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Need for standardised dispute resolution contracts
Case analysis of Bank Islam Malaysia Berhard v Azhar Osman & Other Cases
August 10, 2015: In Bank Islam Malaysia Bhd v Azhar Osman & Other Cases  5 CLJ 54  1 LNS 251, a Malaysian court ruled that in relation to ibra or rebate for an early settlement of a financing facility, the court may infer an implied term from evidence and from commercial business practice that the parties to a contract intended to include the rebate in the contract (ISRA 2012:752). The term ibra literally means removal and acquittal from something. In Islamic jurisprudence, the term refers to one party dropping another’s liability towards him (i.e. dropping the debtor’s liability for a debt) (Zuhayli 2007: 237).
Zuhayli (2007:237) states that most jurists agree that absolution of debts is legally recommended. Zuhayli explains that this was the stated opinion of Al-Khatib Al-Shirbini, who said that the rulings for absolution were much more lax than those for guarantee because of the charitable nature of the former, as evidenced by the dropping of the creditor’s right. The charitable nature of the contract is manifest regardless of whether or not the debtor is in a financial bind, as the verse states, ‘If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew’ [Qu’ran 2:280] (Zuhayli 2007: 238).
Bai Bithaman Ajil (“BBA”) is an agreement whereby a bank buys an asset or property and sells the said asset or property to a customer at an agreed defined price, which the customer has to pay on a deferred basis or by periodic instalments. The sale will include a profit margin (Thani, Abdullah, Hasan 2003:38). The common perception is that this is simply a straightforward charging of interest disguised as a sale. However, nothing in Islamic law dictates how the price for such a sale is determined: it is simply determined by what the parties have agreed upon. Therefore, nothing prevents the seller from linking the sale price to the period of time for which credit is extended (Thani, Abdullah, Hasan 2003:39).
It was unsuccessfully contended on behalf of the plaintiff that in a BBA contract, the bank had a legal right to claim for the full sale price as stipulated in the property sale agreement (“PSA”), regardless of a premature termination. Counsel for the plaintiff argued firstly that the defendant had agreed to the amount of sale price and was under a legal obligation to pay the full sale price. This argument was premised on the underlying presumption that a BBA contract is a sale transaction and not a loan transaction.
Counsel for the plaintiff argued that since it is a sale agreement, the sale price does not change. Secondly, the plaintiff argued that the court was bound by the decision of the Court of Appeal in Lim Kok Hoe, which upheld and acknowledged the obligation to pay the full sale price under the PSA.
The judge disagreed that the court was bound by the decision in Lim Kok Hoe. The judge explained, ‘Whilst it is true that the Court of Appeal in Lim Kok Hoe held that a BBA contract differs in a way from conventional banking because it is a sale transaction, it cannot, however, be regarded as a sale transaction simpliciter.’ The judge elaborated ‘the BBA contract is secured by a charge and concession as ibra is given as a matter of practice to all premature terminations.’ The judge stated, ‘Further, it is not a simple sale because even if the bank does not make payment of the full purchase price under BBA, the bank would still be entitled to claim the amount already paid.’ The judge said, ‘Whereas in a simple sale, if the first leg of the transaction fails, the bank’s right to the amount paid will not ipso facto accrue since the sale was never completed.’ The judge questioned, ‘Why a bank should insist on payment of the full sale price and thereafter as a matter of practice grant a rebate to the customer simply to show that it is a sale transaction may have its purpose, but to place the customer in such a precarious position is quite something else, particularly when such grant is at the bank’s absolute discretion.’
The judge asserted, ‘From the practice of the bank, it is clear that the insistence on enforcing payment of the full sale price appears to be merely an attempt to adhere to written text, but I doubt if such appearance achieve its purpose.’ The judge based her reasoning on commercial business practice and explained, “This is because, despite the written term of the agreement, the bank in reality does not enforce payment of the full sale price upon a premature termination. It always grants rebate or ibra based on unearned profit.”
The judge further stated that granting an order for the full sale price in an order for sale application would defeat the requirements of s. 266(1) of the NLC, which is designed to protect the charger, whose property is about to be sold at an auction (ISRA 2012: 752). The judge ruled that, “The bank should not be allowed to enrich itself with an amount, which is not due while at the same time taking cognizance of the customer’s right to redeem his property.” Therefore, where the BBA contract is silent on the issue of rebate or the quantum of the rebate, by implied term, commercial business practice, and compliance with Malaysian law, the judge held that “the bank must grant a rebate and such rebate shall be the amount of unearned profit as practiced by Islamic banks.”
The judge pointed out in this case, “The legal documentation used by Islamic banks should have addressed the peculiarity of the Islamic banking transaction, instead of adopting a cut and paste approach of the conventional banking documents” as this would have made her job of Islamic finance dispute adjudication easier. Therefore, not only is it necessary to have standardised dispute resolution contracts, but all Islamic finance contracts should be issued in a standardised format by the International Islamic Financial Market or (“IIFM”).
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