Constitutionality of Bank Negara Malaysia’s Shariah Council’s Rulings on issues affecting Islamic financial transactions

The Edge Court Judgement Report (20.9.2019)

ISLAMIC BANKING AND DISPUTE RESOLUTION

CONSTITUTIONALITY of Bank Negara’s Shariah Council’s Rulings on issues affecting Islamic financial transactions

Sections 56 and 57 of the Central Bank of Malaysia Act 2009 (‘BNM Act’) require the Court and an arbitrator to refer a Shariah issue which has arisen in legal proceedings relating to Islamic financial business to the Shariah Advisory Council (‘SAC’) of Bank Negara Malaysia (‘BNM’) for a ruling. The ruling of the SAC is binding on the Court and the arbitrator.

Issue

The fundamental issue is whether Sections 56 and 57 of the BNM Act are unconstitutional for taking away the power of the judiciary to deliberate and decide on an issue in a dispute in Court by vesting the resolution of that issue with the SAC. This question confronted the Federal Court in JRI Resources Sdn Bhd v Kuwait Finance House Bhd. The serious importance raised by this issue in financial transactions based on Islamic principles inspired the Federal Court, for the first time in history, to convene a nine-judge panel, to deliberate upon the issue. Apart from the original parties involved in the litigation, BNM and the Association of Islamic Banking Institution of Malaysia (‘AIBIM’) intervened and actively participated in this case. BNM, AIBIM and the respondent, Kuwait Finance House Bhd (‘KFH’) defended the constitutionality of the statutory provisions.

Summary sketch of the facts

KFH had provided JRI Resources Sdn Bhd (‘JRI’) with an Islamic financing facility under the principle of ijarah (leasing) to fund the acquisition of vessels. In essence, KFH purchased the vessels from a third party at the request of JRI and KHF became the owner of the vessels. The vessels were then leased to JRI. Subsequently, KFH sued JRI in Court for outstanding lease payments.

JRI’s defence was that the vessels had failed to generate income due to KFH’s failure to carry out major maintenance works on the vessels. This, JRI claimed, was the responsibility of KFH as the owner of the vessels. KFH, on the other hand, claimed that pursuant to a clause in the Ijarah Facility Agreement (‘Relevant Clause’), it was JRI’s responsibility to undertake all major maintenance works in respect of the vessels. JRI argued that the Relevant Clause was against Islamic law and appointed a Shariah scholar, Dr. Azman Mohd Noor, to act as an expert witness in the Court proceedings. Dr. Azman’s expert opinion was that the Relevant Clause was not in compliance with Islamic law. KFH also provided expert evidence through its Shariah scholar, Dr. Aznan Hasan. Dr. Aznan agreed that the Relevant Clause was non-compliant with Islamic law but took the view that the non-compliance was immaterial and did not result in any invalidity. A Shariah question on the validity of the Relevant Clause from the Shariah perspective was therefore raised in the proceedings. The High Court referred the issue to the SAC under Sections 56 and 57 of the BNM Act. The SAC ruled in favour of KFH. The ruling was thus binding on the High Court, which then scheduled the case for trial.

Before the trial started, JRI applied to refer to the Federal Court for a determination on the constitutionality of Sections 56 and 57 under which the SAC had given its ruling. The nine-judge panel of the Federal Court was sharply divided in its decision with a five to four majority in favour of the constitutionality of the provisions.

Decision of the majority

The leading judgment of the majority was written by Justice Mohd Zawawi Salleh (Azahar Mohamed, Ahmad Maarop, Ramly Ali and Alizatul Khair Osman Khairuddin FCJJ concurring).

Justice Mohd Zawawi Salleh referred to Section 52 of the BNM Act, which sets out the functions of the SAC, one of which is to ‘ascertain the Islamic law on any financial matter and issue a ruling upon a reference made to it’. Accordingly, the learned Judge held that the SAC only ascertains the Shariah rules that may be in dispute between the parties and the SAC does not determine the ultimate outcome of the litigation and which rests with the Court. As such, the exercise by SAC of its power under ss 56 and 57, including the binding effect of its ruling on the Court, does not involve an exercise of judicial power and does not usurp any power of the judiciary.

Justice Azahar Mohamed (now, CJM) agreed, holding that the ascertainment of Islamic laws are a function or power delegated to the judicial branch and the SAC. In the words of the learned Judge, ‘the impugned provisions could not and did not trespass or intrude onto the judicial power; the provisions did not violate the doctrine of separation of powers’. The majority also justified the impugned provisions by drawing a comparison to the mandatory sentencing regime of the criminal law where it is the Parliament, not the Court, that fixes the punishment on a convicted person. Similarly, it was therefore proper for the Parliament to vest the function of ascertaining Islamic law in respect of Islamic banking to the SAC, which arguably is part of the executive, whose decision is binding on the Court.

Critically, the majority drew attention to the diverse opinions amongst Shariah scholars on any particular Shariah issue which had led to uncertainty in the Islamic finance industry. In disputes brought to Court, there had been several decisions where the Judges on one hand had disregarded the Shariah issues and on the other hand referred to the various sources of Islamic law on their own. Thus, it was important that measures be taken to promote consistent implementation of Shariah contractual principles. This is especially because members of the Judiciary are not trained in Shariah.

In upholding the legislation, Justice Zawawi held that the traditional notion of the principle of separation of powers that there are separate and distinct roles for the executive, the legislature and the judiciary has changed over time and that there are overlapping and blending of functions between the branches of the government to facilitate efficient operation of the government. Ultimately, the Federal Court, by a majority judgment, held that Sections 56 and 57 did not provide for the usurpation of the Court’s judicial function by the SAC.

‘… separation of powers of government has never existed in pure form except in political theory. In reality, there is an overlap and blending of functions, resulting in complementary activity by the different branches that makes absolute separation of powers impossible.’

Justice Zawawi Salleh

Decision of the minority

On the other hand,Richard Malanjum CJ (as he then was) wrote one of the dissenting judgments for the minority (David Wong, Zaharah Ibrahim and Idrus Harun FCJJ concurring).

The then CJ anchored his dissenting judgment on the principle of separation of powers between the executive branch of the Government and the Judiciary.

The then CJ accepted that there might be partial overlapping of functions. However, the overlaps have always been found between the legislative and the executive only. There is no overlapping with the Judiciary, which has ‘absolute independence’. Judicial powers cannot be conferred upon any other body which does not comply with the constitutional safeguards conferred upon the Judiciary.

Further, after accepting that judicial power is the power of the sovereign to decide controversies between subjects and between subjects and itself, it was nonetheless held that the resolution of questions of law arising from judicial proceedings is an exercise of judicial power. This, the then CJ observed, is an aspect of adjudication, not ascertainment of principles. The other aspect of adjudication is the resolution of rights and liabilities of parties in dispute.

In context, Sections 56 and 57, the SAC’s functions intrude in the midst of ongoing judicial proceedings. The intrusions involve determinations affecting rights and liabilities of parties who are before the Court and are not mere general pronouncements on policies applicable for the future. The SAC’s ruling cannot be challenged with any contrary expert evidence, nor reviewed by the High Court nor overturn on appeal. Thus, the rulings of the SAC are not subject to any check and balance mechanism. In this context, it was held that it is immaterial whether the label ascribed to SAC’s function, as held by the majority, is one of ‘ascertainment’ rather than determination. The true nature of the functions can only be discovered upon consideration of the substance and actual effect of the provisions.

Justice Wong Dak Wah CJSS rejected the argument that the impugned provisions ‘do not vest any judicial power on the SAC’, relying particularly on Article 121 of the Federal Constitution that endows judicial power exclusively in the Civil Courts. Although the learned Judge expressed doubt that the test for judicial powers can be simplified into checklist of factors, nonetheless held that applying the three basic elements of ‘adjudication, finality and enforceability’ to test the inherent nature of judicial power, the impugned provisions are unconstituitional. Accordingly, once the SAC had ruled on the Relevant Clause, there is nothing left for decision.

‘… the partial overlap between functions is confined to the spheres of legislative and executive powers … the justification … is to promote efficiency of government … In contrast, questions of judicial power occupy apart under the constitution due to its special nature. The absolute independence of the judiciary is the bulwark of the constitution against encroachment whether by the legislature or by the executive…

Based … on a proper understanding of the principle of separation of powers, [there] are some … basic tenants in relation to judicial powers …(i) judicial power cannot be removed from the judiciary; (ii) … judicial power cannot be conferred upon any other body which does not comply with the constitutional safeguards to ensure its independence; (iii) non-judicial powers cannot be conferred by another branch of the government onto the judiciary …

The legislative purpose behind the enactment of Sections 56 and 57 of the Central Bank of Malaysia Act 2009 is a commendable one … However, good legislative intentions do not excuse a constitutional transgression.’

Richard Malanjum CJ (as he then was)