US 342 (1987).


61 J Makdisi ‘A Survey of AALS Law Schools Teaching Islamic Law’ Journal of Legal Education Vol. 55(4) 2005 p. 588.

62 L Abu-Odeh ‘Commentary on John Makdisi’s “A Survey of AALS Law Schools Teaching Islamic Law” ’ Journal of Legal Education Vol. 55(4) 2005 p. 591.

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Therefore, it is clear that the harmonisation of Syariah and Western law is not so difficult. The attitude of people around the globe is changing in favour of Syariah. When Syariah is incorporated into the arbitration agreement, it is possible to carry out a process of harmonisation between the two legal systems.

Mediation

Mediation is another form of ADR mechanism. The process of mediation is aided by a trained and skilled third party who acts as mediator involving reconciliation and negotiation for the parties to come for an amicable solution to the any given issue. Mediation is defined as a confidentially assisted negotiation, substantially dominated by parties concerned and procedurally controlled by the mediator or mediators who have no authority to use force with regard to the outcome of the proceeding.63 In Islamic Banking & Finance: Principles, Instruments & Operations, mediation is defined as:

... negotiation carried out with the assistance of a third party. The mediator in contrast to the arbitrator or judge has no power to impose an outcome on disputing parties. Despite the lack of “teeth” in the mediation process, the involvement of a mediator alters the dynamics of negotiations. Depending on what seems to be impeding an agreement, the mediator may attempt to encourage exchange of information, provide new information, help the parties to understand each other’s view, let them know that their concerns are understood; promote a productive level of emotional expressions; deals with differences in perceptions and interest between negotiations and constituents (including lawyer and client) help negotiations realistically, assess

63 KA Mokhtar, SNS Ahmad ‘Mediation in Islamic Banking’ in Islamic Banking & Finance: Principles, Instruments and Operations (2016) p. 573.

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alternatives to settlements, learn (often in separate sessions with each party) about those interest the parties are reluctant to disclose to each other and invent solutions that meet the fundamental interests of all parties.64

In fact, there are three kinds of mediation. They are facilitative, evaluative and transformative mediations. The distinction among these is dependent on the volume of control that lies with the parties to a dispute. In the first type of mediation, the mediator merely controls its process while the disputing parties are in charge of the result. Here, the disputing parties have self-determination, that means they are free to resolve their own issues themselves with the advice of the mediator who acts impartially between disputants. In case of evaluative mediation, the strength and weaknesses of the disputing parties are assessed by the mediator who makes suggestions to resolve issues. In this sense, the mediator predicts the view of a judge or jury if the case is brought before them. For this purpose, the mediator conducts a separate meeting with disputing parties at a different time. Parties are given a chance to evaluate the cost and other benefits of mediation compared to litigation. Thus, the mediation process is controlled by the mediator who is involved directly with the outcome of the mediation. Meanwhile, in transformative mediation, the mediator normally tries to inculcate mutual recognition and empowerment between the parties to a dispute. Efforts are made to make each other understand the problem and respect each other’s needs, interests, values and opinion. Both parties are made to approach the problem with a more informed viewpoint. This may also be called as facilitative mediation.65

64 SB Goldberg, FEA Sander, NH Rogers Dispute Resolution: Negotiation, Mediation and other Process (1999) p. 123 cited in KA Mokhtar, SNS Ahmad ‘Mediation in Islamic Banking’ in Islamic Banking & Finance: Principles, Instruments and Operations (2016) p. 574.

65 LL Riskin ‘Understanding Mediators’ Orientations, Strategies and Techniques: A Grid for the Perplexed’ Harvard Negotiation Law Review Vol. 1(7) 1997 p. 24 cited in KA Mokhtar, SNS Ahmad ‘Mediation in Islamic Banking’ Islamic Banking & Finance: Principles, Instruments and Operations (2016) pp. 574-575.

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Syariah Principles In Mediation Process

Islamic law encourages and appreciates the parties to disputes to find solutions amicably, especially for contractual disputes. Generally, Islam discourages waste of time, resources and spoiling a good relationship between individuals. Mediation is a process where parties agree to resolve their issues with the support of a mediator while preserving the individuals’ reputation. In Islamic law, wassatab is considered equivalent to mediation. It means benevolent and non-binding procedure to resolve a dispute. It is identified as, by one or more persons intervening in a dispute either of their own or at the request of one of the parties to a dispute. In the history of Islam, mediation has been adopted for resolving disputes. For instance, in Kitab-al-Wuzraa (The Book of Ministers), Al-Jahshiary, who is the author, has used the term Tawasut regarding the issue of Mohamed bin Muslim where mediation was adopted. Similarly, mediation played a great role for resolving an issue between a man and Caliph Harun al-Rashid.66

With regard to the legality of mediation, one may find it in the Qur’an, Sunnah and from the statements of Companions of the Prophet Mohamed (s.a.w.):

Help ye one another in righteousness and piety, but help ye not one another in sin and rancor.67

In most of their secret talks, there is no good; but if one exhorts to a deed of charity or justice or conciliation between men to him who does this seeking the pleasure of Allah, We shall soon give a reward of the highest.68

If a wife fears cruelty or desertion on her husband’s part, there is no blame on them if they arrange an amicable settlement between themselves and such settlement is best ... .69


67 Surah Al Ma’idah 5:2.



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Prophet Mohamed (s.a.w.) appreciated the mediation process by saying that:

The best of you in and amongst Allah’s eyes are those who are beneficial to others and amongst the best deeds in Allah’s eyes are creating happiness in the heart of a Muslim, paying his debt or eradicating his hunger.70

Mediation In Islamic Banking And Finance Disputes

Mediation, similar to arbitration, is normally cheaper in terms of cost compared to litigation. Equally, parties may get the results of mediation rapidly as no procedural laws or evidence ordinances are followed during the process. In addition, parties to a dispute would be satisfied with the results due to the fact that they themselves resolve the issues without any compulsion or confronting attitude. Implementation of mediated issues will be easier as both parties amicably reach the conclusion, being clearly aware of its terms and conditions. Preserving relationship between disputing parties is another remarkable benefit reachable through mediation compared to litigation that generally spoils the good relationship between the disputing parties. Another encouraging and important feature is that in mediation, there are no losers at the end of the process. Most importantly, the mediation process is confidential and that preserves the reputation of the parties.

Every Islamic commercial bank, for example in Malaysia, has its own unit to handle issues and disputes by way of mediation. Some banks openly publish on their websites encouraging their customers to find solutions through mediation in case of disputes. In addition, the Financial Mediation Bureau (FMB) in Malaysia plays a greater role in resolving disputes between a customer and financial service provider. It is notable that its service is provided free of charge. The FMB entertains disputes, among others, related to Islamic personal financing; Islamic

70 Al-Mu‘jam al-Awsat, Hadith No. 6192.

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housing financing; Islamic credit card; Islamic hire purchase; Islamic saving and current accounts and Takaful. It has to be noted that the FMB also runs the operations for the Ombudsman Financial Services (OFS).

One of the important measures that Malaysia has taken with regard to dispute resolution is the introduction of the Mediation Act 2012 that promotes mediation as a means of effective alternative dispute resolution mechanism. Similarly, The Malaysian Mediation Centre (MMC) has been established under the Bar Council of Malaysia with the purpose of promoting mediation which provides services in civil, commercial and matrimonial matters.71 As such, the mechanism of mediation is considered a better means to resolve disputes than litigation and arbitration. A senior Malaysian judge even went on to say that mediation is the best means to resolve disputes. A former Chief Justice of the Federal Court of Malaysia also suggested introducing mediation to expedite the disposal of cases in the courts.72

Ombudsman

The Ombudsman is another form of ADR which is available in many countries. For example, in Malaysia, the Ombudsman for Financial Services, set up since 2005, provides ADR services between financial consumers and financial service providers. Under this organisation, the Financial Ombudsman Scheme (FOS) has been incorporated with the approval of the BNM that operates pursuant to the Financial Services Act 2013 and Islamic Financial Services Act 2013. It has been providing its services since 2016. According to FOS, its mandate is to resolve

71 KH Lee ‘Mediation Act 2012: Not so bad After All’ The Sunday Daily, (7 January 2013) http://www.malaysianbar.org.my (accessed 28 July 2019).


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disputes between financial consumers and financial service providers in an independent, fair and timely manner. It is claimed to be unbiased and impartial in resolving disputes and makes decisions based on relevant facts or evidence and circumstances of each dispute. Furthermore, it declares its vision as, ‘To be the trusted and well-respected independent dispute resolution avenue for financial consumers’.73 Consumers may refer any eligible complaints regarding the following sectors:74

(1) Licensed Commercial and Islamic Banks;

(2) Licensed Insurers and Takaful Operators;

(3) Prescribed Development Financial Institutions;

(4) Approved Designated Payment Instrument Issuers and Designated Islamic Payment Instrument Issuers;

(5) Approved Insurance and Takaful Brokers and

(6) Approved Financial Advisers and Islamic Financial Advisers.

Their services are also confidential and professional. The Client Charter of the FOS declares:

No person including the member of the Board, Chief Executive Officer, Ombudsman, Case Manager, officer and employee of OFS shall disclose any data, document or information relating to a dispute to any person except with prior consent from you and our Member or if required to or permitted to do so under any applicable laws, regulations or by any court.75

So, it is clear that the Ombudsman service is also utilised for providing ADR for Islamic banking and financial disputes.

73 Ombudsman for Financial Services ‘Company Overview’ at http://www.ofs.org.my (accessed 28 July 2019).

74 Ombudsman for Financial Services ‘Our Members’ at http://www.ofs.org.my (accessed 28 July 2019).

75 Ombudsman for Financial Services ‘Client Charter’ at http://www.ofs.org.my (accessed 28 July 2019).

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Ombudsman In Islamic Banking And Finance Disputes

It strives to resolve issues by processing a complaint within seven working days. Endeavours are made to resolve disputes within 3-6 months. If a dispute does not fall within the scope of the Ombudsman, it would help refer it to the relevant agency for resolution. More importantly, confidentiality is protected. The following table illustrates the period of time taken for resolving disputes.76

Turnaround time for outstanding cases on Islamic banking and finance (2018)

Sector Islamic Banking Takaful

Less than 1 month 03 26

1-2 months 04 6

2-3 months 0 2

3-4 months 1 5

4-6 months 1 8

6-9 months 1 1

9-12 months 0 0

More than 12 months 0 1

Source: OFS Annual Report 2018 p. 49

76 Ibid.

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Scope Of Ombudsman

The OFS has some criterion to accept disputes from financial consumers and the decision will be dealt with the member organisations only — amounted to 202 as at 31 December 2018.77

OFS Monetary Jurisdiction

Type of Dispute Maximum Amount (Per dispute)

Banking and Islamic banking products and services/Insurance and Takaful claims

RM 250,000

Motor Third Party property damage insurance/Takaful

RM 10,000

Unauthorised transactions through the use of designated payment instruments or a payment channel such as internet banking, mobile banking or automated teller machine (ATM), or unauthorised use of a cheque

RM 25,000

Source: OFS Annual Report 2018 p. 33

Similarly, the following Islamic banks and Takaful operators have obtained the OFS membership and agreed to resolve disputes through OFS by way of ADR.78

77 Ombudsman for Financial Services ‘OFS Annual Report 2018’ p. 30 at http://www.ofs.org.my (accessed 28 July 2019).

78 Ibid p. 89.

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No. Islamic Banks Takaful Operators

1 Affin Islamic Bank Berhad AIA PUBLIC Takaful Berhad

2 Alkhair International Islamic Bank Berhad

AmMetLife Takaful Berhad

3 Al Rajhi Banking & Investment Corporation (Malaysia) Berhad

Etiqa Family Takaful Berhad (formerly known as Etiqa Takaful Berhad)

4 Alliance Islamic Bank Berhad Etiqa General Takaful Berhad

5 AmBank Islamic Berhad FWD Takaful Berhad

6 Bank Islam Malaysia Berhad Great Eastern Takaful Berhad

7 Bank Muamalat Malaysia Berhad Hong Leong MSIG Takaful Berhad

8 CIMB Islamic Bank Berhad Prudential BSN Takaful Berhad

9 Hong Leong Islamic Bank Berhad

Sun Life Malaysia Takaful Berhad

10 HSBC Amanah Malaysia Berhad Syarikat Takaful Malaysia Am Berhad

11 Kuwait Finance House (Malaysia) Berhad

Syarikat Takaful Malaysia Keluarga Berhad (formerly known as Syarikat Takaful Malaysia Berhad)

12 Maybank Islamic Berhad Takaful Ikhlas Family Berhad (formerly known as Takaful Ikhlas Berhad)

13 MBSB Bank Berhad (formerly known as Asian Finance Bank Berhad)

Takaful Ikhlas General Berhad

14 OCBC Al-Amin Bank Berhad Zurich Takaful Malaysia Berhad

15 PT Bank Muamalat Indonesia, Tbk

Zurich General Takaful Malaysia Berhad

16 Public Islamic Bank Berhad

17 RHB Islamic Bank Berhad

18 Standard Chartered Saadiq Berhad

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Ombudsman: A Case Study

The following case study indicates how a dispute has been resolved by way of Ombudsman. Real names are omitted due to confidentiality.

Case 1: ATM – Alleged Unauthorised Withdrawal

Background: ‘the complainant alleged that money was withdrawn from his account at Bank C’s ATM without his knowledge. The complainant contended that the ATM card was in his possession and he did not record the PIN for reference. He has viewed the CCTV footage and he does not know the person who had used his card at the ATM to perform the unauthorised withdrawals from his account’.

Investigation and findings: ‘the following evidence was exposed during the mediation session held to hear the dispute between the complainant and Bank C:

(1) The complainant was requested to key in his PIN on the bank’s keypad at the customer service area when he opened his account. The disputed ATM withdrawal occurred on the same day, around 5pm.

(2) The CCTV footage offered by the Bank C revealed that the complainant’s colleague was standing beside him and had witnessed him keying the PIN. It is highly likely the complainant’s PIN was conceded during this time.

(3) The CCTV recordings at the time of the account opening at the bank exposed that the bank’s staff at the customer service counter had furnished the complainant’s ATM card to the complainant’s colleague whilst the complainant was at the ATM at the material time. OFS underlined to Bank C that the bank owed a duty of care to its customer to ensure that the ATM card that is as good as cash must be given only to the rightful owner, i.e. the cardholder.

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(4) The complainant’s colleague was seen handing a card to the complainant when he returned to the counter. However, it is difficult to establish whether the ATM card given to the complainant belonged to him. On this, Bank C was unable to confirm based on the CCTV recordings as to whether the complainant was given the genuine card bearing his card number and not any other card. OFS highlighted to Bank C that the complainant’s colleague could have switched the card thereby deceiving him into believing that the ATM card was in his possession during the occurrence of the disputed withdrawals’.

OFS’s view: ‘Based on the CCTV recordings, OFS held that Bank C had facilitated the fraud by the third party. Thus, Bank C’s contention that the transaction was successfully executed with a valid chip-based ATM card and PIN does not apply’.

Settlement: ‘Based on the findings and the circumstances that led to the loss of money from the complainant’s account, OFS requested Bank C to review the findings and work towards an amicable settlement with the complainant. The complainant also accepted Bank C’s settlement offer’.79

Case 2: ATM – Non-Dispensation of Cash

Background: ‘Mr G maintains a savings account with Bank H and was issued with a debit card. Mr G withdrew the sum of RM1,500.00 from Bank H’s ATM located at a supermarket on 2/8/2017. Mr G contended that he had waited for some time for the cash to be dispensed at the ATM. However, the cash and the transaction slip were not dispensed by the ATM. He did not hear the sound of the cash being counted by the said ATM. He discovered that the sum had been deducted from his savings account when he made a subsequent withdrawal at the next ATM’.

79 Ombudsman for Financial Services ‘Publications: Case Studies’ at http://www.ofs.org.my (accessed 28 July 2019) (accessed 28 Jul 2019).

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Investigation and findings: ‘Bank H’s ATM Electronic Journal revealed that Mr G’s withdrawal was successfully executed and 30 pieces of RM50.00 notes totalling RM1,500.00 was dispensed by the said ATM. In accordance with the records of the ATM Journal, Host Report and Engineer’s Report, the ATM was functioning smoothly and there were no irregularities or cash retraction during the Mr. G’s withdrawal. Bank H’s ATMs are equipped with retraction function whereby the dispensed cash will be retracted into the machines if it is not taken within 30 seconds. The cash balancing records revealed that there were no discrepancies or cash excess at the said ATM. From the ATM Electronic Journal record, it is detected that numerous customers had negated their transactions before and after the disputed withdrawal. Bank H’s investigation and ATM records disclosed that some of the cancellations were due to the unavailability of the denominations requested. However, Bank H was unable to clarify the reasons for the rest of the cancelled transactions. It is also perceived that Bank H’s CCTV was not deliberately placed and it did not capture a clear image of the complainant performing the transaction. The CCTV recording was essential evidence to decide what had transpired during Mr. G’s transaction at the ATM and to recognise the person who had probably collected the dispensed cash. The Guideline on Provisions of Electronic Banking (e-banking) Services by Financial Institutions issued by BNM recommends that banks ought to install close circuit camera or transactions triggered camera at strategic locations with sufficient lighting so as to capture clear images of a person performing a transaction and the retention period on the recorded information must be established’.

Settlement: ‘Based on the Case Manager’s observations, the dispute was settled amicably between the parties.’80

80 Ibid.

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Conclusion

In a nutshell, arbitration is becoming an important ADR mechanism in many countries and even for Islamic banking and finance disputes. Since Islamic finance is based on the principles of the Islamic Syariah, it is imperative to adopt a system that suits the industry with regard to the issue of dispute resolution. In this sense, the arbitration laws of many countries enable the disputing parties to choose Syariah as a governing law of the arbitration process. In the same vein, mediation is also one of the great ADR mechanisms for resolving Islamic banking and finance disputes as it is more independent and convenient as parties themselves resolve their differences with the help of a mediator who facilitates the process towards a successful and amicable solution. In many countries, including Malaysia, mediation laws are available for governing this process and resolving disputes outside the courts. In addition, the ombudsman system is also becoming an ideal form of ADR mechanism among Islamic financial institutions and a good example is Malaysia. Finally, the notable problem with regard to ADR is the lack of awareness among financial consumers and service providers which may incline towards litigation for resolving disputes. However, courts are firm in their position by encouraging the parties to disputes to find the ADR mechanism at the beginning or even during the litigation process for resolving their issues amicably while preserving their reputation and business relationship.

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