Landmark ruling on Shari’a compliant contracts
DUBAI 31 May 2020: A recent judgment by the Dubai Court of Cassation has concluded that for a contract to be Shari’a compliant, an Islamic bank or financial institution is required to do more than just to name that contract as a Murabaha contract (Cassation Appeals Nos. 898-927/2019).
A Murabaha is a contract in which a seller sells an asset to a purchaser at a cost plus a profit mark-up; both costs and profit mark up must be known to buyer and purchaser. The Murabaha contract in this case was in relation to a sale of goods but at the end of the day it is an Islamic mode of financing companies that follows the principle of Islamic Shari’a.
The Court of Cassation ruled that a Murabaha contract has to meet certain objective criteria to be considered as Shari’a compliant. These criteria are subject to review by the court and, if these are not satisfied (in part or in whole), the contract may be deemed null and void by the court, according to Mazen Boustany, Partner and Head of Financial Regulatory at Baker McKenzie Habib Al Mulla law firm.
He said the court considered there must be three elements for a valid Murabaha contract:
- Ownership and retention of the goods before selling them
- No warranty for the deterioration or the destruction of the goods
- The contract is only valid after the Islamic Financial Institution takes ownership of the goods
Boustany pointed out that the case in question did not fail the Murabaha criteria; however the Court of Cassation set aside the court of appeal judgment because the court of appeal brushed aside the appellants arguments and demands while it should have considered them thoroughly before rejecting them. It has also defined what constitutes a Murabaha contract as mentioned above.
The parties involved were an Islamic Financial Institution (IFI) and a company.