How Islamic Commercial Contracts Bring Islam into the International Investment Law?

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Уфимский университет науки и технологий, Уфа, Россия, ,

Introduction. According to the Organization of Islamic Cooperation, there are about 57 Islamic countries in the world today1. The relations of these states in the international community have shown that today, investors or economic operators of them are paying more attention to Islamic commercial contracts than ever before [1]. This has caused international investment law to connect with Islam today through Islamic commercial contracts [2], including financial and banking contracts. Islamic commercial contracts can be divided into five groups: 1. Contracts based on purchase and sale; 2. Contracts based on partnership; 3. Contracts based on lease; 4. Contracts based on payment; 5. Other contracts.

Muslim and non-Muslim investors use these contracts in an international investment process in an Islamic country due to the usefulness of Islamic commercial contracts in two ways: First, an Islamic commercial contract such as an Istisna contract is concluded as the main investment contract between the investor and the host country. Second, Islamic commercial contracts such as Tawarruq or Mudaraba are concluded in line with a main investment contract² 1 . The main point is that Islamic commercial contracts, whether concluded as a main contract or as a secondary contract in line with the main contract, ensure the presence of Sharia rules in the international investment process [3]. In this article, in order to answer the main question of how Islamic contracts introduce Sharia rules into international investment law, there are three hypotheses: 1. When international investors, both Muslim and non-Muslim, refer to Islamic commercial contracts for an international investment, they should conclude these contracts taking into account Sharia principles. 2. If international investors do not pay attention to the rules and principles of Sharia when concluding international commercial contracts, this can undoubtedly lead to international investment disputes. 3. Today, the Islamic world has established Islamic or Sharia councils to reduce future disputes in international economic relations, which can guide investors in concluding accurate commercial contracts based on Sharia principles.

In line with the questions and hypotheses raised, present article consists of five parts: The first part describes the types of Islamic commercial contracts that investors can use in the international investment process. The second part describes the principles of Sharia in two axes: prohibited and permitted ones, which international investors must apply to new Islamic contracts. The third part focuses on the role of Islamic councils in international investment. the fourth part states that if Sharia principles are not taken into account under Islamic contracts, international investment disputes can be raised in international arbitration centers. Finally, the fifth part concludes.

Types of Islamic commercial contracts. International investors can use Islamic commercial contracts within the international investment process in two ways: first, investors conclude Islamic contracts as the main investment contracts and second, sometimes they turn to Islamic investment contracts to advance the main investment contract, such as concluding an Islamic insurance contract (Takaful) with an Islamic insurer to guarantee international investment process [4]. The noteworthy point about Islamic contracts is that although Islamic contracts are based on a religious system, non-Muslim investors can also use this Islamic financial and commer- cial system [5]. In this section, I will divide these contracts in the following table (see, table 1).

Table 1

Types of Islamic commercial contracts in Investment process (Source: author’s investigation)

Principles of Shariah under international investment law. International investors should pay attention to the principles of Shariah when concluding Islamic commercial contracts, because Islamic contracts are based on the principles of Shariah [6]. Although these contracts have their own specificities and characteristics, in general, two basic principles are considered by Shariah for all these contracts: first, negative principles and second, positive principles [7]. Negative principles mean principles that international investors should not follow them in concluding Islamic contracts. If an Islamic contract is concluded without paying attention to the negative principles, it will undoubtedly create challenges for the investment process. Positive principles also mean principles that investors should follow in concluding an Islamic contract. I divide these principles in the following table (see, table 2).

Table 2

Common principles within Islamic commercial contracts (Source: author’s investigation)

Role of Islamic councils in international investment process . Today, Islamic councils play an important role in international economic relations. As I have stated, international investors must conclude Islamic contracts in accordance with the principles of Islamic law, but the point is that in many cases these investors have little or no information about the principles of Sharia. Therefore, to prevent future international disputes, Islamic councils have been established in the international community to guide economic operators or investors in concluding Islamic contracts in corrects framework. Currently, Islamic councils are present in the international community at three levels. The following table shows the different levels of these councils (see, table 3).

Table 3

The levels of International Islamic councils (Source: author’s investigation)

International investors can seek advice from Islamic councils at any stage of the international investment process. The most well-known of these councils are currently the Islamic Fiqh Academy of the Organization of Islamic Cooperation and the Shariah advisory council of Bank Negara Malaysia, which actively advise economic operators, businessmen and international investors.

Islamic commercial contracts and international investment disputes. As I have stated, the strict implementation of Sharia principles in Islamic contracts is very important, and for this reason, Sharia councils play an active role in international investment relations today [12]. However, the lack of attention to Sharia principles can lead to international disputes. As in recent years, with the increasing use of Islamic commercial contracts by international investors and the lack of careful attention to the framework of Sharia principles in these contracts, international investment disputes have been referred to international arbitration centers. I will present four prominent examples that have been raised in recent years in line with Islamic contracts in the table below (see, table 4).

Table 4

International investment disputes based on Islamic commercial contracts (Source: author’s investigation)

The common point among these international investment disputes is that they are all based on a lack of attention to Islamic principles. In effect, one party to the investment process has claimed that the other party has not adhered to the principles of Sharia under the relevant commercial contract [13]. In other words, one of the parties has violated the Islamic principles incorporated in the Islamic commercial contract.

Conclusion. Today, the use of Islamic commercial contracts in the international investment process has increased. International investors, especially in Islamic states such as the Arab countries of the Persian Gulf (Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman and Bahrain) or Southeast Asian states such as Malaysia and Indonesia, use Islamic contracts as the main investment contract or a secondary one. In economic and investment relations between the host state and international investors, Islamic contracts bring Islam into international investment law in three common ways. First, when international investors and the host state conclude an Islamic commercial contract. In this regard, the parties to international investment must pay attention to Islamic principles, including negative principles, namely the prohibition of Riba, the prohibition of Gharar and the prohibition of Maysir, as well as positive principles, namely the compliance of the contract with the dimensions of Sharia and the principle of risk sharing in the investment process. Second, when international investors refer to international Islamic councils to conclude international commercial contracts in correct framework. In fact, international investors want to know how to consider a logical framework based on the Sharia principles for Islamic commercial contracts. In this direction, Islamic councils play a very important role in the international investment process. The third is when the parties to an international investment process have not paid attention to the Islamic dimensions or Sharia principles in the Islamic commercial contract and an investment dispute has arisen. The parties refer this dispute to the dispute resolution centers. In this regard, to resolve the dispute, the arbitrator refers to the Islamic principles to see on what basis a valid Islamic contract is concluded or may also use the opinions of international Islamic councils such as the Academy of Fiqh of the Organization of Islamic Cooperation. Therefore, given the situation, the arbitrator in an international investment dispute also refers to Islamic principles.