I. INTRODUCTION

1. Sharia-compatible finance is now one of the fastest growing sectors of international banking.^[1] Its relevance is no longer confined to domestic Islamic banking markets or to Muslim counterparties, but is increasingly used in cross-border project, real estate and trade finance, including transactions documented in English and enforced before common law courts or arbitral tribunals. It is not enough to ask whether a transaction or contract has been approved by a Sharia committee at signing. The more difficult question is what happens when the same product is tested after default, before a court or tribunal that may not treat Sharia as the governing law of the contract.
2. Islamic finance transactions are usually structured to provide finance without the payment or receipt of interest. They do so through recognised structures such as murabaha, ijara, wakala, mudaraba, musharakaand sukuk, which replace a conventional interest-bearing loan with sale, lease, agency, partnership or asset-linked arrangements. For present purposes, the important point is not the mechanics of each structure, but the legal consequence: after default, a court or tribunal may have to decide whether the transaction should be enforced as documented, or tested against the Sharia principles which justified the structure in the first place.^[2]
3. That structuring is legally important because due to the prohibitions on riba, ghararand maisir (interest, excessive uncertainty, and gambling/speculation), once a dispute arises, the forum deciding the dispute may not approach the transaction in the same way as the Sharia board would^[3]. In a murabaha dispute, an obligor may argue that the financier never acquired the asset or never bore ownership risk, so that the transaction was in substance a disguised loan. In a wakala dispute, the complaint may be that the investor was guaranteed a fixed return, undermining the agency or risk-sharing premise. Once those arguments are raised after default, the decision-maker must decide whether it is being asked to adjudicate Sharia compliance, to interpret a contract, or simply to enforce the written payment obligation.
4. Sharia performs a different legal function in different documents. In some transactions, Sharia compliance is a commercial certification matter. In others, the documents state that they are governed by a national law but are also “subject to” Sharia. In a third category, parties attempt to choose Sharia, or Sharia principles, as the applicable law. A common law court will usually analyse whether Sharia could be applied as governing law, and to what extent Sharia would influence their decision if it could. The concern arises because Sharia is not a national law, but a body of non-codified principles. Much of the case law revolves around whether sharia being a non-national law, can be made the governing law of a dispute, and if so in what capacity.

II. CAN SHARIA BE THE GOVERNING LAW

A. The threshold choice-of-law problem

5. The choice of law in court litigation is saddled with a host of limitations including the narrow choice provided under the 1980 Rome Convention and thereafter under the Rome I Regulation^[4]  (which were implemented into England by Contracts (Applicable Law) Act 1990)^[5] which allows only the choice of a national legal system. Accordingly, the English authorities begin with a clear proposition: the proper law of a contract, in the conflict-of-laws sense, must be the law of a country. In Amin Rasheed^[6], Lord Diplock described the proper law of a contract as the substantive law of the country chosen by the parties. Halpern reached the same conclusion in relation to Jewish law, while also recognising that non-national rules may still assist interpretation or operate through arbitration.^[7]
6. The Court of Appeal in Shamil Bank^[8] later applied that logic to a Sharia finance clause. The dispute arose out of Morabaha financing agreements and subsequent exchange in satisfaction and user agreements, which the defendants alleged were in substance disguised interest-bearing loans and therefore non-compliant with Sharia. The governing law clause provided that, “subject to the principles of the Glorious Sharia’a”, the agreements would be governed by English law.” The Court held that Sharia could not operate as the governing law of the contract, since the applicable law under the Rome Convention had to be the law of a country. The Court also rejected the argument that a reference to Sharia had incorporated Sharia principles as contractual terms. It held that incorporation requires sufficiently identified “black letter” provisions and a general reference to Sharia principles was too broad and uncertain. The agreements were hence determined according to English law.
7. Another interesting consideration is whether after the parties have chosen English law, could a defence that the contract was not Sharia compliant be raised? In Islamic Investment Company of the Gulf,^[9] the dispute arose from a murabaha financing, and the defendants argued that the grant of liquidated damages would be akin to disguised interest and hence contrary to Sharia law. The Court rejected this defence by holding inter alia that the contract being governed by English law would not be subjected to Sharia law defences. The case is significant because it shows the court’s concern with post-default Sharia defences where the documentation itself has not made Sharia non-compliance a ground for avoiding liability.^[10]
8. The result is that a bare clause stating that a commercial contract is governed by Sharia is vulnerable before an English court. A dual clause – for example, English law “subject to” Sharia – is not necessarily better unless it identifies what Sharia adds and how a conflict is to be resolved. Further, if English law has been chosen, Sharia non-compliance will not usually defeat the contractual claim.

B. How Sharia Still Enters the Analysis

9. Although English courts do not directly apply Sharia as the governing law of commercial finance contracts, Sharia may still enter the analysis through recognised contractual routes. The cases show that courts may consider Sharia where it is incorporated with sufficient precision, where it affects a party’s capacity, or where the chosen national law itself gives effect to Sharia principles.
10. Shamil Bankremains the leading example (see [6] above). In principle the court agreed that provisions of Sharia could be incorporated as contractual terms if there is a specific reference. In Investment Dar^[11] an innovative argument was made regarding the corporate capacity / ultra vires. The wakala contract was expressly governed by English law, but the defendant was a Kuwaiti company whose constitutional documents required it to conduct activities in a Sharia-compliant manner and not to engage in usury. The structure before the court gave Blom a fixed anticipated return and return of capital, and the court noted that the commercial effect appeared equivalent to a deposit at interest. The court did not hold, at the summary judgment stage, that Sharia governed the contract. Rather, it held that there was at least a triable issue as to whether the transaction was ultra vires the company under its own constitutional framework. Sharia entered the analysis through capacity to enter the Sharia non-compliant contract, not as the proper law of the contract.
11. Another route for the application of Sharia is through the national law of a country which contains Sharia principles as part of its statutes. In Dana Gas ^[12] the dispute arose out of a Sukuk al-Mudarabah structure under which the Mudarabah Agreement was governed by UAE law, while the Purchase Undertaking was governed by English law. Accordingly, while the purchase undertaking was contrary to prohibition on riba, the court declared it to be valid under English law. However, for the mudarabah agreement, the court held that as it was governed by UAE law, which gave effect to Sharia principles prohibiting riba, the English courts would not enforce that agreement if it was shown to be invalid under those laws. The court’s approach showed that English law and Sharia (UAE law) can operate concurrently.
12. The English authorities make it clear that first, Sharia is not ordinarily a governing law of the contract; secondly, vague references to Sharia will not be treated as terms incorporated into the contract; thirdly, Sharia principles may be applied through contractual terms, if it affects the capacity of a party under its own law, if it is relevant to interpretation, or if the national law governing the contract gives effect to Sharia principles. However, there may be other ways in which Sharia could be applied in English courts, although not as governing law.

C. DIFC, ADGM and Singapore

13. The DIFC is an important forum because it offers a UAE-based common law court familiar with English-law finance documentation. However, that does not mean the DIFC Courts will apply Sharia as the governing law of a commercial contract. Under Article 8 of the DIFC Law on the Application of Civil and Commercial Laws, the applicable law must be the law of a recognised jurisdiction.^[13] The position is therefore broadly aligned with English law.
14. In Emirates NBD ^[14], the Court of Appeal dealt with syndicated facilities of approximately AED 1.9 billion, including conventional facilities and Islamic facilities documented through a master murabaha agreement and an investment agency agreement. The defendants resisted enforcement by alleging non-compliance with AAOIFI Sharia Standard No. 30. The DIFC Court of Appeal rejected the defence. It held that the AAOIFI standards had not been incorporated as binding contractual terms, and that the documents contained an effective waiver of Sharia non-compliance defences. It also rejected the argument that non-compliance with AAOIFI standards would, without more, be contrary to English public policy. It shows that the DIFC Courts, like the English courts, are likely to focus on governing law, incorporation, estoppel, waiver and risk allocation, rather than reopen Sharia certification after default.
15. In Deyaar Development ^[15], the dispute arose from a Murabaha financing arrangement where the governing law clause provided for the laws of Dubai, UAE, to apply only to the extent they were not inconsistent with Sharia principles. The clause also expressly referred to Sharia Standards published by AAOIFI and/or the Islamic High Academy of the Organisation of Islamic Conference, with Sharia principles prevailing in case of inconsistency. The DIFC Court of Appeal treated the governing law as DIFC law and framed the issue as one of incorporation of Sharia standards, rather than Sharia itself being the governing law. The Court distinguished Shamil Bank on this basis: unlike a bare reference to “the principles of the Glorious Sharia’a”, the clause in Deyaar identified specific Sharia Standards. The Court therefore considered that there was sufficient reference to specific aspects of Sharia law intended to be incorporated into the agreement.
16. The same broad approach is likely in the ADGM, given the express application of English common law^[16]. Although Singapore courts have engaged with Muslim law institutions in contexts such as wakaf and charitable trusts^[17], that is different from treating Sharia as the governing law of a commercial finance contract. On present authority, Singapore should therefore be treated as a jurisdiction where Sharia is unlikely to operate as a free-standing governing law before the civil courts, though it may be relevant if incorporated.

D. Onshore UAE Courts

17. The onshore UAE position is different. Dubai and Abu Dhabi courts operate within a civil law system influenced by Sharia and UAE statutory law. In disputes involving Islamic banks, murabaha facilities or late payment remedies, they may examine Sharia based principles that form part of UAE law.
18. A recent Dubai Court of Cassation General Assembly ruling^[18] has taken a strict approach towards Islamic financial institutions and takaful companies. The ruling arose from a formal referral under Article 20 of Law No. 13 of 2016 to resolve conflicting decisions on whether Islamic financial institutions could charge late payment penalties. Relying on Article 473 of the Federal Commercial Transactions Law and Federal Decree-Law No. 50 of 2022, the General Assembly held that Islamic banks and takaful companies are prohibited from imposing or collecting any interest, benefit, fee or charge for delayed payment, even if described as “compensation”, and irrespective of the debtor’s intent. It further held that this prohibition is a matter of public order, requiring courts to apply it ex officio even where earlier decisions had taken a different view.
19. Onshore litigation may therefore appear attractive where a party wants the court to engage directly with Sharia compliance and local statutory rules. However, it carries practical limitations for international parties, including language, procedure, interim relief, disclosure and speed. It may also be less predictable where the transaction involves multiple instruments governed by different laws, such as English law, DIFC law and UAE law. The point is not that onshore courts are preferable or inferior. They answer a different question. They are more likely to test the transaction against local Sharia and statutory rules, while common law courts are more likely to enforce the contract as documented, without undertaking a broader Sharia compliance review.

III. ARBITRATION AS THE MIDDLE PATH

20. It is clear from the above analysis that English, DIFC, ADGM, and Singapore courts are unlikely to apply Sharia principles directly as governing law of the contract due to the reasons mentioned above. However, arbitration changes the analysis because it is less rigid than court litigation on the rules applied to the merits. Article 28 of the UNCITRAL Model Law  adopted in many jurisdictions^[19] permits the tribunal to apply not only a national law but also the “rules of law” or other considerations chosen by the parties. This is broad enough to cover non-national systems such as Sharia law and the arbitrator can directly interpret and apply Sharia as applicable law.
21. That was not always the position. The early oil concession awards took a markedly different approach. In the Sheikh of Abu Dhabi arbitration,^[20] the arbitrator declined to apply Sharia or Abu Dhabi law on the basis that there was no settled body of legal principles applicable to modern commercial instruments, and instead applied general principles drawn substantially from English law. A similar approach was taken in the Ruler of Qatar arbitration,^[21] where Qatari law was rejected despite the ruler being Qatari, Qatar being the seat, and the agreement being in Arabic. In ARAMCO ^[22], the tribunal acknowledged that Islamic law recognised pacta sunt servanda, but nevertheless treated Islamic law as insufficiently developed for oil concession disputes and completed Saudi law by reference to general principles and oil industry practice. Those awards provoked significant criticism because they displaced Sharia without properly engaging with its content.
22. However, that phase is now behind us. The current trend is that arbitral tribunals apply Sharia principles which are certain as the governing law of the contract. Musawi ^[23] illustrates the distinction. Although as obiter, the court held that under Section 46(1)(b) of the English Arbitration Act, the parties could choose rules or principles that do not themselves constitute national legal systems such as Sharia, UNIDROIT principles, or lex mercatoria. Halpern makes the same point in general terms, stating that if parties want rules or law not of a country to apply, they may do so through an arbitration clause.
23. In Sanghi, the contract provided for the dispute to be governed by English law except to the extent inconsistent with Islamic Sharia. The arbitrator awarded the principal and profit claims but disallowed the additional damages claim, as they were prohibited under Sharia law. The English court upheld the award and had no difficulty agreeing that in the event of conflict, given the choice of law, Sharia would apply.^[24]  This shows that arbitration can accommodate a more nuanced use of Sharia than a court might apply directly. It also shows that the result need not be all-or-nothing: a tribunal may apply national law to some issues and Sharia restrictions to others.
24. Even in arbitration, however, a vague reference to Sharia may not suffice. Arbitration answers the threshold problem of whether a non-national body of rules can be applied, but it does not identify the content of those rules. If the clause simply states that “Sharia shall apply”, the tribunal may still have to determine the relevant school of thought, standard, Sharia board determination, expert evidence or interpretive method. The safer drafting approach is therefore to identify the relevant Sharia source with precision.^[25]
25. This concern should not be overstated. Islamic finance practice has become more formalised over time through standard-setting bodies, Sharia supervisory institutions and specialist Islamic finance arbitration frameworks. Parties may now refer to AAOIFI Sharia Standards, Islamic Fiqh Academy resolutions. Specialist frameworks such as the former KLRCA Rules for Islamic Banking and Financial Services Arbitration, the AIAC i-Arbitration Rules and the International Islamic Centre for Reconciliation and Arbitration also show that Sharia-sensitive mechanisms have developed. However, Islamic finance disputes do not require a wholly separate arbitral system. They can be resolved under ordinary institutional or ad hoc arbitration if the clause identifies the relevant Sharia standards, permits expert input where required, and preserves a conventional seat and procedure to support enforcement.^[26]

IV. OUR ANALYSIS AND CONCLUSION

26. It is clear from the above that if the priority is certainty of application and enforcement, the safer course is to choose a clear national governing law, such as English law or DIFC law. However, in this case it is unlikely that the court will check Sharia compliance. To mitigate Sharia non-compliance defences, parties often include “Sharia waiver clauses” – the contract records that it has been approved as Sharia compliant by a Sharia board and neither party shall raise any Sharia non-compliance defence.^[27]
27. Alternatively, where parties genuinely want Sharia principles to decide the merits, arbitration provides a better solution because the tribunal can be expressly authorised to apply non-national rules or considerations including Sharia chosen by the parties. This is where the semi-secular model becomes useful. It does not choose between a purely secular and a purely religious forum. It combines a conventional arbitral seat and institution with a defined Sharia merits mandate. For example, the contract may be governed by English law or DIFC law except to the extent inconsistent with identified Sharia standards, or the tribunal may be directed to apply specified AAOIFI standards, etc. A DIFC seat may be particularly attractive where the assets or counterparties are in the UAE or wider GCC, because it gives parties a common law supervisory court within the UAE, a familiar procedural framework, and a possible route for onshore enforcement through the conduit mechanism.^[28]
28. Another issue then arises in enforcement: whether an award or judgment which gives effect to Sharia principles would itself be contrary to international public policy or public policy in secular countries such as England. The key question here is whether prohibition of interest would be considered as contrary or incompatible with international public policy. In principle, it should not be. There is nothing inherently objectionable in parties agreeing that interest will not be awarded, that remedies will be framed by reference to actual loss, disgorgement of profit, late performance loss or another Sharia-compatible remedy, or that a tribunal will apply identified Sharia standards.^[29] This was addressed in a Swiss Federal Tribunal decision where a panel of arbitrators had rejected a claim for interest on the basis that it was prohibited. The Tribunal upheld the award while stating that the right to receive interest is not per se a right protected by international public policy. ^[30]Even in Sanghi, when damages were denied as being barred by Sharia, the English courts upheld the award without any difficulty.
29. Further, although interest is barred, practitioners have adapted and sought alternate reliefs in creative Sharia-compliant methods. In IAIGC v BAII,^[31] the tribunal did not simply award default interest, but relied on the compensatory principle and awarded direct and foreseeable loss, including actual loss and lost profit, using LIBOR as a measure. Similarly, in ICC Case No. 7063,^[32] which involved two Saudi parties and a construction contract in Saudi Arabia, the tribunal avoided awarding commercial interest and instead compensated the claimant by reference to inflation, treating that as financial loss caused by delayed performance rather than a monetary gain without consideration. A claimant may be better placed if it pleads alternate remedies to interest that can be justified within the applicable Sharia framework. Hence, Sharia compliant decisions should not be at enforcement risk in secular countries.
30. However, the converse is not true. A Sharia non-compliant decision would not be enforced in countries applying Sharia including GCC countries. Article 2 of the GCC Convention^[33] permits refusal of execution where the judgment violates Islamic Sharia, the constitution or public order of the state of enforcement. The result is an enforcement asymmetry: a Sharia-compliant award is unlikely to offend public policy in a common law jurisdiction merely because it applies Sharia, but a non-Sharia-compliant judgment or award may face resistance in a GCC jurisdiction if the remedy is treated as interest, usury or another prohibited benefit.
31. Hence, parties entering into Sharia-compliant finance contracts must ensure that dispute planning begins at the drafting stage so that unnecessary complications including applicable governing law, the role and extent of Sharia involvement in the dispute, and enforcement being contrary to public policy do not arise.

Authors: Prateek Bagaria, Aayush Khandekar & Mohammad Ahmad