The Ex Officio Power of the Arbitrator to Raise New Issues of Law in Islamis Finance Disputes

• Author: Mohamed A. Hassan
• Position: American University in Cairo
• Pages: 477-540

e Indonesian Journal of International & Comparative Law

ISSN: 2338-7602; E-ISSN: 2338-770X

http://www.ijil.org

© 2020 e Institute for Migrant Rights Press

thE Ex offiCio PowEr of thE

arBitrator to raisE nEw issuEs of

law in islamiC finanCE disPutEs

Mohamed A. Hassan

American University in Cairo

Email: Mohamed-hassan@aucegypt.edu

e legal nature of arbitration varies from the legal nature of litigation. While

the judge derives his authority from the state power, the arbitrator derives his

powers, in the rst place, from the parties' agreement. e power of the court to

raise new issues of law ex ocio is widely recognized. When it comes to arbi-

tration, the matter is more complicated. e ex ocio power of the arbitrator to

raise new issues of law is controversial in international commercial arbitration.

e situation is even more complicated in contemporary Islamic nance disputes

due to the nature of the applicable law to the merits of such disputes. Sharīa,

which is the applicable law or a signicant part thereof, obliges the arbitrator to

apply the mandatory rules of Sharīa ex ocio regardless of the parties' claims.

Under Sharīa, the primacy is to its mandatory rules, contrary to international

arbitration which grants the primacy to party autonomy. is sometimes results

in a conict between the rules of Sharīa and the rules of international arbitra-

tion. is paper examines to what extent the arbitrator may raise new issues of

law ex ocio in Islamic nance disputes. e paper argues that the arbitrator

has a power, not a duty, to raise new issues of law ex ocio in Islamic nance

disputes; however, such a power is surrounded by considerable practical and

legal challenges which may impede it. In doing so, the paper compares the scope

of arbitrator's power between Islamic legal theory and international arbitration

theory. It also examines and analyzes the available case studies which deal with

the ex ocio power of the arbitrator to raise new issues of law in Islamic nance

disputes.

Keywords: Financial Law, Alternative Dispute Settlement, Islamic Law, Litigation.

VII Indonesian Journal of International & Comparative Law 477-540 (October 2020)

478

Hassan

INTRODUCTION

International commercial arbitration has its own features which are

far dierent from litigation. Party autonomy, as expressed in the ar-

bitration agreement, is the cornerstone of the arbitration institution.

Without such an agreement, the arbitration proceedings cannot be

legally instituted. ere is a controversy amongst arbitration scholars

with respect to the juridical nature of arbitration, which is reected

in their opinion concerning the scope of the arbitrator’s power. Some

scholars consider the functions of an arbitrator like the functions of a

judge sitting in the court. Other scholars acknowledge the particularity

of arbitration which is based on the consensual element and the arbi-

trator has only the powers conferred by the parties. Others embrace a

compromise between the two theories. is variation aects the scope

of arbitrator’s power in deciding a dispute.

Raising new issues of law ex ocio is frequently exercised by judges

siting in the courts. It means that the judge may go beyond the legal

submissions provided by the parties. In other words, the judge may on

his own initiative legally re-characterize a fact which parties characterize

dierently. e judge also may ex ocio invalidate some clauses of the

contract or reject some claims due to its contradiction to mandatory

rules. e justication for that power is based on the premise that the

judge knows the law or based on the protection of state’s interests. e

situation is more problematic in arbitration. ere is a huge controversy

as to the possibility of raising new issues of law by arbitrators on their

own motion. e arbitrators are chosen by the parties and the scope of

their power is determined by the parties’ agreement. While the judge

derives his power from the state, arbitrators derive their power from

the parties’ agreement including the applicable rules chosen by the

parties. Raising new issues of law is justied on justice and fairness

considerations or the non-convincing legal submissions provided by

the parties. at power may be undermined due to procedural and

practical challenges.

e matter is more complicated in Islamic nance disputes. In

Islamic nancial industry, the main legal concern is the compliance

with Islamic Sharīa as it is the cornerstone of Islamic nance existence.

e theorists of Islamic nance are Muslims who aim to replace the

479

e Ex Ocio Power of the Arbitrator in Islamic Financial Disputes

Hassan

conventional nancial system with Islamic one. Islamic nance

theorists recalled classical Islamic contracts as a basis of the new

nancial system. e main problem of Islamic nance is that there is

no well-established regulatory framework to govern Islamic nance

contracts. e absence of such a legal framework resulted in great

uncertainty and unpredictability which are embodied in the dierent

opinions held by Muslim scholars as to various legal matters in Islamic

nance such as the legality of certain Islamic nance contracts and the

validity of some clauses incorporated into other contracts. Raising new

issues of law is more risky in Islamic nance disputes than conventional

disputes, especially in light of the absence of a well-established

regulatory framework. e underlying rationale for raising new issues

of law in Islamic nance disputes is the mandatory application of

Sharīa. In other words, under Islamic legal theory, the arbitrator, like a

judge (qādī) is obliged to apply Sharīa, as the governing law in Islamic

nance disputes. e diculties arise due to three reasons: rst, the

arbitrators are deciding disputes in an international context not in an

Islamic one; second, the mandatory rules of Sharīa are not mandatory

rules of a dened national legal system; third, there are some practical

challenges arising such as the arbitrators’ knowledge of Sharīa in the

light of the absence of Sharīa codication. is thesis ultimately argues

that the arbitrators have a discretionary power to raise ex ocio new

issues of law in Islamic nance disputes. In doing so, the arbitrators

have to observe the due process requirements, honor their mandate

and narrow the scope of the mandatory rules of Sharīa to the denitive

rules.

Section one provides an overview of Islamic nance, its main

products and its regulatory problem. It explores the risk of non-Sharīa

compliance as a ground to invalidate Islamic nance contracts. It also

examines the underlying motive to resort to arbitration instead of

litigation. e main reason for that recourse is to ensure the compliance

with Shar īa rules. Section two explores the dierent theories as to the

juridical nature of arbitration and the impact of these theories on

the views of arbitration scholars as regards the scope of arbitrators’

powers. It explores the main determinants of the ex ocio power of

the arbitrator to raise new issues of law. Lastly, the main challenges

which may impede the exercise of the ex ocio power by arbitrators

are explored. Section three provides an overview of arbitration and