On 17 November 2017, Mr Justice Leggatt handed down a judgment in the High Court of London that had been eagerly awaited by the global sukuk market and the rest of the Islamic finance industry.
Mr Justice Leggatt decided (quite emphatically) that an English law contract relating to an Islamic finance transaction was valid and enforceable under English law and that it was irrelevant whether or not the underlying Islamic transaction (which is governed by the laws of the United Arab Emirates (UAE), and which is the subject of ongoing proceedings in the Emirate of Sharjah) is invalid and unenforceable under the law of the UAE on the basis that the structure is not Shari'ah compliant.
Although the substantive question of Shari'ah compliance is yet to be determined by the UAE courts, the decision of the High Court in London will be well-received by the global Islamic finance industry. The decision also reinforces the appeal of English law in providing certainty when considering the appropriate governing law for an Islamic contract.
The claimant, Dana Gas PJSC, a UAE company raised US$1 billion of finance in 2007 using the issuance of certificates (sukuk). This issuance was restructured in 2013, and the sukuk certificates were due for redemption on 31 October 2017.
The sukuk were issued based upon an underlying Shari'ah-compliant structure known as a "mudaraba". A mudaraba contract is a form of joint-venture in which one party invests capital (rab al-maal) whereas the other invests using their skills or expertise (mudarib) with a view to making a profit which is ultimately shared between the parties on an agreed basis. This kind of Shari'ah-compliant structure - where the investor assumes risk - is distinct from a conventional structure in which interest or a coupon is the basis for a financier's return on its capital (which is prohibited under Shari'ah principles).
A mudaraba agreement was entered into in 2013 between Dana Gas (as mudarib) and Dana Gas Sukuk Ltd (as rab al-maal and as issuer / trustee, the "Sukuk Trustee"). The contract was stipulated to be governed by UAE law. The profits generated by the underlying mudaraba assets were to be distributed in agreed proportions between Dana Gas and the Sukuk Trustee.
At the same time, Dana Gas (as obligor) entered into a purchase undertaking in favour of the Sukuk Trustee (and its delegate) pursuant to which Dana Gas irrevocably granted the Sukuk Trustee (or the delegate) the right to oblige Dana Gas to buy all of the Sukuk Trustee's interest and entitlements in and to the mudaraba assets on an "as is" basis in exchange for payment by Dana Gas of an exercise price in certain circumstances (including default). This contract, however, was governed by English law.
In June 2017, almost four months before the redemption date, Dana Gas issued proceedings in the High Court seeking a declaration that obligations under the purchase undertaking were unenforceable. In a press release, Dana Gas stated that following the "evolution and continual development of Islamic financial instruments and their interpretation" the company had received legal advice that the sukuk were (in their present form) no longer Shari'ah-compliant and invalid under UAE law. Dana Gas considered it necessary to restructure the sukuk. This was based (at least in part) on the argument that the purchase undertaking - by guaranteeing to the certificate holders the return from their investment - removed the risk of their loss of capital. Dana Gas argued that this was inconsistent with Shari'ah principles as it amounted to compensation for the use of money (riba). Therefore, Dana Gas argued that it naturally follows that the purchase undertaking should also be invalid and unenforceable if the underlying transaction is found to be invalid under UAE law.
As a result of an interim anti-suit injunction ordered by a court in the Emirate of Sharjah in September 2017 (which prohibited the parties from proceeding with litigation in England until such time as the Sharjah court had decided the substantive action in the UAE), the High Court sought only to decide - as a preliminary issue - whether or not the purchase undertaking would be valid and enforceable as a matter of English law if the mudaraba agreement was to be determined to be unlawful or invalid and therefore unenforceable in the UAE.
Mr Justice Leggatt emphatically held that the purchase undertaking was valid and enforceable under English law regardless of the position under UAE law. In doing so, Mr Leggatt stated the following:
- On a proper construction of the purchase undertaking, it was "untenable and flatly inconsistent" with its express wording to contend that the obligations were contingent on the validity of the mudaraba agreement. Furthermore, Mr Leggatt held that the performances under the two contracts were "not concurrent conditions" but were split separately and he went on to state that it was very clear that the undertaking had been structured in that way on purpose
- The purchase undertaking was not, as Dana Gas was contending, void on the basis of a mistaken common understanding that the mudaraba agreement was lawful and enforceable under UAE law. Mr Justice Leggatt held that the fact that the purchase undertaking expressly contemplated and catered for the possibility of the mudaraba agreement being unlawful and unenforceable (by making it an 'Event of Default' and a 'Dissolution Event' and therefore also a trigger to exercise of the purchase agreement) meant that Dana Gas could not now seek to rely on it as a basis for arguing that the purchase undertaking was void for mistake
- There are no public policy reasons under English law that would prevent the court from enforcing obligations under the purchase undertaking. The general rule under English law is that the validity and enforceability of a contract governed by English law is not generally affected by considerations of whether or not the contract would be regarded as valid or whether or not its performance would be unlawful under the laws of another country. It was only if a contract had as its object and intention the performance in a friendly foreign country of an act which was illegal under the law of that country that the contract would be considered contrary to English public policy. In this case, Mr Leggatt held there was nothing to indicate that the purchase undertaking had as its object and intention the doing of anything in the UAE which was unlawful under the laws of the UAE (as alleged by Dana Gas). On a proper construction of the purchase undertaking, the inability to enter into a valid sale agreement in the UAE would not affect the independent contractual obligation of Dana Gas under the purchase undertaking - namely to pay the exercise price required upon delivery of an exercise notice
Whilst the substantive question in the UAE relating to the Shari'ah compliance of the underlying Islamic structure is still to be determined (and continues to be anxiously awaited by the Islamic finance industry), this decision will at least be reassuring to the industry that the question of Shari'ah compliance and the application of English law to contracts are two quite distinct issues - at least insofar as the English courts are concerned. Furthermore, payment obligations expressed as independent obligations in English law contracts (as used in a number of Islamic finance structures, not just sukuk) should continue to be enforceable under English law if those English law contracts are clear and concise as to how they are intended to operate.
The focus of the Islamic finance world will inevitably shift now to the UAE in order to see what stance the UAE courts will take towards transactions which were previously pronounced as being compliant by a board of Shari'ah scholars.
For now, however, the High Court in London has provided some very welcome news allowing the industry to breathe a sigh of relief.