Oommen Koshy and Muhammad Suhaib explain a landmark decision of the Federal Court.
On 15 April 2019, in the first ever sitting of a full nine-member bench in Malaysia, the Federal Court in JRI Resources Sdn Bhd v Kuwait Finance House (M) Bhd (President of Association of Islamic Banking Institutions Malaysia & Anor, interveners)
 3 MLJ 561 held that rulings on Islamic finance by the Shariah Advisory Council (“SAC”) of Bank Negara Malaysia under sections 56 and 57 of the Central Bank of Malaysia Act 2009 (“CBMA”) are constitutional and binding on civil courts as they do not amount to judicial decisions.
Sometime in 2008, Kuwait Finance House (Malaysia) Berhad (“KFH”) granted JRI Resources Sdn Bhd (“JRI”) various Islamic credit facilities (“Facilities”), including four Ijarah Muntahiah Bitamlik Facilities (“Ijarah Facilities”). The Facilities were for the purposes of facilitating the leasing of ships by JRI from KFH and were guaranteed by three individuals (“Guarantors”).
HIGH COURT AND COURT OF APPEAL
Arising from JRI’s default in making monthly lease payments under the Facilities, KFH commenced legal proceedings against JRI and the Guarantors to recover the amounts owing under the Facilities and obtained summary judgment against them for the sum of RM118,261,126.26 together with compensation fees.
In the appeal to the Court of Appeal by JRI and the Guarantors, JRI contended, among others, that clause 2.8 (“clause 2.8”) of the Ijarah Facilities agreements which required it to undertake and bear the costs, charges and expenses of all major maintenance of the leased vessels was not Shariah compliant. JRI further submitted that the High Court had erred in not seeking a ruling on this issue from the SAC pursuant to section 56 of the CBMA.
The Court of Appeal allowed the appeals and set aside the summary judgement. It remitted the case to the High Court for trial and directed the High Court to make a reference to the SAC for a ruling as to whether clause 2.8 is Shariah compliant.
In response to the High Court’s request, the SAC issued its ruling through a letter dated 30 June 2016 stating, inter alia
, that although, in principle, KFH (as owner) should bear the maintenance cost of the lease vessels, it was permissible for the contracting parties to negotiate and agree as to who should bear these costs. In effect, the SAC ruled that clause 2.8 is Shariah compliant.
JRI then applied to have the High Court refer to the Federal Court for the latter’s determination as to whether sections 56 and 57 of the CBMA was constitutionality valid. The application was rejected by the High Court but was allowed by the Court of Appeal, resulting in the reference coming before the apex court.
POSITIONS TAKEN AT THE FEDERAL COURT
The proceedings turned on the effect of sections 56 and 57 of the CBMA. Section 56 states that where any question arises in any proceedings relating to Islamic financial business before a court or arbitrator concerning a Shariah matter, the court or arbitrator shall take into consideration any published rulings of the SAC or refer the question to the SAC for its ruling. Section 57 of the CBMA provides that any ruling made by the SAC pursuant to a reference made to it under Section 56 shall be binding on the court or the arbitrator making the reference.
JRI’s position in the Federal Court was that sections 56 and 57 of the CBMA take away judicial power of the High Court from determining any question concerning a Shariah matter and gives it to the SAC, a non-judicial body not provided for under the Federal Constitution (“Constitution”).
KFH contended that the impugned provisions do not vest any judicial power in the SAC. It argued that the SAC only has power to ascertain and rule on Shariah issues and present such ruling to the court. The SAC, it submitted, makes no determination of the case at hand; that determination is left to the court to apply the SAC’s ruling to the facts of the case.
THE DECISION OF THE FEDERAL COURT
The Federal Court, by a 5:4 majority decision, held that sections 56 and 57 of the CBMA were constitutional and that the ruling by the SAC under section 57 did not conclude or settle the disputes between the parties arising from the Islamic financing facilities. The majority added that the SAC only ‘ascertained’ Islamic law for the purposes of the Islamic financial business and did not ‘determine’ the liability of the borrower under the facility. The determination of the borrower’s liability under any facility was determined by the presiding judge and not the SAC.
Four judgments were delivered by the learned judges. Mohd Zawawi Salleh FCJ delivered the leading judgment with the concurrence of Ahmad Maarop PCA, Ramly Ali FCJ, Azahar Mohamed FCJ and Alizatul Khair Osman Khairuddin FCJ. In addition, Azahar Mohamed FCJ delivered a supporting judgment.
Richard Malanjum CJ delivered a dissenting judgment, which was concurred by David Wong CJ (Sabah and Sarawak) and Idrus Harun JCA. David Wong CJ (Sabah and Sarawak) also delivered a supporting dissenting judgment.
We shall now examine the leading majority judgment as well as discuss briefly the other three judgments by the learned judges.
THE MAJORITY JUDGMENTS
Judgment by Mohd Zawawi Salleh FCJ
Doctrine of Separation of Powers
The learned judge noted that the doctrine of separation of powers is recognised as an integral element of our Constitution (see Semenyih Jaya Sdn Bhd v Pentadbir Tanah Daerah Hulu Langat and another case  5 CLJ 526
”)) even though it is not expressly provided for in the Constitution.
The doctrine recognises the functional independence of the three branches of government, namely the legislature, the executive and the judiciary, with the legislature being responsible for making the law, the executive for executing and enforcing the law, and the judiciary for interpreting the law.
The Court observed that in reality there is an overlap and blending of functions, resulting in complementary activity by the different branches that makes absolute separation of powers impossible. It acknowledged that the traditional notion of separation of powers has changed over time to reflect the growing interrelationship between the three branches of government to facilitate the efficient operation of government. The Court noted that there are various bodies in Malaysia, such as the Special Commissioners of Income Tax, the Customs Appeal Tribunal and the Competition Appeal Tribunal, with similar trappings as a court but do not exercise “judicial power
” and are not “courts” in the strict sense.
His Lordship acknowledged that “judicial power” is difficult to define and that it is more appropriate to examine its characteristics or attributes. The Court then referred to Semenyih Jay
a where the Federal Court had highlighted that the exercise of judicial power carries two features namely:
(1) that judicial power is exercised in accordance with the judicial process of the judicature; and
(2) that judicial power is vested only in persons appointed to hold judicial office; therefore, a non-judicial personage has no right to exercise judicial power.
Effect of the SAC’s Ruling
The Federal Court then considered the position in law in relation to the binding effect of the SAC’s ruling. The Judge made a comparison to the mandatory sentencing regime under various penal laws where the court is required to impose a specific term of imprisonment. After analysing the position in various jurisdictions, the Court concluded that Parliament is competent to vest the function of the ascertainment of Islamic law in respect of Islamic banking in the SAC and such ascertainment is binding on the court. It likened the position to the legislative power in prescribing the minimum sentence to be imposed by the court on a convicted person.
The Judge added that the function of the SAC is merely to ascertain the Islamic law for Islamic banking and upon such ascertainment, it is for the court to apply the ascertained law to the facts of the case. The ascertainment of Islamic law for banking does not settle the dispute between the parties before the court. The SAC does not determine or pronounce authoritative decision as to the rights and liabilities of the parties before the court and does not convert the High Court into a mere rubber stamp.
Finally, the Court considered Semenyih Jaya,
given the heavy reliance placed on that decision by JRI to support its contention that sections 56 and 57 of the CBMA are unconstitutional.
The Court was of the view that Semenyih Jaya
can be distinguished from the present case based on its facts. In Semenyih Jaya
, the impugned section 40D of the Land Acquisition Act 1960 provided for the final decision on compensation for compulsory acquisition to be determined not by the judge but by the two assessors sitting with him in the High Court. The offending part of section 40D was that it empowers the assessors, and not the judge, to determine conclusively the issue before the High Court, namely the amount of compensation to be awarded to the landowner.
Based on Semenyih Jaya,
the test is therefore whether there has been a “take-over of the judicial power of the court
” by non-judicial personages. Unlike the accessors in land reference proceedings, the SAC in ascertaining the Islamic law for Islamic banking does not conclusively and finally determine the rights between the parties. The judge presiding over the case is still clothed with the ultimate responsibility of coming to a decision based on his assessment of the facts and the application of the SAC’s ruling.
Thus, the majority of the Federal Court concluded that a ruling of the SAC does not amount to a judicial decision. As there is no judicial power vested in the SAC, the SAC does not usurp the judicial power of the court.
Judgment by Azahar Mohamed FCJ
Azahar Mohamed FCJ made two points in his supporting judgment.
First, that it was incontrovertible that Item 4(k) of the Federal List in the Ninth Schedule of the Constitution vests legislative competence in Parliament to enact laws for the “[a
]scertainment of Islamic law … for the purposes of federal law
.” This meant that insofar as the Constitution is concerned, the power to ascertain Islamic law for the purposes of Islamic financial business is a legislative power and is not inherent or integral to the judicial function.
Second, that as the Constitution is silent on the methodology to be used to ascertain Islamic law for that purpose, it is entirely within the powers and discretion of Parliament to decide how this should be exercised.
His Lordship said that such power and discretion include the power to assign or delegate the powers to any branch of the government or to any administrative body. The decisions of the High Court of Australia in Federal Commissioner of Taxation v Munro; British Imperial Oil Co Ltd v Federal Commissioner of Taxation
 ALR 339 and R v Trade Practices Tribunal; Ex parte Tasmanian Breweries Pty Ltd
 ALR 449 were cited in support of this proposition.
Based on the foregoing, Azahar Mohamed FCJ concluded that the ascertainment of Islamic law for the purposes of Islamic financial business embodied in sections 56 and 57 of the CBMA is a function or power delegated by the legislative branch to the judicial branch and the SAC. As such, the impugned provisions did not trespass on the judicial power and did not violate the doctrine of separation of powers. The principle of separation of powers did not apply to invalidate any legislative delegation of powers to the SAC and the courts to ascertain Islamic law for the purposes of resolving disputes on Islamic financial matters. This did not strip the judiciary of its powers; neither did the executive nor legislature usurp or intrude into the sphere of judicial powers.
THE DISSENTING JUDGMENTS
Judgment by Richard Malanjum CJ
Malanjum CJ considered the issue from three aspects, namely separation of powers vis-a-vis
judicial independence, the rule of law and judicial power.
Whilst acknowledging that the separation of powers as between the legislature and the executive is not absolute or rigid, the Chief Justice expounded that separation of powers between these two powers on the one hand and judicial power on the other must be total or effectively so. His Lordship, citing Semenyih Jaya
, added that the principle of separation of powers and the concept of judicial independence have been recognised as sacrosanct and form part of the basic structure of the Constitution.
His Lordship added that the power of Parliament to make laws under the Constitution and the matters set out in the legislative lists (including the Federal List) in the Ninth Schedule must be understood in the context of the constitutional scheme as a whole and the entries in the legislative lists are not a carte blanche
for Parliament to make law contrary to the principle of separation of powers or the exclusive vesting of judicial power under Article 121 of the Constitution.
In his Lordship’s opinion, it is a fallacy to suggest that the purported ‘flexibility’ of the separation of powers doctrine allows an ‘overlap and blending’ of functions between the branches of government so that each can exercise the powers of another. Such a suggestion ignores the fundamental separation of judicial power from legislative and executive power.
According to the Chief Justice, the exclusive vesting of judicial power in the judiciary is inextricably intertwined with the underlying principle of the rule of law. Citing the Federal Court’s decision in Indira Gandhi a/p Mutho v Pengarah Jabatan Agama Islam Perak and Ors and other appeals
 1 MLJ 545 (“Indira Gandhi
”), he added that the power of the courts is a natural and necessary corollary not just to the separation of powers, but also to the rule of law.
Adopting the dicta
from Labour Relations Board of Saskatchewan v John East Iron Works Ltd
 AC 134, Malanjum CJ said that the three common (but non-exhaustive) features of judicial power are: (a) the exercise of an adjudicative function; (b) finality in resolving the whole dispute; and (c) the enforceability of its own decision (by the decision-making body).
The learned judge opined that the function exercised by the SAC undoubtedly exhibits the first feature of judicial power for two reasons. First, by ruling that clause 2.8 was Shariah compliant, the SAC had effectively rendered JRI’s appeal – that KFH had failed in its obligation to maintain the ships – unsustainable, as it had disposed of the central issue in this case. Second, under section 57 of the CBMA, the ruling is binding on the High Court. It is not open to the High Court to determine the question of law or consider expert evidence on the issue.
According to the Chief Justice, a parallel can be drawn between the role of the SAC under sections 56 and 57 of the CBMA and the role of land assessors under section 40D of the Land Acquisition Act 1960. Under section 40D, the High Court Judge is required to adopt the opinion of the two assessors, or if there is a difference in the opinions of the assessors, to adopt the opinion of one of them. Similarly, in the present case, the ruling of the SAC is final as regards the issue of whether the clause is Shariah compliant. Accordingly, his Lordship concluded that the ruling of the SAC also demonstrates the second suggested indicia
of judicial power.
The learned judge was also of the view that the third feature of judicial power was satisfied. First, the ruling is binding not on the parties but on the High Court. Second, the High Court cannot be said to have retained its judicial power by reason of the SAC merely forwarding its ruling to the High Court. The SAC ruling will necessarily be reflected in the order of the High Court on which it binds. It means the determination of the SAC on the issue referred to it becomes enforceable forthwith. Following Brandy v Human Rights and Equal Opportunity Commission
(1995) 127 ALR 1, it is impermissible for the decision of a non-judicial body to take effect as an exercise of judicial power.
Where a function is not exclusive to any particular power, but may be ancillary or incidental to legislative, executive or judicial power, the true character of that function would depend on the context or purpose for which it is used. The ascertainment of Islamic law for the purpose of enacting Islamic banking regulations would be an exercise of legislative power. If it is done for the purpose of approving the activities or transactions of a central bank, it could be regarded as an administrative function.
As the ascertainment of Islamic law under sections 56 and 57 of the CBMA occurs in the context of an ongoing judicial proceeding in the High Court, the ascertainment becomes an integral and inextricable part of the process of determining the rights and liabilities of the parties in dispute. Thus, even if the SAC’s function is merely one of ascertainment and does not exhibit any core feature of judicial power, it cannot be regarded otherwise than as ancillary or incidental to the exercise of judicial power. In view of its purpose and context, the issuance of a binding ruling by the SAC undoubtedly falls within the ambit of judicial power.
On the basis of the foregoing, the learned Chief Justice concluded that section 57 of the CBMA contravenes Article 121 of the Constitution and must be struck down.
Judgment by David Wong CJ (Sabah and Sarawak)
Referring to Semenyih Jaya
and Indira Gandhi
, the learned judge said that it was clear that the “basic structure
” doctrine, which includes the principle of separation of powers and the independence of the judiciary, has been accepted by the Malaysian Courts. The exclusive and inherent jurisdiction conferred on the civil courts to review a public authority’s actions is a basic part of the Constitution that cannot be altered or removed. Further, judicial power conferred on the civil courts under Article 121(1) of the Constitution also cannot be given to any other body as they do not have the similar protection as the civil courts to safeguard their independence.
Applying the “basic structure
” doctrine, David Wong CJSS was of the opinion that the impugned provisions contained all three elements of judicial power, namely adjudicative, finality and enforceability. The rights and liabilities of the parties in dispute are adjudicated and finally determined by the SAC in its ruling. As regards enforceability, the learned judge expressed the view that it is “artificial” to contend that the ruling is not itself enforceable by the SAC as the Court has no option but to incorporate and apply the substance of the ruling in making the order and delivering its decision.
His Lordship added that even if the functions of the SAC do not exhibit the core characteristics of judicial power, it may arguably be regarded as a “borderline” case. Citing the decision of the Australian High Court in R v Davison
(1954) ALR 877, the Judge said that borderline functions would form part of judicial power if they are ancillary or incidental to its exercise.
The Judge said that if there were no sections 56 and 57 of the CBMA, the learned trial judge would have, in the normal course of event, in a trial accepted and taken into consideration the respective and conflicting expert opinions in considering whether clause 2.8 is Shariah compliant. With the enactment of those provisions, it is crystal clear that with the SAC’s binding ruling, the trial judge’s function of analysing the conflicting opinions has been completely usurped - there is a complete prohibition on the part of the trial judge to determine a substantial issue of dispute as to the legality of clause 2.8. The SAC’s ruling for all intents and purposes becomes the ruling of the trial judge. Hence the legislative purpose here is to take away from the civil courts the judicial power and place it with the SAC on issues relating to Shariah matters.
The learned judge also disagreed that Semenyih Jaya
is distinguishable from the case at hand. In Semenyih Jaya
, the learned judge had no option but to accept the assessment value of the assessors. In this case, similarly the judge’s judicial power to determine whether clause 2.8 is Shariah compliant is also taken away by the binding effect of the SAC’s ruling. In both instances, the judges have been prohibited from exercising their constitutional duty of judging.
His Lordship added that although the SAC is not part of the court structure, two important features cannot be ignored. Firstly, that the court is obliged to refer a dispute on Shariah compliance to the SAC, and secondly, that the ruling is binding on the court, including the appellate courts. These two features in substance make the SAC very much part of the judicial framework. The SAC by providing a ruling that is binding on the courts has in no uncertain terms stepped into the sphere of judicial function which is solely reserved to the civil courts under the Constitution.
David Wong CJSS also agreed that there is merit in JRI’s contention that the binding ruling of the SAC under sections 56 and 57 deprives a litigant of his right to a fair trial and to due process as it denies him of the right to lead evidence and to argue that clause 2.8 is forbidden by law.
For the reasons set out above, the learned judge was constrained to find that sections 56 and 57 had violated the doctrine of separation of power as the provisions clothed the SAC, a non-judicial body under the Constitution, with judicial power.
The introduction of sections 56 and 57 of the CBMA is well intended as the provisions seek to achieve certainty in Islamic banking principles by vesting the interpretation of such principles in the SAC which comprises individuals of vast experience and knowledge in various fields, especially in finance and Islamic law.
Noble intentions aside, the crucial issue is whether the power conferred on the SAC to make rulings which are binding on the court amounts to the exercise of judicial power. The majority judges were of the view that the SAC does not encroach into the realm of judicial power as the trial judge remains responsible for deciding the dispute based on its facts and by applying the SAC’s ruling. The minority judges on the other hand, took the opposite view and maintained that in substance, the SAC exercises judicial power as the trial judge is bound to follow the SAC’s ruling on the question of Islamic law referred to it.
Regardless whether we agree with the views of the majority or minority judges, this decision is a milestone in Malaysian judicial history as it is the first ever sitting of a full nine-member bench of our Federal Court.
You may view the full issue of Skrine’s Legal Insights Issue 2/2019 here.