Dana Gas PJSC (Dana Gas), the Abu Dhabi Stock Exchange listed, UAE-based energy producer, commenced restructuring negotiations with a number of its creditors in May 2017. Just over a month later, Dana Gas announced that:
"Due to the evolution and continual development of Islamic financial instruments and their interpretation, [it had] received legal advice that the Sukuk in its present form is not Shari'a-compliant and is therefore unlawful under UAE law…"
Shortly after making this announcement, Dana Gas commenced proceedings in England and Sharjah (UAE) as well as applying for injunctive relief in the BVI.
In the English proceedings, Dana Gas alleged that the outstanding Sukuk transaction was not Shari'a-compliant and was therefore invalid and unenforceable under UAE law. Dana Gas further contended that given the unlawfulness of the transaction, the English law governed purchase undertaking (the Purchase Undertaking) granted by Dana Gas in favour of Dana Gas Sukuk Limited (the Trustee) was also unenforceable as a matter of English law. In doing so, it relied on three separate grounds: (i) that on a proper interpretation of the Purchase Undertaking, the obligation to pay was conditional upon a lawful transfer of assets; (ii) that the Purchase Undertaking was void for mistake; and (iii) that the Purchase Undertaking was unenforceable on the grounds of English public policy.
On 17 November, the High Court ruled against Dana Gas on all grounds. While Dana Gas has announced that it will appeal, the judgment provides additional certainty and clarity for Islamic Finance practitioners.
In 2007, Dana Gas raised US$1 billion of financing through the issue of Trust Certificates (sukuk). These were structured to be Shari'a-compliant. The transaction was restructured in 2013, when two separate classes of Irish-listed Trust Certificates (the Sukuk) were issued (one exchangeable and the other not), with an aggregate face amount of US$850 million and a scheduled redemption of 31 October 2017). Under the transaction, the Trustee entered into an amended and restated UAE law governed mudarabah agreement (the Mudarabah Agreement) with Dana Gas (as mudarib). This provided that Dana Gas (as mudarib) would invest the Sukuk issue proceeds in certain Shari'a-compliant assets (the Mudarabah Assets) in accordance with a pre-agreed investment plan, in order to generate sufficient funds, thereby enabling the Trustee to make the periodic distribution amounts to holders of the Sukuk. To ensure that the Sukuk would be redeemed in full on any scheduled or early redemption, Dana Gas and the Trustee also entered into an English law governed Purchase Undertaking. Under this, the Trustee had the right following certain events to serve notice on Dana Gas and require it to buy the Mudarabah Assets for a pre-defined exercise price. Dana Gas was required to pay the exercise price into a specified transaction account (which was held on trust by the Trustee for the holders of the Sukuk), and the transfer of title to the underlying Mudarabah Assets was then by way of a separate (UAE law governed) sale agreement (the Sale Agreement).
Conflict of laws
Dana Gas argued that the transaction infringed principles of Islamic Shari'a which form part of UAE law prohibiting usury (riba), and was accordingly unlawful. Therefore all relevant contractual obligations were unenforceable as a matter of UAE law. In his judgment, Mr Justice Leggatt assumed (for the purposes of assessing arguments rather than as a finding in fact or law) that Dana Gas' contention about the unlawfulness of the transaction was correct and that the relevant contracts (that is, the Mudarabah Agreement and the Sale Agreement) were unenforceable as a matter of UAE law.
The Judge went on to say that, in general, English courts would apply the law which governs a contract when deciding on questions of validity and enforceability. Given that the Mudarabah Agreement (and the Sale Agreement) are governed by UAE law, an English court would not enforce them if they were invalid under UAE law (article 10(1) of the Rome I Regulation (Regulation No. 593/2008)).
Applying the same principle, the Judge held that English law would determine whether or not the Purchase Undertaking was enforceable. Absent public policy issues (and there were none here), the fact that the Purchase Undertaking would be regarded as invalid in the place of performance was irrelevant (Kleinwort, Sons & Co v Ungarische Baumwolle Industrie AG  2 KB 678).
Practical considerations: This is a helpful restatement of the English court's approach to conflict issues when considering the applicable governing law in an Islamic Finance transaction.
Dana Gas construction argument
Dana Gas argued that its obligation to pay the Exercise Price under the Purchase Undertaking was conditional upon the parties being able lawfully to transfer the Trustee's rights to the Mudarabah Assets to Dana Gas under the Sale Agreement. Dana Gas argued (and Mr Justice Leggatt assumed) that this Sale Agreement would be invalid under UAE law. Consequently, given that no such transfer could validly occur, Dana Gas argued that no obligation to pay the Exercise Price could arise. Alternatively, Dana Gas argued no such payment obligation could arise because the Mudarabah Agreement itself was void. Accordingly, the Trustee never acquired any rights to the Mudarabah Assets which it was able to sell by exercising its rights under the Purchase Undertaking.
The Judge held that, as drafted, payment of the Exercise Price under the Purchase Undertaking was not conditional upon the transfer of the Mudarabah Assets. Using terminology sometimes used, the two performances were not concurrent conditions. This was because the obligation to pay the Exercise Price arose upon delivery of a (valid) exercise notice, and there was no other condition that had to be satisfied to trigger that payment obligation. The obligation to transfer the Mudarabah Assets and execute a Sale Agreement only arose following payment of the Exercise Price. Therefore, the Mudarabah Assets purchase process should be viewed as two separate stages: the first stage being payment of the Exercise Price and the second stage being the transfer of Mudarabah Assets pursuant to a Sale Agreement.
Practical considerations: Again, this is a helpful clarification for practitioners. It underlines the importance when drafting to separate the obligation to pay the exercise price (and what pre-conditions apply) from the obligations to transfer the underlying related assets. In order to mitigate the risk that the consequences of any potential defect in the underlying asset transfer could prejudice the related payment obligations, the performance of these obligations should not be dependent on each other.
Dana Gas also argued that the Purchase Undertaking was void for mistake because the parties entered into it on the mistaken assumption that the Mudarabah Agreement was lawful and enforceable under UAE law, that any Sale Agreement would also be valid under UAE law and that therefore the Trustee had valid rights to the Mudarabah Assets. In an interesting analysis of the history of the doctrine of mistake, Mr Justice Leggatt traced the doctrine from Bell v. Lever Bros  AC 161 to the most recent leading authority Great Peace Shipping Ltd v. Tsavliris Salvage (International) Ltd  QB 679.
The Judge decided that the modern doctrine of mistake was not dependent on the subjective beliefs of the parties but on an objective analysis of what they agreed. Furthermore, the doctrine did not depend on what the parties had, expressly or impliedly, agreed would happen when an assumption underlying the contract proved to be false. Rather, it would only apply where "it is to be inferred from the terms of the contract or the surrounding circumstances that the contract was never intended to apply in the situation which in reality existed when the contract was made..." Accordingly, the doctrine could only apply where there was a gap in the contract. If the parties had expressly or impliedly agreed what would happen if a certain event occurred, then there would be no gap in the contract and the doctrine of mistake could not apply.
The Judge decided that the invalidity of the Mudarabah Agreement, unenforceability of the Sale Agreement, and any defect in the Trustee's title to the Mudarabah Assets were not grounds for mistake. The Judge analysed carefully how the invalidity and unenforceability of the Mudarabah Agreement and Sale Agreement would be treated for the purposes of the “Repudiation” and “Illegality” events of default. Given that the consequences of these events triggered a Dissolution Event, thereby giving the Trustee the right to service an exercise notice under the Purchase Undertaking which would, in turn, require payment of the Exercise Price, the Judge concluded there was no gap in the contractual framework. The parties had agreed at the outset that the risk of these illegality and repudiation events lay with Dana Gas. As such, a claim for mistake was not available.
Practical considerations: In order to mitigate the risks of any potential claim for mistake as a result of non-Shari'a compliance, it is important to make it clear which party bears this risk. In this case, the Judge was satisfied that the Illegality and Repudiation events of default achieved this purpose. In addition, robust Shari'a compliance representations and warranties, as well as indemnities and contractual restitutionary provisions for defects in asset transfer provisions, could achieve a similar result.
The validity and enforceability of an English law governed contract is not generally affected by considerations of whether the contract would be regarded as valid, or whether its performance would be lawful under the laws of another country. However this is subject to a number of exceptions. In this case, Dana Gas argued that as a result of Article 9(3) of the Rome I Regulation, the court was required to take into account whether or not the Purchase Undertaking was enforceable in the UAE.
Article 9(3) provides that "effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful…"
Dana Gas argued that all of the obligations under the Purchase Undertaking had to be performed in the UAE, and therefore UAE laws were relevant.
The Judge disagreed. Given that the Transaction Account was maintained by the Trustee with Deutsche Bank in London (and therefore the place of performance of the obligations following service of an exercise notice was in England), Article 9(3) was not applicable and the court did not need to consider any overriding mandatory provisions of UAE law when analysing the Purchase Undertaking.
Practical considerations: To mitigate the risks that an English court would need to take into account any overriding mandatory provisions of local law when analysing a Purchase Undertaking, it is important to specify clearly where performance of the obligations will take place. In this case, locating the transaction account in a jurisdiction that was not the obligor's jurisdiction was sufficient.
Although the decision does not introduce any new legal concepts, it provides welcome clarity on the issues contemplated in the context of sukuk and Islamic Finance transactions.