Islamic commercial arbitration and private international law: mapping controversies and exploring pathways towards greater coordination

The global expansion of the Islamic financial industry is evident in its geographical reach and the increasing variety of Shari'ah-compliant institutions and products. Islamic commercial arbitration has emerged as a key dispute resolution mechanism for Shari'ah-compliant transactions. This article defines arbitration as a procedure where parties agree to have a third party (arbitral tribunal) settle their disputes, differentiating between domestic and international arbitration. While Arab cultures traditionally favor informal dispute resolution, Islamic commercial arbitration addresses the need for formal dispute resolution within the Shari'ah-compliant economy, including for smaller institutions like Sharia Micro Financing Institutions (SMFIs). The increasing transnational reach of Islamic commercial transactions, particularly with international Islamic banks, raises critical questions of private international law: What law applies to international commercial disputes subject to Shari'ah compliance? What is the role of ‘public order’? Are Shari'ah-compliant arbitral awards internationally enforceable? This paper investigates whether Shari'ah compliance and private international law rules must be mutually incompatible.

The authors review existing literature on Islamic arbitration, highlighting its basis in the Quran and Sunnah, and its acknowledgment by juristic consensus (ijma). They discuss the conditions for Shari'ah-compliant arbitral awards, differentiating them from those prescribed by applicable private international law rules. The concept of “positive law” is clarified as the set of rules regulating relations within a society, including state-enacted legal provisions. The Islamic Fiqh Council's clarification that arbitration between Muslims must conform to Shari'ah law is highlighted. The literature also explores the differences between capitalist and Islamic economies, particularly concerning the regulation of economic transactions and the ex post scrutiny of transactions by Islamic arbitral tribunals. Additional procedural conditions based on Shari'ah are examined, such as the requirement for Muslim arbitrators and the potential complexities related to the acceptability of women arbitrators. The challenges of ensuring Shari'ah compliance in jurisdictions where Shari'ah is not part of the legal hierarchy are also discussed, along with the concept of 'public order' in private international law and its application to the context of Islamic commercial arbitration.

This article employs a qualitative methodology common in legal analysis. This methodology involves three main steps: (1) Desk-based research comparing legal texts and doctrinal opinions based on Shari'ah law applicable to commercial arbitration with the rules and principles of private international law across various jurisdictions. This comparison involves detailed examination of the legal texts and doctrinal opinions that have roots in Shari’ah law concerning commercial arbitration, juxtaposing this with the rules and principles of private international law that are common to many jurisdictions. (2) Exploration of the implications of different formulations by analyzing ‘limit cases’ where different wordings result in incompatible solutions. This step investigates actual and possible ‘limit cases’ where different legal interpretations would lead to contradictory resolutions of disputes. (3) Development of proposals to resolve the identified incompatibilities. This aspect suggests specific ways to harmonize private international law and Shari’ah compliance through, for example, a broadened definition of ‘public order’ that incorporates Shari’ah principles. The methodology focuses on identifying and analyzing points of conflict and proposing solutions to enhance coordination between Islamic commercial arbitration and private international law.

The study reveals key disparities between Shari'ah-compliant commercial arbitration and private international law rules. One major area of discrepancy is the applicable law. Shari'ah compliance necessitates disregarding foreign positive law rules that conflict with the Shari'ah, even if those rules are chosen by the parties in the arbitration agreement. This is particularly relevant in areas like asset disposal, where capitalist economies prioritize unrestricted freedom compared to the Shari'ah-guided restrictions in the Islamic economy. The requirement that arbitrators be Muslim is another significant difference, potentially creating challenges for international enforcement. The paper also analyzes the potential for a notion of ‘Islamic economic public order’ within private international law. This could provide a mechanism for safeguarding the integrity of Shari'ah-compliant awards by allowing national judges to refuse enforcement of awards that violate Shari'ah principles. However, the authors acknowledge that the acceptance of such a concept by Western courts is unlikely. The study further examines existing international conventions and model rules as potential tools for enhancing coordination. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards is discussed, along with its limitations in overriding national public order concerns. The Saudi Arbitration Law of 2012, which attempts to combine Shari'ah law with UNCITRAL Arbitration Rules, is also analyzed as an example of an attempt at convergence. The study also explores the role of model rules issued by international bodies like the ICC and UNCITRAL as a potential means of incorporating Shari'ah principles into international commercial arbitration practices. The authors highlight the diversity of Islamic jurisprudence as a challenge to the consistent enforcement of Shari'ah-compliant awards, and suggest the need for a body to address doctrinal differences. The authors also note the language barrier with Arabic being used for many arbitration awards, possibly causing problems in foreign jurisdictions.

The findings highlight the significant challenges in harmonizing Shari'ah compliance with private international law in Islamic commercial arbitration. The lack of coordination creates legal uncertainty and potential for inconsistent outcomes in cross-border disputes. The proposed notion of ‘Islamic economic public order’ offers a potential pathway to greater recognition and enforcement of Shari'ah-compliant awards, but its feasibility depends on its acceptance by different legal systems. The authors suggest that multilateral or bilateral international conventions or uniform model rules specific to Islamic commercial arbitration could provide a more robust and universally acceptable framework. These tools could standardize procedures, address the issue of applicable law, and clarify the role of Shari'ah compliance in the context of public order. The diversity of interpretations within Islamic jurisprudence remains a considerable hurdle, highlighting the need for internal harmonization efforts within Islamic law to facilitate greater integration with international legal frameworks.

This article identifies significant gaps between Islamic commercial arbitration and private international law. The authors propose several solutions to foster greater coordination: multilateral or bilateral international conventions, establishing uniform model rules for Islamic commercial arbitration, and addressing internal inconsistencies within Islamic jurisprudence. The adoption of these solutions could reduce uncertainty and improve the enforceability of Shari'ah-compliant awards in international settings. Further research could explore the development of these proposed models and analyze their effectiveness in practice.

The study's primary limitation is its reliance on desk-based research. Empirical data on the practical application of Islamic commercial arbitration and the enforcement of awards in various jurisdictions is limited. Future research should consider empirical studies to assess the effectiveness of proposed solutions and the actual challenges faced in practice. The study does not address every nuance of Islamic jurisprudence, given its complexity and variation across schools of thought.