<p><strong>Introduction</strong></p>
<p>Wakala contracts are agency agreements that are widely used in  Shari&rsquo;ah compliant Islamic finance transactions.&nbsp; A wakala contract is  formed when a principal, the muwakkil, appoints an agent, the wakeel, to  undertake certain transactions on the principal&rsquo;s behalf.&nbsp; An important  characteristic of wakala contracts is that the muwakkil and the wakeel  share in the profit and risk of loss of the transaction.&nbsp; Nonetheless,  some wakala contracts contain provisions that guarantee a specified rate  of return or certain profits despite the results of the  transaction(s).&nbsp; Such provisions arguably contravene Shari&rsquo;ah principles  as guaranteed returns or profits are not Shari&rsquo;ah compliant in that  they do not enable risk sharing between the wakeel and the muwakkil.<span>&nbsp;&nbsp;</span></p>
<p>Recent court decisions regarding disputes involving such wakala  contracts have created some concerns among the Islamic finance sector.&nbsp;  One such dispute involving Blom Developments Bank, S.A.L. (&ldquo;Blom&rdquo;), a  Lebanese bank, and the Investment Dar (&ldquo;TID&rdquo;), a Shari&rsquo;ah-compliant  finance house based in Kuwait, was litigated in England in late 2009.&nbsp;  In addition, a case with a similar fact pattern has been litigated in  Kuwaiti courts and its implications on the current Islamic finance  sector within Kuwait will be analyzed below.&nbsp;</p>
<p><strong>Blom v. TID</strong>&nbsp;</p>
<p>The aforementioned dispute surrounds Blom&rsquo;s English law governed  master wakala contract with TID (the &ldquo;Contract&rdquo;).&nbsp; Under the Contract  Blom appointed TID as its agent to make certain investments in  Shari&rsquo;ah-compliant instruments on behalf of Blom&rsquo;s 11.5 million US  Dollar investment with TID. TID also had an obligation to pay Blom a  specific rate of return regardless of the results of the investments.&nbsp;  TID&rsquo;s investments were unsuccessful and as a result TID was unable to  make payments to Blom under the Contract.&nbsp; Consequently, Blom filed a  claim for summary judgment requesting that the court order TID to repay  to Blom the amounts it had invested with TID, in addition to the repay  the specified rate of return on the investments owed to Blom.&nbsp; The  English High Court granted summary judgment to Blom and ordered that TID  pay Blom the original principal amount but not the profit element.&nbsp;</p>
<p>During appeal, TID argued that its constitutional documents prohibit  it from entering into non-Shari&rsquo;ah compliant agreements and that the  Contract was non-Shari&rsquo;ah compliant, and therefore nullifying the  Contract. The appellate court held that TID raised an arguable case  which required consideration at a full trial.&nbsp;</p>
<p><strong>National Sukuk Company v. Al-Madina Finance and Investment Company</strong></p>
<p>With respect to the recent decision held by the courts of Kuwait, two  companies had entered into a wakala agreement (the &ldquo;Agreement&rdquo;) whereby  National Sukuk Company (the &ldquo;Principal&rdquo;) provided facility amount of  AED 120 Million (KD 9,261,045) to Al-Madina Finance and Investment  Company (the &ldquo;Investment Agent&rdquo;).&nbsp; In the Agreement, the two parties  agreed that upon a defined maturity date, the Investment Agent would  repay to the Principal the original facility amount plus a prescribed  profit amount. Upon the maturity date, the Investment Agent failed to  repay said amounts, and entered into a settlement agreement with the  Principal to pay a lesser amount on a subsequent maturity date. Upon  this subsequent maturity date, the Investment Agent failed to pay the  agreed upon amount, and thus the Principal filed a civil claim against  the Investment Agent.&nbsp;</p>
<p>The Kuwait Court of First Instance rendered a judgment in favour of  the Principal ordering the Investment Agent to pay settlement amount to  the Principal. It based its opinion on a report submitted by an expert.  Upon appeal by the Investment Agent, the appellate court slightly  reduced the award to the Principal. The Investment Agent filed a second  appeal basing the same on the following: (i) the judgment is in  violation of the law; (ii) the court erred in its application of the law  by failing to provide an adequate explanation as to the fault of the  Investment Agent; and (iii) that its judgment was based on the expert&rsquo;s  opinion which failed to apply the principals of a Shari&rsquo;ah compliant  wakala agreement.&nbsp;</p>
<p>The Investment Agent&rsquo;s argument against the expert&rsquo;s opinion was that  the expert failed to accept that the Agreement was based on the  Shari&rsquo;ah principles of a wakala arrangement by concluding that the  parties intended for the facility amount to be repaid with a fixed  profit. In other words, the relationship between the Investment Agent  and the Principal was built upon the premise that profit is expected and  probable and not fixed. Further, the Investment Agent argued that the  expert should have interpreted the Agreement whereby the Investment  Agent was not guaranteeing the facility amount but rather that the two  parties shared the risk of loss, unless in circumstances of intentional  error or gross negligence by the Investment Agent.&nbsp;</p>
<p>The appellate court agreed with the Investment Agent that if these  defences raised by the Investment Agent were substantiated and if the  expert did not apply an acceptable rationale for its opinion, then there  would be reason to overturn the lower court&rsquo;s opinion. Therefore, the  appellate court remanded the case to a panel of three experts from the  Kuwait Department of Experts at the Ministry of Justice to determine the  following issues of law: (i) whether the facts of the case merit an  interpretation that the Agreement is a Shari&rsquo;ah compliant wakala  arrangement; (ii) whether either party had breached its obligations; and  (iii) what is the proper amount of the award, if any.&nbsp;</p>
<p><strong>Analysis</strong></p>
<p>An ultimate decision has yet to be held in either case; however, from  a Kuwaiti law and court perspective, it seems as though the outcome of  the National Sukuk case may provide an affirmative defence for Islamic  financial institutions like Al-Madina Finance and Investment Company  that because the executed transaction was later viewed as non-Shari&rsquo;ah  compliant despite having knowingly agreed and accepted terms and  conditions of the so-called wakala arrangement, its obligations to repay  become nullified. &nbsp;</p>
<p>Such a decision will likely raise a red flag to any creditor who has  entered into similar arrangements under Kuwaiti law with Kuwaiti court  jurisdiction.&nbsp; Furthermore, the credibility of these institutions may be  negatively impacted if such an affirmative defence would allow  nullification of these arrangements.&nbsp; Ultimately, any creditor who seeks  to enter into a similar arrangement shall consider inserting protective  provisions such as a waiver by the investment agent to any defence it  may have in connection with the arrangement being Shari&rsquo;ah compliant and  furthermore to require a Shar&rsquo;iah pronouncement by the investment  agent&rsquo;s Shar&rsquo;iah board confirming the terms and conditions of the  arrangement.</p>