UK court dismisses Investment Dar's case versus Blom

The Islamic finance industry overcame a hurdle when a London court threw out an appeal in a case that Moody’s Investors Service said could have undermined the market.

Investment Dar Co, the Kuwait-based company that owns half of luxury carmaker Aston Martin Lagonda Ltd, won’t be able to challenge a contract with Blom Development Bank SAL of Lebanon, because UK courts required it to pay more than $10 million to proceed with the appeal, court documents show. The company didn’t meet the May 25 deadline and an out of court settlement may be sought, Blom lawyer John Bramhall, said last month in an interview.

While the case got little attention in London, it is being followed by the Islamic finance industry, which manages $1 trillion in assets, to see if local courts would rule on contracts governed by religious law. The lack of a final decision led regulators in the developing market for Shariah- compliant debt to seek provisions in loan contracts to prevent similar disputes.

Every development in Islamic finance litigation “is going to be closely scrutinised by markets,” Rafael Martinez Dalmau, director of Islamic investments at BNP Paribas Investment, said in a June 30 interview from Singapore. “A successful resolution should set new parameters allowing investors to participate in this market with a greater degree of confidence.”

Bramhall, head of commercial litigation at Davies Arnold Cooper LLP in London, declined to give an update on his June 16 statement when contacted on Wednesay. Investment Dar won’t be able to comment on the case, Latham & Watkins LLP, which represents the company, said in an e-mail statement on June 15. The company didn’t respond to a request yesterday.

Investment Dar, which had $3.5 billion of liabilities outstanding at the end of September 2008, is restructuring debt. The Kuwaiti company contradicted its own scholars’ assessment and argued the financing from Blom breached the religion’s shariah principles because Dar “was taking deposits at interest,” according to a December 11 court document.

Investment Dar’s Shariah Supervisory Board issued a statement on June 8 barring the Kuwaiti company from using arguments based on Islamic law and advised it to drop the lawsuit.

“The scholars have done the right thing here,” Harris Irfan, head of Islamic products at Barclays Capital in Dubai, said in a June 17 interview. “They’ve actually helped to restore order of confidence back in the system. There was a time that people like me were actually getting pretty nervous.”

Global standards are still developing the industry whose assets may almost triple to $2.8trn by 2015, according to the Kuala Lumpur-based Islamic Financial Services Board. Moody’s said the case prompted the rating company to evaluate additional risks when assessing such transactions.

“The lack of a clean resolution will leave some uncertainty for market participants regarding the risks of Shariah-compliant deals,” Khalid Howladar, a Dubai-based senior credit analyst at Moody’s said on Wednesday. “This risk will have a cost.”

Islamic bond defaults in Malaysia, the world’s largest sukuk market, reached 176m ringgit ($55m) in the first four months of the year, or 65 per cent of the 2009 total, according to data compiled by Bloomberg.

Dubai World, whose unit Nakheel PJSC is building palm- shaped islands off Dubai’s coast, reached an agreement with its main creditor group in May to restructure $23.5bn of debt.

The average spread on Islamic bonds above the London interbank offered rate has widened 101 basis points, or 1.01 percentage points, from an 11-month low of 328 basis points on October 20 last year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The difference increased 2 basis points on Wednesday to 429. Sales of Islamic debt have fallen 24 per cent to $6.5bn in 2010 from a year-earlier, Bloomberg data show.

Sukuk returned 6.5 per cent so far this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt in developing markets gained 6.1 per cent, JPMorgan Chase & Co’s EMBI Global Diversified Index shows.

Malaysia’s 3.928 per cent Islamic note due June 2015 was unchanged at 3.4 per cent on Thursday, the lowest level since the bonds were sold on May 27, according to prices from HSBC Holdings Plc.

Investment Dar’s legal dispute revolved around a Wakalah contract, used in about 10 per cent of outstanding Islamic bonds, in which capital is raised to acquire assets that are entrusted to an agent, or Wakil. Holders take the risk of the underlying projects and are entitled to profits generated from them. In 2007, Blom signed a contract with Investment Dar to place such a deposit. It had invested $10.77m as of December 2008, when the contract was renewed a third time, court documents show.

Blom took Investment Dar to the High Court of Justice in London after the Kuwaiti company missed a payment on its deposit in January 2009, documents show. The court granted a summary judgment, a determination made without a full trial, in the Lebanese bank’s favor last July, ordering Investment Dar to return the initial deposit plus profit accrued up until mid- December 2008, said Bramhall.

Investment Dar was allowed to challenge the shariah contract as long as it agreed to pay the sum in dispute to BLOM, the Dec. 11 court document shows.

A clause preventing parties questioning the validity of Islamic contracts may need to be included in future transactions, said Mohammad Amin, a London-based member of the HM Treasury Finance Experts Group that advises the British government. Only regional courts with Shariah expertise should hear cases involving potential default, said Hussain Hamed Hassan, chairman of the Shariah Coordination Committee of the Islamic Financial Institutions in the UAE.