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Wakala contracts: what are the implications of the judgment in TID v Blom?

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05 March 2010

The recent English High Court decision in The Investment Dar Company K.S.C.C v Blom Developments Bank S.A.L [2009] All ER (D) 145, might, at first glance, appear to throw some doubt on the Shari'a-compliance of wakala contracts.

Background

The Respondent, Blom Developments Bank S.A.L (Blom) had placed various deposits with the Appellant, The Investment Dar Company K.S.C.C (TID), pursuant to a wakala arrangement (comprising a master wakala agreement and subsequent agreements made pursuant to the terms of the master agreement, the Wakala Agreement ). 

The Wakala Agreement was governed by English law and provided that TID would invest the deposited sum in a Shari'a-compliant manner.  At the end of the investment period, TID was obliged to repay the capital sum together with the agreed anticipated return, regardless of whether or not the capital sum generated a profit in the hands of TID.  TID failed to fulfil its payment obligations under the Wakala Agreement.

Blom sought, and was granted, summary judgment in the amount of the capital sum but not on the agreed anticipated return. TID appealed the summary judgment arguing, in particular, that notwithstanding that the transaction had been approved by its Shari'a committee, the Wakala Agreement was non-Shari'a compliant (and therefore ultra vires on the basis that, in reality, TID was in fact accepting deposits at interest).  The High Court judge allowed the appeal, accepting that there were issues which required consideration at a full trial.

What does this decision mean for the wakala ?

It is important first, to recognise what the decision is not. The judgment does not state that the Wakala Agreement in question was, or that wakala arrangements in general are, legally invalid or not compliant with the Shari'a in any way. Rather, on the basis of limited arguments raised before it, the judge found (albeit with some circumspection) that a "triable issue" had been shown.  In other words, the matters raised by TID simply warranted a full hearing and further discussion.

Second, the judgment also makes clear that, even assuming the worst case, namely, if the Wakala Agreement is ultra vires, Blom would have a restitutionary claim against TID which, if successful, would put the parties back into their original positions and would result in TID being liable for at least the whole of the amounts deposited. If on the other hand the Wakala Agreement is intra vires , then the claim in contract will succeed, with the result that TID would be liable for the amount deposited, plus the guaranteed return. The difference between the two results is therefore not all money lost and all money returned with the agreed return, but rather the profit element only.

Third, the appeal was allowed conditional upon the interim payment by TID of the whole principal amount claimed.  In reaching his decision to award interim payment to Blom (a Lebanese company described by the judge as having 'no allegiance to the English courts' which means that if TID's defences succeeded it may have no means of recovery against Blom) the judge was of the view that there was no "significant chance" of TID's defences to the return of the capital sum succeeding at trial.

Finally, it is also important to note that this is not a new risk nor is it limited to Wakala arrangements, Islamic financings, or any particular sector or area: any limitation in the object clause of a company could potentially cause this issue to arise regardless of its nature.  This is an inherent risk when dealing with companies with limited objects in jurisdictions where ultra vires contracts are void.

Download the full case citation