On 10 April 2019, the Federal Court assembled its nine-member panel and came to a narrow 5-4 majority decision which held that the Civil Courts is bound by Bank Negara Malaysia’s Shariah Advisory Council’s (“SAC”) findings in relation to disputes and/or matters regarding Islamic finance and its businesses.
As illustrated in the case of JRI Resources Sdn Bhd v Kuwait Finance House (Malaysia) Berhad  MLJU 275, the issue that was discussed by the Federal Court was inter alia whether Sections 56 and 57 of the Central Bank of Malaysia Act 2009 (“CBA”) are constitutional as the provisions require the courts to refer any Shariah matters that may arise in any proceedings in relation to Islamic finance to the SAC for its rulings and said rulings shall be binding on the court.
As a general rule, Section 56 of the CBA requires the court to take into consideration any published SAC ruling or to refer a question on Islamic law to the SAC in any proceedings relating to Islamic financial businesses. Section 57 of the CBA provides that any ruling made by the SAC shall be binding on the Islamic financial institutions and the court.
In the above mentioned case, Kuwait Finance House (Malaysia) Berhad (“KFH”) took action in the High Court against JRI Resources Sdn Bhd (“JRIR”) for defaulting payments on their Ijarah Facilities and a Murabahah Tawarruq Facility (collectively referred as “Islamic Facilities”) which was provided by KFH to JRIR involving the lease financing of several vessels by KFH. The High Court then granted a summary judgment in favour of KFH which JRIR then appealed to the Court of Appeal. JRIR stated, inter alia, that the High Court did not seek a ruling from the SAC whether Clause 2.8 of the Ijarah agreements pursuant to the Ijarah Facilities which states that JRIR shall undertake all of the major maintenance of the vessels and bear all the costs in carrying out the same; was Shariah compliant as per Section 56 of the CBA.
The appeal by JRIR was allowed by the Court of Appeal and the said matter was then referred to the SAC. The SAC ruled that the said clause in the Ijarah agreements were Shariah compliant. JRIR then proceeded further to the Apex Court for an application to determine whether Section 56 and 57 of the CBA contravenes Article 121 the Federal Constitution which vests judicial power over civil matters in the High Court.
The dissenting justices included Chief Justice Tan Sri Richard Malanjum and three others. Justice Malanjum ruled Section 57 as unconstitutional as the provision can be interpreted as removing judicial power from the judiciary branch of the government. His judgment included the fact that the ruling is binding on the court and the ascertainment becomes an integral and inextricable part of the judicial process of determining rights and liabilities of the parties in dispute. The dissenting judgment also included that the central issue in the case has been disposed of by virtue of the SAC ruling and since it is binding on the court, it is not open to determine the question of law or consider expert evidence on the issue and as such, the court was unable to reach any other possible outcome on the issue.
He further added that in substance, the rights and obligations of the parties in dispute have been effectively been determined by virtue of the SAC ruling. This substantive effect is not annulled by the declaration in the SAC’s ruling and in the manual issued by Bank Negara Malaysia, being that the function of the SAC is merely to state the Hukum Syarak. Justice Malanjum also stated that in light of this, the task of adjudication has been removed and assigned to the SAC, therefore the impugned provision must be struck down as unconstitutional and void.
However, the majority of the justices led by Justice Mohd Zawawi decided that both provisions of the CBA mentioned were indeed consistent and does not contravene the Federal Constitution since the SAC itself cannot enforce its own rulings and the judicial power still remains and shall be forwarded to the court. The court stated that giving of a binding and authoritative decision does not itself indicate judicial power as the decision must be enforceable by the decision making body itself.
It was further stated that under Sections 56 and 57 of the CBA, the ascertainment of Islamic law by the SAC occurs in the context of an ongoing judicial proceeding before the court and the purpose is for the SAC to make a ruling on a Shariah matter which arose from proceedings relating to Islamic financial business. The court also mentioned that the SAC’s function is merely one of ascertainment and does not exhibit any core feature of judicial power. Justice Zawawi further added that the rulings passed by the SAC constitute a form of expert opinion in the matter of Islamic finance as the members are highly qualified in the fields of Shariah, economics, banking, law and finance which ultimately can be regarded as a collective ijtihad to provide consistency and conformity.
Even though the majority of the court upheld the validity of Section 56 and 57 of the CBA, the strong points and views of the minority will fuel many discussions on this issue for many years to come.
The judgment rendered by the Federal Court in this matter is available from the website of the Office of the Chief Registrar of the Federal Court of Malaysia, www.kehakiman.gov.my.
SYED MOHAMMAD DILNAWAZ, Associate of Naqiz & Partners