A dual challenge
Navigating the complexities of Shari’ah and civil law systems in MENA arbitration requires practitioners to adeptly merge traditional legal frameworks with modern commercial practices, writes Sherif Akl and Karam Farah of ICC.
The issue of interest rates in arbitration across the MENA region presents unique challenges due to the region’s dual legal frameworks, where Shari’ah law and civil law systems often coexist. This complexity is particularly pronounced in jurisdictions where Shari’ah principles — which prohibit riba (interest), viewed as unjust enrichment—are embedded in the legal framework. At the same time, modern commercial practices often require the application of interest-based mechanisms. As a result, arbitration practitioners in the MENA region must navigate a careful balance between respecting traditional legal norms and facilitating efficient dispute resolution.
SHARI’AH LAW AND THE PROHIBITION OF INTEREST
One of the central principles of Shari’ah law is the prohibition of riba, which is understood to include both interest on loans and exploitative financial transactions. In jurisdictions where Shari’ah law predominates, riba is considered harmful to the social fabric. The rationale is rooted in the view that riba disproportionately benefits the wealthy at the expense of the poor. This prohibition is particularly stringent in countries like Saudi Arabia and Iran, where riba is not only deemed unlawful under civil law but may also be subject to criminal penalties.
In these jurisdictions, interest is generally not recoverable in contractual arrangements or arbitral awards. For instance, Saudi Arabian courts typically refuse to enforce arbitral awards that include interest. To address this constraint, local practices encourage alternative mechanisms, such as collateral enforcement or contractual clauses allowing suspension of performance until payment is made, to incentivise timely payment. These mechanisms, though functionally similar to interest, remain compliant with Shari’ah principles.
THE DUAL LEGAL SYSTEMS IN QATAR AND THE UAE
Some MENA jurisdictions have adopted dual legal systems, combining Shari’ah principles with civil or common law structures, thereby providing more flexibility in handling interest-related matters. Qatar and the United Arab Emirates (UAE), for example, permit the award of interest in certain contexts, particularly in offshore financial zones such as the Qatar Financial Centre (QFC), Dubai International Financial Centre (DIFC), and Abu Dhabi Global Market (ADGM).
In Qatar, while the QFC operates under a common law framework that permits interest-bearing transactions, the mainland legal system adheres to Shari’ah principles, prohibiting interest and limiting compensation to actual losses or future profits. Similarly, in mainland UAE, courts typically allow simple interest in commercial cases, with tribunals often applying a statutory interest rate (commonly 9 per cent) in the absence of an agreement. However, compound interest is generally not allowed in mainland UAE, whereas offshore jurisdictions like DIFC and ADGM apply more liberal approaches, allowing a wider range of interest rates, albeit still subject to limitations.
The coexistence of these dual systems creates a complex environment for businesses and legal practitioners. While international businesses may prefer the flexibility of offshore jurisdictions, they must remain mindful of Shari’ah-compliant standards that may apply to enforcement within the broader national legal framework. Understanding these nuances is crucial when structuring contracts and preparing for arbitration.
IRAN: A STRICT PROHIBITION ON INTEREST
Iran presents one of the most restrictive legal environments in the region regarding interest. Under Iranian law, riba is strictly prohibited, and any contractual provisions involving interest are deemed unenforceable. Iranian law thus provides no room for exceptions, and there is no recognition of interest-bearing agreements, even in the context of international arbitration.
In response, Iranian businesses and parties involved in commercial disputes often use Shari’ah-compliant alternatives to protect themselves from financial losses due to non-performance. These include profit-sharing arrangements, compensation clauses for delayed payments, and the use of collateral. While effective, these mechanisms require precise drafting to ensure compliance with Iranian law and Shari’ah principles.
ENFORCEMENT CHALLENGES AND ALTERNATIVES TO INTEREST
The enforcement of interest-bearing awards remains one of the most significant challenges in Shari’ah-compliant arbitration systems. In jurisdictions where interest is prohibited, arbitral tribunals may be forced to sever interest clauses from international awards to preserve enforceability within the county. This reflects a broader regional trend of balancing international arbitration norms with domestic public policy constraints. As such, in Saudi Arabia, if an arbitral tribunal awards interest in a case, the enforcement of that award is unlikely unless the interest is removed or replaced with an acceptable alternative.
To mitigate enforcement risks associated with interest, parties can rely on (i) collateral agreements, such as real estate or shares pledges, which can be included in arbitration agreements as a form of security to guarantee the payment of claims; (ii) contractual suspension rights allowing for the suspension of performance; or (iii) liquidated damages or penalty clauses for delayed payments, ensuring that there is a financial incentive for compliance.
In jurisdictions like the UAE and Qatar, parties may refer to central bank rates or claim damages for late payment under general contract principles. However, in stricter jurisdictions like Saudi Arabia and Iran, it is common to avoid explicitly mentioning interest in contracts. Instead, parties rely on financial disincentives structured within a Shari’ah-compliant framework.
These alternatives highlight the importance of careful contract drafting in MENA jurisdictions. Legal practitioners must ensure that contracts are not only enforceable but also tailored to align with both commercial realities and local legal limitations.
PUBLIC POLICY AND INTERNATIONAL ARBITRATION
Public policy considerations play a critical role in the enforcement of arbitral awards in MENA jurisdictions. While bilateral investment treaties (BITs) may permit interest-based awards, they can conflict with domestic laws that prohibit or limit interest. As a result, arbitral tribunals must consider the local legal framework when rendering interest-based awards.
As a practical response, in jurisdictions like Saudi Arabia, arbitral tribunals have sometimes resorted to severing the interest provisions from awards to ensure compliance with local Shari’ah laws. This approach reflects the region’s pragmatic stance toward ensuring compliance with local legal norms while facilitating the recognition and enforcement of international awards.
CONCLUSION
The MENA region presents a complex legal landscape for arbitration involving interest, shaped by the interplay between Shari’ah law and modern commercial frameworks. While interest remains strictly prohibited in many jurisdictions, others—particularly those with dual legal systems—offer more flexibility through offshore arbitration centers and commercial courts. To ensure enforceability and reduce risk, parties should consider alternative financial remedies such as collateral enforcement, compensation clauses, and suspension rights. For arbitration practitioners, understanding the nuances of local law and public policy is essential to crafting effective and enforceable dispute resolution clauses. By navigating these complexities, businesses and legal professionals can ensure that their arbitration agreements are enforceable and aligned with the legal norms of the region.
Text by:
- Sherif Akl, director, Arbitration and ADR, Middle East, ICC Dispute Resolution Services
- Karam Farah, counsel, ICC International Court of Arbitration
