Findings on Islamic finance binding on civil courts, rules Federal Court

The Federal Court says the function of BNM’s Shariah Advisory Council does not encroach the powers of the judiciary.

PUTRAJAYA: In a 5-4 ruling today, the Federal Court held that the findings on Islamic finance by Bank Negara Malaysia’s Shariah Advisory Council (SAC) are binding on the civil courts.

It also ruled that SAC’s function did not encroach the powers of the judiciary or violate the doctrine of separation of powers.

Judges Ahmad Maarop, who is also the Court of Appeal president, Azahar Mohamed, Ramly Ali, Alizatul Khir Osman Khairuddin and Mohd Zawawi Salleh were in the majority.

However, the minority – led by Chief Justice Richard Malanjum, Chief Judge of Malaya Zaharah Ibrahim, Chief Judge of Sabah and Sarawak David Wong Dak Wah and Idrus Harun – held that the binding nature of any SAC ruling was unconstitutional because it usurped the powers of the judiciary.

The SAC was set up under the Central Bank of Malaysia Act (CBMA) to ascertain whether Islamic finance business was shariah-compliant.

Delivering his judgment, Zawawi said Section 57 of the CBMA was constitutional as the SAC’s ruling pursuant to the provision was not determinative but merely ascertainment.

“The SAC merely ascertains Islamic law but it is the courts that determine the rights and liabilities of parties,” he said.

Azahar said SAC’s function was lawful as Parliament could delegate its power to any branch of the executive.

“The delegation of power to SAC is not an intrusion and violation of judicial power,” he said.

Alizatul said the civil court had no jurisdiction to determine shariah laws and the question of encroachment did not arise.

However, Wong said Section 57 took away the powers of the judiciary and gave them to SAC, a non-legal entity which was not provided in the constitution.

He said the civil court had jurisdiction to determine whether a dispute fell under shariah law or otherwise.

Malanjum said separation of power and judicial independence were vital to act as an effective check and balance on the executive and legislature.

“It is a complete mockery if Parliament delegates judicial power to a branch of the executive,” he said, adding that Section 57 was unconstitutional and must be struck down.

This case came to the apex court last year by way of a constitutional reference following a dispute in five commercial agreements between Kuwait Finance House (Malaysia) Berhad (KFH) and a shipping company, JRI Resources Sdn Bhd, and three guarantors.

KFH brought a claim against JRI and the guarantors for alleged failure to make RM120 million payment under Islamic banking facilities, namely Ijarah facilities and asset purchase agreements.

JRI generated its revenue through charter-parties from the various vessels it operated.

Beneficial ownership of these vessels was vested with KFH under the Islamic banking agreements.

A dispute arose as to who ought to have been responsible for the payment of major maintenance work of the vessels as certain clauses of the agreements require KFH to be responsible for major maintenance works whereas other clauses provide that JRI be responsible for all maintenance work.

This became an issue because JRI was bearing all the maintenance cost and was therefore unable to service the loan repayment.

The High Court referred these conflicting clauses in the agreements to the SAC to determine whether these were shariah-compliant.

The SAC ruled the agreements were valid and shariah-compliant.

A question then arose if SAC’s ruling under Section 57 of CBMA was binding on the High Court.

JRI took the position that the SAC ruling was not binding on the High Court as judicial powers were vested only with the judiciary.

Lawyer Gopal Sri Ram said the majority ruling was worrying as it attempted to water down two previous apex court ruling on judicial powers.

“Alizatul’s judgment is troubling because where a shariah issue arises, the civil court has no jurisdiction,” said Sri Ram, who was present to follow the proceedings.

Lawyer Malik Imtiaz Sarwar, who appeared for JRI, said the views of the majority and minority showed that the issue was not clear-cut.

“Though the majority of the court upheld the validity of the provision, the strong view of the minority is reason enough for the attorney-general and the government to consider whether the legislative framework should be amended,” he said.