Definition and Shari'ah Basis
item 2 defines arbitration as: a method of resolving disputes whereby the parties agree to submit their disagreement to one or more impartial arbitrators whose decision is binding. The Shari'ah basis rests on the Quranic encouragement of peaceful settlement (Q 4:35, Q 49:9) and the Prophetic tradition of appointing arbitrators to resolve disputes. Arbitration is classified as a form of Sulh (amicable settlement) when it results in compromise, or as a form of Qada (judicial ruling) when the arbitrator issues a binding award based on evidence and Shari'ah principles.
Scope of the Arbitration standard
The standard covers commercial disputes arising from Islamic finance transactions — including but not limited to disputes over Murabahah pricing, Musharakah profit distribution, Ijarah lease terms, Sukuk defaults, and syndication disagreements. The standard applies when at least one party is an Islamic financial institution or when the underlying contract is governed by Shari'ah principles. It does NOT cover criminal matters, family law disputes, or disputes over inherently public rights (e.g., citizenship, taxation), which remain the exclusive domain of state courts.
Essential Requirements for Valid Arbitration
-5 establish the prerequisites for a valid arbitration: 1. Mutual consent of both parties — arbitration cannot be imposed unilaterally. Both parties must agree, either through a pre-dispute arbitration clause in the contract or through a post-dispute submission agreement. Consent must be free from duress or coercion. 2. Clear arbitration terms — the agreement must specify: the seat (location) of arbitration, the language of proceedings, the procedural rules to be followed, the number of arbitrators, and the applicable law (Shari'ah, national law, or a combination). Ambiguity in any of these elements may render the arbitration clause unenforceable. 3. Arbitrable dispute — the subject matter must be capable of resolution by arbitration. Disputes involving criminal liability, public policy matters, or inalienable personal rights are not arbitrable. Commercial disputes — including those involving monetary claims, contractual interpretation, and damages — are fully arbitrable.
Written agreement preferred: While oral arbitration agreements are theoretically valid under classical Fiqh, the Arbitration standard strongly recommends a written arbitration agreement to ensure enforceability and clarity. The agreement may be a clause within the main contract (pre-dispute) or a separate submission agreement after a dispute arises (post-dispute). International arbitration conventions (e.g., New York Convention) typically require a written agreement for cross-border enforcement.
Arbitrator Qualifications
-7 set out the qualifications for arbitrators: 1. Legal expertise in the relevant subject matter — the arbitrator must possess sufficient knowledge of the legal and commercial issues in dispute. For complex Islamic finance transactions, this may include expertise in banking regulation, capital markets, or construction law. 2. Impartiality and independence — the arbitrator must have no financial interest in the outcome, no prior relationship with either party that could create bias, and must disclose any potential conflicts of interest before accepting appointment. 3. Good moral character — Adalah (عدالة) — the arbitrator must be a person of integrity and trustworthiness. This reflects the classical Fiqh requirement that a judge (Qadi) must be of sound moral character. 4. Shari'ah expertise — for disputes arising from Islamic finance transactions, arbitrators with Shari'ah knowledge are preferred but not mandatory. Where the arbitrator lacks Shari'ah expertise, the tribunal should have access to a Shari'ah advisor or expert witness who can guide the tribunal on relevant Shari'ah principles. 5. Odd number recommended — the Arbitration standard recommends an odd number of arbitrators (typically one or three) to avoid deadlock in deliberations.
Arbitration Process
-10 outline the arbitration procedure: 1. Filing and response: The claimant files a request for arbitration with the designated institution or directly with the respondent if ad hoc arbitration is agreed. The respondent must file a response within the agreed timeframe. Failure to respond does not prevent the arbitration from proceeding — the tribunal may issue a default award based on the claimant's evidence. 2. Evidence and hearing: Both parties have the right to present documentary evidence, call witnesses, and make oral submissions. The tribunal may also appoint independent experts — including Shari'ah scholars — to provide opinions on technical or religious matters. The hearing must observe principles of due process: both parties must be heard, and neither party may be deprived of a reasonable opportunity to present its case. 3. Award issuance and enforceability: The tribunal issues a written, reasoned award. The award must be based on the applicable law (including Shari'ah principles if specified), the evidence presented, and the terms of the arbitration agreement. The award is final and binding unless the parties have agreed to an appellate mechanism. Enforcement follows the procedural law of the seat of arbitration and applicable international conventions.
Binding Nature and Withdrawal
: A valid arbitration clause is binding on both parties. Once the parties have agreed to arbitrate — whether through a pre-dispute clause or a post-dispute submission — neither party may unilaterally withdraw from the arbitration or refer the dispute to a state court (unless the arbitration agreement itself is challenged as invalid). This binding nature reflects the Islamic principle that contracts must be honored: "O you who believe, fulfill your contracts" (Q 5:1). However, a party may challenge the arbitration agreement on grounds of duress, fraud, or incapacity — in which case a court determines validity before arbitration proceeds.
Relationship to Sulh (Amicable Settlement)
the Arbitration standard recognizes that parties may settle their dispute amicably (Sulh — صلح) at any stage of the arbitration process — before, during, or even after the hearing but before the award is issued. If the parties reach a settlement, the tribunal may record the settlement as a consent award, giving it the same enforceability as an arbitral award. Sulh is encouraged as the preferred outcome: the Quran states "Settlement is best" (Q 4:128). The arbitration framework thus serves as both a pathway to binding resolution and an incentive for parties to negotiate in good faith.