Mandatory Rebate upon Early termination of BBA Contracts

A case commentary on Bank Islam Malaysia Berhad v Azhar Osman & Other Cases [2010] 5 CLJ 54 by Oommen Koshy

 

 

 

BACKGROUND

The High Court's judgment in Bank Islam Malaysia Berhad v Azhar Osman & Other Cases [2010] 5 CLJ 54 dealt with four cases which were sent to the High Court by the Court of Appeal for determination of the quantum of the plaintiff bank’s claim.

 

These cases were from a second quorum of the Court of Appeal hearing appeals from the High Court decision in Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors; Koperasi Seri Kota Bukit Cheraka Bhd (Third Party) And Other Cases [2009] 1 CLJ 419.

 

The Court of Appeal had agreed with the decision of the earlier quorum in Bank Islam Malaysia Berhad v Lim Kok Hoe And Other Appeals [2009] 6 CLJ 22 which had held that Bai Bithaman Ajil (“BBA”) contracts are valid and enforceable.

 

These cases involved proceedings commenced by writs of summons and originating summons.

 

DECISION OF THE HIGH COURT

The plaintiff in each of these cases was Bank Islam Malaysia Berhad ("Bank"). The Bank contended that it had the legal right to claim the full sale price stipulated in the respective property sale agreements which it had entered into with each of the defendants.

 

After hearing submissions by the Bank's counsel and considering the statements of accounts tendered by the Bank, the learned High Court Judge, Rohana Yusuf J, inter alia, held as follows:

 

(1) In BBA contracts, despite stipulating the full sale price as being payable, the bank grants ibra or rebate on a termination due to breach or for prepayment.

(2) In an application for an order for sale, the bank must state the sum due and payable at the date on which the order is made, which sum must deduct the unearned profit of the bank.

(3) A BBA contract is not a sale transaction simpliciter.

(4) Despite the written term of the agreement, the bank in reality does not enforce payment of the full sale price upon a premature termination. It always grants rebate or ibra based on unearned profit.

(5) The bank should not be allowed to enrich itself with an amount which was not due. Therefore where the BBA contract was silent on the issue of rebate, by implied term, the bank must grant a rebate and such rebate shall be the amount of unearned profit.

 

Accordingly, the amounts awarded by the judge to the Bank in respect of the claims under the writs of summons were subjected to deductions of unearned profits, if any, upon full realisation and in respect of proceedings commenced by originating summons, the Bank was required to state the amount outstanding after deducting unearned profit as of the date on which an order for sale was obtained.

 

This decision delivered on 28 January 2010 has caused some confusion in the Islamic banking industry as it does not seem to follow the Court of Appeal decision in Lim Kok Hoe.

 

LIM KOK HOE

In Lim Kok Hoe, the Court of Appeal had, inter alia, held as follows:

 

(1) A BBA contract is a sale agreement.

(2) The law applicable in a BBA contract is no different from the law applicable in a conventional loan agreement, i.e. the law applicable is the law of contract.

(3) The Court has a duty to defend, protect and uphold the sanctity of the contract entered into between the parties unless there are any vitiating factors.

(4) It is trite law that the Court should not rewrite the terms of a contract between the parties that it deems to be fair or equitable.

 

AREAS OF CONTRADICTION

The apparent contradictions between the High Court's decision in Azhar Osman and the Court of Appeal's decision in Lim Kok Hoe are as follows:

 

(1) The High Court Judge held that a BBA contract is not a sale transaction simpliciter whereas the Court of Appeal held that it is a sale agreement.

(2) The High Court Judge looked for implied terms despite there being clear written terms whereas the Court of Appeal held that the court has a duty to uphold the sanctity of the contract.

(3) The High Court Judge relied on equitable grounds whereas the Court of Appeal held that the court should not rewrite the terms of the contract.

 

In addition thereto, the High Court Judge ruled that the Bank must grant a rebate and such rebate shall be the amount of unearned profit. This is not consistent with the then applicable Bank Negara Malaysia Shariah Advisory Council’s ruling made on 22 April 2002 which resolved that Islamic banking institutions may incorporate an undertaking in the transaction documents to provide ibra to customers who make early settlement. The granting of ibra is not mandatory. In any event, it is the granting of ibra and not the deduction of unearned profit.

 

It is however noted that the Shariah Advisory Council has on 20 May 2010 ruled that Islamic banking institutions are now obliged to grant ibra to customers for early settlement of financing based on buy and sell contracts. The determination of the formula for ibra is to be standardised by Bank Negara Malaysia.

 

The reasons behind the High Court Judge’s decision appear to be out of concern that the customers should not be taken advantage of by the bank and that the court’s protection is needed to safeguard their interests. However, the question is whether the bank has taken advantage of the customer. It would not appear to be so because the Judge had found that the bank in reality does not enforce payment of the full sale price and does grant a rebate. So the bank does not in reality enrich itself.

 

Ultimately, the issue at hand is upholding the sanctity of the contract entered into between the parties.

 

The Bank has filed an appeal to the Court of Appeal against the High Court decision. It is hoped that the Court of Appeal will clarify the current confusion.

 

 

OOMMEN KOSHY ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

Oommen is a Partner in the Dispute Resolution Division of SKRINE. His main practice areas are Islamic Finance and Commercial Litigation

 

 

 
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