The basics of the transaction was the Blom Bank would place funds with TID where Blom Bank was acting as muwakkil (depositor) and TID was wakil. The judge describes:
"Thus the form of the contract was that of an investment by TID as agent. However, the investment was to be, as clause 2 stated expressly, 'in the wakeel's treasury pool'. The treasury pool was defined in another recital as meaning the wakeel's treasury pool of funds, which is somewhat circular as a definition goes."The contract specified an anticipated profit rate that was used to determine the breakdown of profit allocation between the wakil and muwakkil. For example, if the anticipated profit rate was 5% then any profits above 5% would be retained by the wakil as an incentive fee and if the profits came out to be less than 5%, the muwakkil would retain the entire profit and give up the difference between the actual and anticipated profit rate. However, the wakala agreement added in a clause that changed the relationship in the wakala agreement:
"Clause 7. 1 provided that the funds provided by the muwakkil/depositor would be invested in the treasury pool of the wakeel with effect from the value date. It was also provided that the funds would be treated at par with the funds of the other depositors in the treasury pool, which I understood to mean pari passu. Clause 7.2 provided that on the settlement date the wakeel would pay to the muwakkil/depositor an amount equivalent to the profit stated in the respective offer. That amount was to be paid "on account of the profit" in accordance with the offer for such wakala transaction. That on account payment was to equate to the anticipated profit. Thus there was an unconditional obligation to pay the on account profit in the amount of the anticipated profit whether or not it had in fact been earned by the investment (so called) in the treasury pool. "This essentially required that TID as wakil would pay the anticipated profit rate whether or not the profit was earned by the assets in the treasury pool. There is doubt about whether this is in harmony with the general idea of wakala, but it was signed off on by TID's Shari'ah scholars, presumably based on other details in the contract which rendered the contract Shari'ah-compliant. This led the judge in the case to argue that Blom Bank should receive an interim payment of the principal amount it invested in the wakala with the remainder (the anticipated profit) being determined later. The judge also allows TID to continue appeal on the interim payment, although expressing that it is unlikely to reverse this payment:
"Ultimately, if the master wakala contract is intra vires, the contract claim will succeed. If not, the restitutionary claim will succeed. Either way, TID is liable for at least the whole of the amounts deposited. [...] On the face of it, it should be made to Blom, but Blom, though a highly respected Lebanese company, owes no allegiance to the English court and TID is concerned that it may in the event, if all its defences ultimately succeed, have no means of recovery from a Lebanese company. Had I thought that there was at the end of the day any significant chance of that result being achieved, I would have required either a payment into court or the retention of the sums within the jurisdiction. However, as far as I can see, one way or another Blom is bound to succeed and I shall therefore order the interim payment to be paid to Blom unconditionally in the amount of the judgment sum."The end result here is an interesting outcome whereby Islamic financial institutions operating in Shari'ah-compliant financing are left to their own for issues of Shari'ah-compliance and the use of English law requires that this Shari'ah review occur before the contract is signed. When the contracts are governed by English law, the debate about whether a contract is or is not Shari'ah-compliant will not hold much sway. This is similar to the Shamil Bank of Bahrain v. Beximo Pharmaceuticals, which limited the ability to have contracts subject to both English and Shari'ah law (with English law taking precedence). If the case proceeds the way the judge anticipates, this could secure firms engaging in Islamic finance under English law at least with regards to the principal amounts invested in wakala agreements. We will have to wait and see what the outcome is with regard to the 'anticipated profits' from wakala agreements, which will probably also apply to some mudaraba and musharaka agreements as well.
Note: I am not a lawyer. The post should be taken accordingly.