Dana Gas – choice of English governing law upheld over arguments of non-Shari'a compliance

by Dentons


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.

The Transaction

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).

The Judgment

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 [1939] 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 [1932] AC 161 to the most recent leading authority Great Peace Shipping Ltd v. Tsavliris Salvage (International) Ltd [2003] 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.

Public policy

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.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dentons | Attorney Advertising

Written by:


Dentons on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.