Beximco Pharmaceuticals Ltd & Ors v Shamil Bank of Bahrain EC

Factual and Procedural Background

This appeal arises from a summary judgment granted by Mr Justice Morison in favour of the claimant, Company A, against the first and second defendants as principal debtors and against the third, fourth, and fifth defendants as guarantors. The judgment awarded a sum of approximately US $49.7 million under various financing agreements. Permission to appeal was initially refused by the trial judge but later granted by a higher court limited to a single issue concerning the construction and effect of the governing law clause in the financing agreements.

Company A is incorporated under the laws of The State and licensed as a bank. It holds itself out as an Islamic bank, conducting business in accordance with Islamic principles or "the principles of the Glorious Sharia'a," though these principles have not been incorporated into the commercial law of The State. The first and second defendants are companies involved in pharmaceutical manufacturing and trade, with the third, fourth, and fifth defendants acting as guarantors.

In 1995 and 1996, the defendants entered into Morabaha Financing Agreements with Company A, which are contracts of sale recognized under Islamic law, structured to avoid the charging of interest by instead reflecting a deferred sale at a profit. Later, Exchange in Satisfaction and User Agreements (ESUAs) were entered into to discharge outstanding obligations under the Morabaha Agreements in exchange for certain assets and user fees, guaranteed by the third, fourth, and fifth defendants.

The defendants challenged the enforceability of these agreements on the basis that, despite their form, they were in substance interest-bearing loans prohibited under Sharia law, thus void and unenforceable. The trial judge granted summary judgment for Company A, concluding that the governing law clause should be construed as English law alone, with the reference to Sharia principles being no more than a statement of Company A's business ethos rather than a substantive governing law provision.

Legal Issues Presented

1. What is the proper construction and legal effect of the governing law clause stating that the agreements are "subject to the principles of the Glorious Sharia'a" but "governed by and construed in accordance with the laws of England"?
2. Whether the Morabaha Financing Agreements and ESUAs are enforceable under English law, given the defendants' contention that they are void under Sharia law as disguised interest-bearing loans (Riba).
3. Whether the guarantors are liable under the guarantees, particularly in light of the defence of mutual mistake regarding the enforceability of the underlying obligations.

Arguments of the Parties

Appellants' Arguments

• The governing law clause does not preclude the incorporation and application of Sharia principles as legal rules enforceable by an English court, acting as a condition precedent to enforcement.
• The clause should be construed as English law governing the contract, subject to incorporation by reference of specific Sharia principles relevant to interest and financing contracts, similar to incorporation of foreign statutes or international rules in English contracts.
• It is neither unusual nor improbable that English courts would apply Sharia principles when assisted by expert evidence, as supported by prior case law.
• The trial judge erred in concluding that the principles of Sharia law relevant to this case were controversial, as the proscription of Riba and essentials of Morabaha contracts are not disputed among Islamic scholars.
• The defence of mutual mistake as to the enforceability of the ESUAs should succeed, relying on recent authority that mutual mistakes of law may found a defence and analogies with mistakes of foreign law.

Respondent's Arguments

• The governing law clause selects English law as the sole governing law; the reference to Sharia principles is a non-binding statement of religious ethos without legal effect on the contract's enforcement.
• It is legally impossible to have two governing laws; the Rome Convention and relevant statutory provisions only permit choice of the law of a country, not a religious or non-national legal system.
• The principles of Sharia law are broad, controversial, and not sufficiently defined or identified in the contract to be incorporated as contractual terms.
• The Morabaha and ESUA agreements are enforceable under English law, and the defendants have admitted the sums owed.
• The guarantors are liable as the guarantees are valid and enforceable, and the alleged mutual mistake does not qualify as a defence because the defendants were aware of the commercial realities and intended to be bound.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Nea Agrex SA v Baltic Shipping Co Ltd [1976] 1 QB 933 (CA)	Incorporation of foreign statutes or rules as contractual terms under English law.	Illustrated the distinction between choice of governing law and incorporation of foreign law provisions as terms of contract; court found incorporation of Hague Rules valid.
Glencore International AG v Metro Trading International Inc [2001] 1 Lloyds Law Rep 284	Application of foreign law principles by English courts with expert assistance.	Held to be irrelevant for construction of governing law clause but acknowledged English courts can apply foreign law where clearly chosen.
Al-Bassam v Al-Bassam [2002] EWHC 2281 (Ch)	English court's obligation to apply foreign law when it is the governing law of the dispute.	Confirmed that English courts apply foreign law with expert evidence; not relevant to disputed choice of law clause in this case.
Swain v Hillman [2001] 1 All ER 91	Principles governing summary judgment and the inadvisability of mini-trials on conflicting expert evidence.	Supported the trial judge's view that expert conflicts on Sharia law should not be resolved at summary judgment stage.
Kleinwort Benson Ltd v Lincoln City Council [1999] 1 AC 153	Doctrine of mutual mistake and its application to mistakes of law.	Provided authority for considering mistakes of law as grounds for restitution; court found no applicable mistake here.
Brennan v Bolt Burden [2003] EWHC 2493 (QB)	Setting aside agreements on grounds of mistake of law based on court decisions.	Referenced in relation to mutual mistake defence but distinguished on facts.
Furness Withy (Australia) Pty Ltd v Metal Distributors (UK) Ltd ("The Amazonia")	Analogy of mistake of foreign law to mistake of fact in contract law.	Relied upon by appellants to argue mistake of Sharia law as mistake of fact; court rejected applicability.
Associated Japanese Bank (International) Ltd v Crédit du Nord SA [1989] 1 WLR 255	Requirement for mistake to render contract subject matter essentially different.	Applied to assess whether mutual mistake defence was available; court found it was not.
Bell v Lever Bros Ltd [1932] AC 161	Definition of fundamental mistake invalidating contract.	Applied to determine if mistake defence available; court held it was not applicable here.
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407	Clarification of mistake doctrine in contract law.	Confirmed legal principles applied in rejecting mutual mistake defence.

Court's Reasoning and Analysis

The court's central task was to construe the governing law clause, which states the contract is "subject to the principles of the Glorious Sharia'a" but "governed by and construed in accordance with the laws of England." The court emphasized that the Rome Convention and UK law contemplate the choice of the law of a country as governing law, thus excluding the possibility of selecting a non-national legal system such as Sharia as a governing law. The court rejected the appellants' construction that the clause incorporates Sharia principles as contractual terms because the clause does not specify particular, identifiable rules of Sharia law, making the reference too vague and broad to be effective.

The court accepted that the reference to Sharia principles is a statement of Company A's religious ethos and business practice rather than a substantive legal condition affecting enforceability. This interpretation aligns with the commercial purpose of the agreements and avoids rendering the clause contradictory or meaningless.

The court noted that the defendants and the bank were aware of the commercial realities of the agreements, which were essentially loans structured as Morabaha sales or Ijarah leases for Sharia compliance appearances. The defendants had not raised Sharia objections before the proceedings commenced.

Regarding the guarantors, the court held that the doctrine of mutual mistake did not apply because the defendants' own admissions showed awareness of the transaction's nature and intention to be bound. The mistake alleged was not fundamental or common to the parties to void the guarantees.

The court further held that the conflicting expert evidence on Sharia law's application could not be resolved at summary judgment, but since the governing law is English law and the contracts are enforceable under it, the defendants are liable.

Holding and Implications

DISMISSED

The court upheld the summary judgment in favour of Company A, confirming that the governing law of the contracts is English law exclusively. The reference to the principles of Sharia is a non-binding statement of religious ethos rather than a substantive legal condition affecting contract enforceability. Consequently, the Morabaha Financing Agreements, the ESUAs, and the guarantees are enforceable under English law. The guarantors are liable for the sums claimed. The decision does not establish new precedent regarding the incorporation of religious principles into commercial contracts but clarifies the interpretation of governing law clauses referencing non-national legal systems in the context of English law.