Libyan Supreme Court upholds interest in commercial transactions
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Kilian Bälz
Amereller Rechtsanwälte (Berlin) in association with P&A Legal, Tripoli
kb@amereller.com
Hussam Mujally
Amereller Rechtsanwälte (Berlin) in association with P&A Legal, Tripoli
mujally@amereller.com
Introduction
In a landmark decision on 16 June last year, the Libyan Supreme Court ruled that Law 1/2013 ‘Prohibiting Usurious Transactions’ does not prevent the claiming of delay interest in commercial transactions. The Court adopted a restrictive interpretation of the law, pursuant to which the ban of interest is limited to credit transactions.
Law 1/2013 ‘Prohibiting Usurious Transactions’
Law 1/2013 prohibits interest in civil and commercial transactions. Article 1 (1) provides: ‘Interest on deposits and loans in all civil and commercial transactions between natural and legal persons shall be prohibited. All usurious interest, whether evident or concealed, earned from such transactions shall be invalidated on an absolute basis.’
The law was part of an effort by Libya’s transitional government to bring existing legislation in line with Islamic principles. The ban of interest (or usury) is a fundamental principle of Islamic contract law.[1]
The law entered into force on 21 March 2013. However, its Article 7 provided that its application to transaction between legal entities was suspended until 1 January 2015. The idea was to give the financial sector more time to convert to an Islamic, interest-free system.
In view of the difficulties facing the Libyan banking sector in the ongoing monetary crisis in Libya, the Libyan House of Representatives enacted Law No 7/2015 which further suspended application of the interest ban in transactions between legal entities until 1 January 2020. Legislative enactments by the House of Representatives, a body associated with the so-called Tobruk government of Abudullah Al Thinni, however, are not of universal application in Libya. The backdrop is the unclear government structure in Libya at present, with two competing governments in the western and the eastern parts of the country.[2] The courts in the parts of the country under the control of the Government of National Accord regularly disregard legislative enactments of the House of Representatives.
The broad wording of the provisions of Law 1/2013 resulted in considerable uncertainty, in particular with regard to its scope of application. Is the application of the Law 1/2013 limited to the financial sector, requiring banks to re-organise their business along Islamic principles, or does it also ban interest in commercial transactions in general?
The Supreme Court decision
The Supreme Court has now provided important guidance on the application of Law 1/2013.
In the case, a freight forwarder claimed payment for transporting trees on behalf of the Ministry of Agriculture. The lower courts had ordered the Ministry to pay the outstanding invoices in addition to statutory interest amounting to five per cent, pursuant to Article 229 of the Civil Code. The Ministry challenged the decision and, inter alia, submitted that statutory interest was in violation of the provisions of Law 1/2013.
In its decision, the Supreme Court upheld the decision of the Court of Appeal and took a restrictive approach in interpreting Law 1/2013, effectively confining the prohibition of interest to credit transactions.
After citing Articles 1, 2, 3, 4, 5 and 7 of Law 1/2013, the Court explained: ‘The meaning of these provisions altogether is that it is only concerned with loans regardless of the types or denominations […] And therefore, there is no way to apply it to the provision of Article 229 of the Civil Code [providing for delay interest]’
In conclusion, therefore, the prohibition of interest only applies to credit transactions. It does not bar claims for interest for late payment in commercial transactions. In commercial transactions, a creditor continues to be entitled to claim interest at a rate of five per cent as from the day of raising the action in court.
Outlook
The decision of the Supreme Court clarifies that Law 1/2013 does not prevent claiming delay interest. This, however, is only one aspect of the recent legislation banning interest in Libya. In particular, the proposed conversion of the Libyan banking sector to an Islamic, interest-free system is still awaited.
Notes
[1] The background is the Islamic prohibition of ‘riba’. Sura II:275 of the Qur’an states: ‘God hath permitted sale but prohibited usury’. The majority of Islamic jurists understand this to prohibit interest paid in consideration for the lending of money.
[2] The House of Representatives became the Libyan legislative body on 4 August 2014, after elections on 25 June 2014. The House of Representatives, after its formation, moved from the capital Tripoli to Tobruk. It is affiliated with the Government of the Second Cabinet of Abdullah Al Thinni (also referred to as the Tobruk government). Although never unanimously recognised in Libya, the Tobruk government was widely recognised at international level as the legitimate government of Libya until the Government of National Accord (GNA) was established on the basis of the United Nations-sponsored Libyan Political Agreement of 17 December 2015. The GNA generally does not recognise the legislative powers of the Tobruk Government, hereby referring to a decision of the Supreme Constitutional Court on 6 November 2014, concluding that the elections of the House of Representatives were flawed. The House of Representatives, in turn, does not recognise the jurisdiction of the Constitutional Court.
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