A review of Raj Parker's visit to the Commercium Colloquium

Lizzie Hill (the Commercium Colloquium's Bloomsbury Ambassador, GDL 2012/13) reviews the 02/05/2013 visit of Raj Parker, partner at Freshfields Bruckhaus Deringer LLP:

Background

Raj Parker, now a dispute resolution partner at the London office of Freshfields Bruckhaus Deringer, started at the criminal bar then took on a job at Lloyd’s at a time of scandal and corruption during which he instructed Freshfields, and subsequently (hesitantly) took on a job there which he found he really enjoyed. His favourite thing about working at Freshfields is the quality of work, the variety and challenge and the people. He runs the pro bono practice.

Dispute resolution

The Freshfields team covers a huge number of different industry areas such as sports, construction, insurance, energy, media and telecoms, banking.

Sports has included a lot of work for the FA since the 80s, such as a bid to introduce AstroTurf to allow play in the UK in bad weather conditions, which the ECJ and UEFA blocked. Margaret Thatcher was quite concerned with hooliganism as a problem in football, and Raj Parker had the opportunity to participate in think tanks and policy and help the FA deal with some of these issues. Then the Hillsborough disaster happened and Freshfields represented the FA on matters with fans and the police and advised on introducing seated stadia. Much of the documentation surrounding Hillsborough is now available online. The Report of the Hillsborough Independent Panel in September 2013 upheld the Taylor Report's finding that the fans weren’t to blame and the authorities were – there may be further litigation and compensation in this area.

In 1991, Raj Parker helped prepare and set up the Premier League as the Football League First Division was breaking away from the Football League. Several actions were brought to block this move, including a judicial review claim that it would be ultra vires to form the Premier League as it was moving into the private commercial realm and the FA was a public body, and a breach of contract claim that the Football Association wasn't fairly considering all 92 clubs in the Football League. Ultimately all such actions failed. Raj Parker had no idea what he had helped create, and the Premier League's value soared from circa £300 million in 1992 to over £3 billion today.

Other notable work in the sports arena involved Lance Armstrong and the International Cycling Union, LOCOG and London 2012, Qatar and the 2022 FIFA World Cup, and the Board Of Control For Cricket In India. Raj Parker also works in white-collar crime. This area is seeing a lot of activity at the moment, as is regulatory work.

The current legal landscape

Raj Parker notes an increasing number of crises such as the Deepwater Horizon accident and more hostile bids, unexpected events, and natural disasters. Economic woes have led to more risk-taking, and therefore to more collapses and more 'man-made' disasters.

The emergence of the 'BRIC' economies means that companies are expanding into areas with different business cultures (and regulation), and this means a lot of work to manage risk. Raj Parker mentioned Bumi's issues in Indonesia.

There is an increasing number of class and collective actions in the UK, albeit not yet on a par with America.

There are also growing concerns about the safety of data – especially hacking, by both businesses and states, in defence, finance, and healthcare. Privacy is therefore set to be a big growth area.

Joint ventures in Asia mean more work with different and difficult antitrust laws, and more need to identify and manage risks.

The government sees commercial litigation as a jewel in the crown of British law, and somewhat as a cash cow. Many big international disputes are brought to London and the government is keen to encourage this and to secure London’s place as the pre-eminent arena for arbitration and litigation.

Many international disputes, such as those between Russian businessmen, come to London as people have confidence in English law owing to the high calibre and integrity of the judiciary, who are 'beyond reproach'. All cards are laid on the table and parties have a chance to cross-examine. Litigants also like the public nature of justice, whereby back-room deals and unrecorded minutes are exposed. There are also equitable remedies such as freezing orders, and the chasing of payments as judgments are enforced.

Pro bono

In Hong Kong, the practice has brought medical negligence claims against an international hospital which had been systematically at fault.

Criminal tribunals in former Yugoslavia re genocide involved Freshfields lawyers from offices all over the world.

Trainees have the opportunity to attend clinics and give legal advice, e.g. on child homelessness.

Freshfields help UK asylum-seekers with a very high success rate.

Another review of John Dewar's visit to the Commercium Colloquium

Tarini Barat (LPC 2012/3) reviews the 25/04/2013 visit of John Dewar, partner at Milbank, Tweed, Hadley & McCloy LLP:

On 25th April, the Commercium Colloquium hosted John Dewar, partner at Milbank, Tweed, Hadley & McCloy and head of the firm’s Islamic finance practice. Mr. Dewar, having just returned to London from Saudi Arabia, gave a presentation introducing the basic principles of Islamic finance techniques.

Context
Islamic Finance has been spreading widely, especially after the credit crunch in 2008. Mr. Dewar explained, that with the downfall of western banks, it was Islamic finance, and in particular Islamic banks that were willing and able to invest money and provide financing for infrastructure, petro-chemical and project finance deals, not just in the Middle East but also Pakistan, India, Malaysia and beyond.

The increasing profile of Islamic finance has meant that Islamic financing techniques now often sit side by side with conventional financing on large global projects and Mr. Dewar shared stories of deals in Texas and Vietnam which involved elements of Islamic finance.

What is Islamic finance?
Islamic finance is the conduct of commercial and financial activities in accordance with Islamic law, i.e. Sharia’a.

There are five key principles in Sharia’a that underpin Islamic finance: -
• Riba: any profit or benefit must be linked to performance of a real asset and its risk. One cannot use money to make more money such as in the case of interest on a loan.
• Gharar: there must be a certainty of contractual terms such as subject matter, price and time of delivery.
• Maisir: commercial risk taking is encouraged but contracts tantamount to gambling are prohibited such as hedging.
• Unjust enrichment
• Unethical purpose or trading in forbidden goods or assets are not allowed.

How are these principles applied?
The banks that invest through Islamic finance techniques have a Sharia’a board. As most Islamic finance deals are bespoke transactions, during the development and structuring process for these transactions they share the term sheet (providing all the details of the transaction) with Islamic scholars, who conduct research to see if the transaction is compliant with Islamic law principles. The scholars will issue fatawa (legal opinions) as to whether the transaction is compliant with Sharia’a. Mr. Dewar emphasised how essential the fatwa [this being singular of sukuk] is to the transaction and in attracting investors; however, he did mention that fatawa issued by the banks made clear that they provided one such legal opinion and that investors might sometimes also undertake their own research as to the compliance of the transaction with Sharia’a and may challenge a fatwa issued by a bank’s Sharia'a board.

Key aspects of Islamic finance structures
Mr. Dewar outlined in his presentation that Islamic finance techniques are asset backed and involve the transfer of risk and ownership from the customer to the banks. It is this Sharia’a-compliant transfer of risk or asset that allows the bank to earn money on its financing deals.

There were three main categories of Islamic finance structures that Mr. Dewar went through: -
• Asset-backed
• Risk-sharing
• Sukuk, aka "Islamic bonds"

ASSET-BACKED
Murabaha (Cost Plus Financing)
A murabaha transaction involves the purchase of an asset by the financier (on behalf of the client) who then sells the asset to the client for the cost of the asset plus a pre-stated margin on a deferred payment basis, which may be pegged to a benchmark such as LIBOR.

[This and all images were kindly provided to guests by John Dewar.]

Ijara (lease purchase finance)
The ijara is a form of lease financing where the lessor/financier purchases the asset from the supplier and then transfers possession to the lessee/client with a profit margin built into each lease payment over the term of the lease.


Istisna’a (commissioned manufacture of specified asset)
The istisna’a is a construction and procurement contract for commissioned manufacture of a specified asset. Following a request from the client, the financier procures contractor to manufacture the specified asset. Client contracts to act as wakil (agent) of financier. Upon construction, the contractor transfers the title to the asset to the financier, who will then either sell the asset to the client outright or lease the asset to the client under an ijarah.


RISK-SHARING STRUCTURES
Mudaraba (investment fund arrangement)
A mudaraba is an investment fund arrangement under which the financier acts as capital provider (rab al-mal) and the client acts as mudareb (akin to an investment agent) to invest the capital provided by the rab al-mal and manage the partnership. Profit of the venture can be distributed between the parties at a predetermined ratio but with any loss (subject to whether the loss is caused by the mudareb’s negligence) being borne by the rab al-mal.


Musharaka (joint venture arrangement)
The financing arrangement for a musharaka is similar to that for a mudarabah, except that any losses are borne in proportion to the capital invested by both the client and the financier.


SUKUK
Often referred to as an Islamic bond, a sakk [sakk being singular of sukuk] represents an undivided beneficial ownership interest in an underlying asset. Unlike conventional bonds where the holder is paid a fixed or floating interest, the returns on a sakk are linked to the performance of a real asset and are also exposed to the risks associated with ownership of the asset. The sakk is linked to the asset through either an ijarah or musharaka arrangement to generate revenues. Below are two respective figures: -


Mr. Dewar also went through a sukuk structure that combined both musharaka and ijarah structures, which was similar to the structure of a deal that Milbank had been acting on.

Q&A following presentation
After the presentation, the floor was thrown open for questions and there was keen interest shown by the audience. Students asked a wide range of questions touching on the Sharia'a board process and methods of gaining expertise in this field.

Mr. Dewar recommended students who were interested in gaining a better understanding of this field to read Islamic Finance: Law and Practice published in 2012 by Oxford University Press. He also shared with us a book he has edited, International Project Finance: Law in Practice published in 2011 by Oxford University Press.

The presentation on Islamic finance provided students with a broad primer. Mr. Dewar was able to outline and bring to life the intricacies of Islamic financing techniques and principles by providing first hand experiences and anecdotes. His presentation not only helped to demystify complex transaction structures but also helped us to appreciate the growing role of Islamic finance in the global market.

One review of John Dewar's visit to the Commercium Colloquium

Tamara Lucas (LPC 2012/3) reviews the 25/04/2013 visit of John Dewar, partner at Milbank, Tweed, Hadley & McCloy LLP:

John Dewar, a partner in the London office of of Milbank, Tweed, Hadley & McCloy, has a wealth of experience across the Middle East, Africa and India in Sharia’a-compliant financing. Following a fascinating talk, he was particularly generous with his time, answering all the questions sparked by many issues raised — all the more impressive given that he had stepped off a plane that morning from Saudi Arabia.

Rather than reiterate all the specifics of Islamic deal structures given in the talk, I recommend the PLC UK law overview of Islamic finance.

Background
Milbank specialises in corporate finance; i.e. banking capital markets and project finance, mergers and acquisitions, often cross-border. The main jurisdictions which Milbank deals with are New York, England and Germany. English law is often used in financing projects because the investment community is familiar with it and the courts in England are trusted to come to the right judgment, if proceedings are issued. Fortunately the default rates in project finance are very low and litigation is rare.

John Dewar began his career in project finance, especially energy projects. His first project involving Islamic finance was 20 years ago in Karachi, but it was another 10 years before his next Sharia’a-financed project. Over the years the sector continued to grow, experiencing rapid development after the banking crisis. Previous inhibitors to growth had included the relative expense of Sharia’a-compliant financing, regulatory and tax issues, and ethical considerations. There was some debate, for instance, as to whether Islamic banks could accept deposits. Post banking crisis, the margins worldwide had tripled, narrowing the disparity between Sharia’a and other financing structures. Some jurisdictions, and in particular the UK, addressed regulatory and tax disadvantages to encourage the UK to be in the forefront of this developing financing structures. Methods of structuring deals to comply with Sharia’a law developed. The problems in other structures, exemplified by the banking crisis made people and companies more receptive to the principles of Sharia’a financing.

What is Sharia’a financing?
Sharia’a financing is a type of deal structure which has been certified by a committee of Sharia’a law scholars. There are several schools of thought in Sharia’a law. Different schools predominate in different areas: for example, Hanbali is dominant in Saudi Arabia. Different banks have their own Sharia’a committees and different practices. The most conservative compliance is in Saudi Arabia. Malaysia, for instance, has more liberal interpretations of Sharia’a-compliant financing. There are no set forms for a deal (which would be comparable to those recommended by the the Loan Market Association for instance) nor is there consensus as to precisely how deals should be structured to be compliant.

Sharia’a financing is usually in conjunction with conventional banking arrangements. If the deal is certified as Sharia’a-compliant this is merely an opinion of the Sharia’a board which has been appointed by the bank or project. Investors are supposed to do their own assessment as to whether they consider that the product or deal meets the requirements of Sharia’a law.

Sharia’a-compliant financing is now potentially available worldwide. John Dewar has seen Islamic financing used in deals in Texas and has recently been consulted on its possible use for a project in Vietnam. The lack of liquidity in the banking sector, tripling of margins, normalising of deal structures, improved regulatory adjustments and distrust of the conventional banking sector have fuelled growth in the Islamic finance sector. Population growth and growing GDP also helps – money is being deposited and is available for investment. The heartland is in big project finance and asset based deals. The Middle East has always favoured investment in infrastructure but Islamic banks are growing further afield. Conventional banks such as HSBC have now established Islamic finance divisions and John Dewar believes that these giants of conventional financing they will become the major players in Sharia’a financing in the next 10-15 years.

Principles
Sharia’a-compliant deal structures are based on principles of trading used in the Islamic world for centuries. This means that there is a basis of consensus to work from. There are two main types of deal: asset-backed deals and risk-sharing deals. All deal structures are used to adapting to commercial realities, whilst adhering to strict principles: -
• Riba: any profit must be linked to performance of a real asset and a share of the risk. (As a shorthand riba is often referred to as the no-interest principle.) In practice it means that the lender must own the asset before advancing money.
• Gharar: there must be no uncertainty in the deal. This is much stricter than the certainty required in English law contracts.
• Maisir: there must be no speculation, such as gambling. This makes contracts which work on principles similar to derivatives controversial. The Swaps and Derivative Association (ISDA) has devised a Sharia’a-compliant document but this is not universally accepted.
• Unjust enrichment of the lender is forbidden.
• Unethical purpose or trading is prohibited (so a project cannot be connected to alcohol or gambling, for example).

Within these principles John Dewar felt there was considerable flexibility within financing arrangements. There was a sense of collaboration to find an appropriate commercial and ethical solution. "Everything is permitted unless it’s prohibited."

The process
Every Islamic company has a committee of Sharia’a scholars who scrutinise day-to-day activity of the company; new transactions (non-repeated) must be checked and amended if required. At the end of the year the scholars issue a letter stating that the business has been run according to principles of Sharia’a law, which will be included in the company’s annual report.

When working on a deal the contract must be submitted to the Sharia’a board for scrutiny. The contract may have to be translated as well. Aside from any delays in translation, the board may take 2-3 weeks to comment on the contract. The comments must then be addressed by the lawyers, who return the document to the Sharia’a board. When they are happy, the main board can assess the contract from a commercial perspective.

Large transactions will be reviewed by the committee, and if approved a legal opinion (fatwa) will be issued stating that the deal is Sharia’a compliant.

Drafting the contract
When drafting the contract, which is usually based on English law, you must consider Sharia’a principles and the local framework as well. Some national laws are mandatory and cannot be derogated from. Also, if a court in the Middle East, for instance, is asked to apply English law, they may not want to disregard the legal practices of that country. There are many considerations in drafting. The client must be advised of potential problems and when considering so many legal practices it is not always possible to ‘draft your way out of it’.

Following the Shamil Bank judgment (Beximco Pharmaceuticals Ltd and others v Shamil Bank of Bahrain EC [2004] EWCA Civ 19) which stated that Sharia’a law was not a temporal law and could not be applied to a contract, there was much consternation in the Middle East as to the effect on Sharia’a compliant contracts. Consequently, in Saudi Arabia, there is a preference for using Saudi law and not English law. This affects inter-creditor relationships. The complex deal structure usually has an international element. To make the deal acceptable to the other creditors there is usually a provision that those creditors can have disputes heard in English courts under English law.

Deal structures
Deal structures in Islamic finance broadly fall into the following categories: -
• Asset-backed: -
o Murabaha: cost plus financing
o Ijarah: lease purchase financing
o Istisna’a: commissioned manufacture of specified assets
• Risk-sharing: -
o Mudaraba: investment fund arrangement or financed by way of trust
o Musharaka: joint venture or financed through partnership
• Sukuk: Sharia’a-compliant financial instruments including bonds
• Sharia’a-compliant derivatives

The above structures can be used individually or in combination. Flexibility and adaptability appear to be hallmarks of Sharia’a financing.

John Dewar foresees rapid growth in the next 10-20 years.

If you’d like to find out more, John Dewar has edited the book International Project Finance published in 2011 by Oxford University Press which has a chapter on Islamic Finance. A new edition will be published in 2014.