The Financial List in the English High Court has considered the preliminary issue of the validity and enforceability of an agreement governed by English law, which formed part of a complex financial transaction partly governed by UAE law and the principles of Islamic Sharia: Dana Gas PJSC v Dana Gas Sukuk Ltd & Ors EWHC 2928 (Comm).
Assuming (for the purpose of trying the preliminary issue) that all the relevant contractual obligations were unlawful and unenforceable as a matter of UAE law, the High Court held that the English law agreement was nevertheless valid and enforceable. The claimant has applied to the Court of Appeal for permission to appeal.
This decision will be of interest to financial institutions providing finance in the Middle East. It should promote the certainty of being able to enforce obligations under English law contracts within a complex finance structure intended to comply with Sharia principles, regardless of any change to the interpretation of those principles during the lifetime of the transaction. It highlights the importance for lenders and investors involved in such transactions to seek sufficient protection and to consider the appropriate governing law for such protection. Finally, the decision is a helpful illustration of the doctrine of mistake and of the possibility to narrow its scope by contractual allocation of the relevant risks and consequences.
A number of specific drafting points also arise:
- In the instant case, the English law agreement (a purchase undertaking), had been drafted so as to contemplate some of the arguments which were in fact raised. It highlights the importance of identifying potential concerns (here, to protect investors in the event that documents governed by UAE law within an Islamic finance transaction were found to be unlawful and unenforceable), and addressing them specifically.
- Where Sharia governance is not institutionalised or supervised on a national level, drafters should consider being more specific as to the precise Sharia standards incorporated (e.g. per the Accounting and Auditing Organization for Islamic Financial Institutions) or other institutions, to minimise the uncertainty which matters of interpretation of Sharia principles may give rise to. For highly regulated jurisdictions such as Malaysia, however, this is less of a concern as all sukuk issuances are subject to stringent approvals requirement, including the Sharia elements of the transaction.
- It is understood that issuers are amending their terms to waive the right to rely on Sharia non-compliance. This is already common in more established centres for Islamic finance, such as South-East Asia.
The claimant, Dana Gas PJSC (“Dana Gas”), is a UAE public joint stock company and the first private sector regional gas company in the Middle East. In 2007, it raised US$1 billion through an issue of certificates which were tradeable and listed on the Irish Stock Exchange. The certificates were intended to be compliant with Sharia principles, which prohibit interest being paid on any loans of money. Such Sharia compliant certificates are known as sukuk.
The transaction was restructured in 2013, at which time Dana Gas obtained legal opinions confirming that the transaction complied with Sharia, UAE and English law. However, in 2017, the company announced that it had received legal advice that the sukuk was not Sharia compliant and was therefore unlawful under UAE law. Dana Gas issued proceedings in a number of different jurisdictions, including the instant claim in the English High Court.
In these English proceedings, Dana Gas sought declarations that obligations were unenforceable under a particular agreement within the matrix of the transaction. The agreement in question was a purchase undertaking (the “Purchase Undertaking”), which was governed by English law. The complaint made by Dana Gas was that the Purchase Undertaking had the effect of guaranteeing certificate holders the return from their investment by removing the risk of a loss of capital, which was against the Sharia prohibition of riba (compensation for the use of the money). The particulars of the Purchase Undertaking and the structure of the transaction are set out in more detail below.
It is fair to say that the procedural history to the instant decision is complex and unusual. The principal complication was that Dana Gas obtained an interim injunction from the Sharjah Federal Court of First Instance in the UAE, which (among other things) prohibited the first four defendants from participating in the English proceedings. The anti-suit injunction also prevented Dana Gas from continuing to participate in the English proceedings (although the English court noted that Dana Gas felt able to participate for the purposes of opposing the joinder of the fifth defendant and seeking adjournments of the trial). After various applications and adjournments, the English High Court proceeded to give judgment on a preliminary issue of English law on the basis of detailed written opening submissions, which had already been filed. Unusually, it did not hear oral argument.
The High Court did not attempt to decide any issue of UAE law. It assumed in favour of Dana Gas that its case on UAE law was correct and that as a matter of UAE law, all the relevant contractual obligations were unlawful and unenforceable. The essential question to be decided as a preliminary issue was whether or not, on this assumption, the Purchase Undertaking was valid and enforceable as a matter of English law.
The High Court held that the Purchase Undertaking was valid and enforceable under English law.
To understand the court’s reasoning requires comprehension of how the transaction was structured to comply with Sharia principles. Accordingly, set out below is a brief overview of the structure of the transaction, followed by the court’s analysis of the applicable law and reasons for rejecting the arguments advanced by Dana Gas based on contractual construction, mistake and public policy.
(1) Structure of the transaction
The transaction was structured to enable Dana Gas to raise finance without breaching the Sharia prohibition on payment of interest/financial compensation. Because of this prohibition, Dana Gas was unable to take out a straightforward loan or issue securities directly. Dana Gas therefore raised finance through an issue of sukuk certificates, which were intended to be Sharia compliant. The form of sukuk used was a sukuk al-mudarabah, derived from the mudarabah partnership structure. This is a type of joint venture where one party invests capital and the other provides its skills or labour in order to make and ultimately share a profit between them.
Dana Gas entered into the mudarabah partnership structure with Dana Gas Sukuk Limited (the “Trustee”). The Trustee issued the certificates and both the proceeds of the issue and the assets derived from those proceeds were held by the Trustee on trust for the certificate holders. The Trustee then contributed capital (i.e. the capital received from the certificate holders) to be invested by Dana Gas (i.e. in its gas company activities). The profits generated were to be split each quarter in a ratio of 99% to the Trustee and 1% to Dana Gas. These profits were expected to fund quarterly payments to the certificate holders, with any excess to be kept in a reserve account, as well as the principal amount of the certificates on redemption. These arrangements were set out in the “Mudarabah Agreement”, governed by UAE law, between Dana Gas and the Trustee.
With a view to protecting the investors (i.e. the certificate holders) from the risk of insufficient funds for quarterly payments or repayment of principal, Dana Gas entered into the Purchase Undertaking. On the occurrence of certain specified events, the Purchase Undertaking gave the Trustee the right to oblige Dana Gas to repay the investment, following which the Trustee would return rights in assets held on trust to Dana Gas (by entering into a “Sale Agreement”). The events triggering these rights are explained below, under the contractual construction analysis.
(2) Conflicts of laws
The court dealt firstly with the applicability of English law to determine whether the Purchase Undertaking was valid and enforceable. It noted the following general principles:
- Questions about contractual validity/enforceability are decided in the English courts by applying the law which governs the contract: Rome I Regulation (Regulation (EC) 593/2008).
- It is perfectly lawful under English law to guarantee the return from an investment and to pay and receive compensation for the use of money.
- As a matter of English law, it is generally irrelevant whether the contract or its performance would be regarded as unlawful or invalid under a foreign law not applicable to the contract itself (Kleinwort, Sons & Co v Ungarische Baumwolle Industrie AG 2 KB 678).
As an English law agreement, the Purchase Undertaking was therefore prima facie valid and enforceable, whatever view would have been taken had UAE law been applicable. Likewise, the English courts would not enforce the Mudarabah Agreement or the Sale Agreement (if executed), if they were found to be invalid under the law of the UAE, because they were both governed by UAE law.
(3) Contractual construction
As explained above, the Purchase Undertaking provided for repayment to the Trustee (for onwards repayment to the investors under the trust arrangements) in certain circumstances. Specifically, Dana Gas irrevocably granted to the Trustee the right to oblige Dana Gas to buy “all of the Trustee’s rights, benefits and entitlements in and to the Mudarabah Assets” at the relevant “Exercise Price”. The “Mudarabah Assets” were the assets of the mudarabah partnership as referred to in the Mudarabah Agreement. To transfer the Mudarabah Assets, the Purchase Undertaking provided that “following such payment” (i.e. of the Exercise Price) the parties would enter into a “Sale Agreement”.
Dana Gas asserted that, according to the correct interpretation of the Purchase Undertaking, the payment of the Exercise Price was conditional on the parties’ ability to lawfully enter into a valid Sale Agreement. Alternatively, it contended that no obligation to pay the Exercise Price could arise because the Mudarabah Agreement was void (so the Trustee never acquired any rights to the Mudarabah Assets, and so could not sell them under the Purchase Undertaking).
The court found that the performance of: (a) the purchase by Dana Gas of the Trustee’s rights to the Mudarabah Assets; and (b) the transfer of those rights to Dana Gas by the parties executing a Sale Agreement; were not concurrent conditions. It was a two-stage process. The first stage was payment of the Exercise Price, and the only condition to trigger the payment obligation was delivery of a valid notice. The second-stage obligation to execute the Sale Agreement only arose “following” payment of the Exercise Price. The court observed that the Purchase Undertaking had not been structured in this way by accident, particularly given that it was intended to protect the certificate holders against the risk that the mudarabah and the transaction documents governed by UAE law turned out to be invalid.
Dana Gas alleged that when they entered into the Purchase Undertaking, the parties mistakenly understood that: (i) the Mudarabah Agreement was lawful and enforceable; and/or (b) the Trustee’s rights to the Mudarabah Assets could be transferred to Dana Gas by the execution of a Sale Agreement.
The court established that the doctrine of mistake could not be invoked by Dana Gas because the risk that the Mudarabah Agreement and Sale Agreement were unlawful and unenforceable was expressly contemplated and contractually allocated to Dana Gas in the Purchase Undertaking.
(5) English public policy
The final ground relied on by Dana Gas was based on the principle derived from Foster v Driscoll  1 KB 470: as a matter of public policy, the English courts will not enforce a contract whose object and intention are to perform in a friendly foreign country an act which would be illegal under the local law. Dana Gas alleged that the object of the Purchase Undertaking was the execution of a Sale Agreement which would be invalid under UAE law.
The court considered the authorities applicable to this principle: Regazzoni v Sethia  AC 301, and Ispahani v Bank Melli Iran Lloyds LR (Banking) 133. Following these cases, it was an essential and necessary ingredient of the principle that performance of the illegal act in question should be carried out within the foreign country’s own territory.
In the instant case, there was nothing to indicate that the object and intention of the Purchase Undertaking was to do anything in the UAE that was unlawful under the laws of the UAE. Even if the object of the Purchase Undertaking included the execution of a Sale Agreement, there was no suggestion that the Sale Agreement should be executed in the UAE. And even if that was the case, the court’s view was that the Purchase Agreement would only be partially invalid with no effect on Dana Gas’s obligation to pay the Exercise Price.
Accordingly, even on the assumptions made for the purpose of the preliminary issue, the court rejected all of the grounds on which Dana Gas sought to challenge the validity of the English law Purchase Undertaking.