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Islamic Finance Update

Islamic finance update: The arranging bank’s duty of care & the validity and enforceability of English law governed agreements in Islamic finance transactions

This update considers two recent Commercial Court decisions which will be of interest and importance to parties involved in Islamic finance transactions.

1) The arranging bank’s duty of care

On 7 December 2017, Males J handed down his Judgment in Golden Belt 1 Sukuk Company BSC(c) v BNP Paribas; FCOF II UB Securities LLC and others v BNP Paribas [2017] EWHC 3182 (Comm).

This case provides a useful examination of the duty of care owed by an arranging bank of a Sukuk (an Islamic finance structured transaction) to holders of Sukuk certificates.

Background to the dispute

BNP Paribas acted as arranger of the Sukuk which has equivalent effect to a Eurobond issue but is structured in a way so as to conform to the principles of Sharia’a law. The purpose of the Sukuk was to raise US$650m for Saad Trading, Contracting & Financial Services (“Saad”), a limited partnership company registered in Saudi Arabia. Under the Sukuk, Golden Belt 1 Sukuk Company BSC(c) (“Golden Belt”) (an SPV incorporated in Bahrain) would issue certificates to the investors to the value of US$650m and act as trustee of the rights of certificate holders. BNP Paribas was engaged by Saad to arrange the Sukuk and to place certificates with investors. A key document of the transaction was a promissory note, governed by the law of Saudi Arabia, for the sum of US$650m which was issued by Saad to the certificate holders as security in the event of default by Saad. The promissory note gave certificate holders a right to secure Judgment through the Courts of Saudi Arabia.

BNP Paribas was to coordinate the execution of the transaction documents including the promissory note. The promissory note was executed with a laser-printed signature and not a wet ink signature as required by the law of Saudi Arabia making it unenforceable.

Saad defaulted on sums due under the Sukuk and the sum of US$650m became due. Subsequently, two New York hedge funds specialising in distressed debt (the “Funds”) purchased certificates for US$49m in the Sukuk.

Golden Belt commenced proceedings before the Saudi Arabian Committee for the Settlement of Negotiable Instrument Disputes. Saad argued that the promissory notes were not signed in wet ink and therefore unenforceable. Golden Belt took the view that proceedings before the Saudi Arabian Committee for the Settlement of Negotiable Instrument Disputes were doomed to fail and took no further action in them.

Golden Belt and the Funds commenced proceedings in the Commercial Court arguing that BNP Paribas owed a duty to exercise reasonable care and skill to ensure that the promissory note was properly executed.

Commercial Court Judgment

Males J held that BNP Paribas was in breach of its duty of care to the Funds (but not to Golden Belt) to take reasonable care to ensure that the promissory note was properly executed. Males J found that Golden Belt was merely a SPV with no economic interest of its own in the validity of the promissory note.

In establishing a duty of care, Males J considered the following factors: 1) the service provided by BNP Paribas; 2) the purpose of this service; 3) for whose benefit was the service provided; 4) the investors dependence on BNP Paribas; and 5) BNP Paribas’s knowledge. 

It was held that the three tests in establishing a duty of care were satisfied, namely:

1) BNP Paribas had assumed responsibility to certificate holders to exercise reasonable care and skill.

2) It was foreseeable that if reasonable care was not exercised, certificate holders would suffer loss because the rights under the promissory note would be flawed. The relationship between BNP Paribas and certificate holders was sufficiently proximate and in the circumstances, it was just, fair and reasonable to impose a duty of care.

3) The imposition of such a duty would not be a novel extension of the law as the duty found to exist is limited and specific.  

Males J stated that BNP Paribas had “failed to live up to the standard of the ordinary skilled banker engaged in a transaction of this nature”. Given the promissory note’s importance to the protection of certificate holders and that issues of enforcement regularly arise in respect of transactions involving Saudi Arabia, BNP Paribas should have ensured that a wet ink signature was secured and failing to do so was negligent. In addition, BNP Paribas could not rely on the disclaimers in the Offering Circular for the Sukuk. The risk that the promissory note might turn out to be invalid because it had not been executed properly was outside of the scope of the disclaimers in the Offering Circular.

It was held that BNP Paribas’s negligent actions caused the Funds to suffer a loss. Males J found that the Funds were entitled to recover the difference between 1) the recovery which they would have made had the promissory note been valid and 2) the recovery which they will in fact achieve (if any).


This case sounds a cautionary note for arranging banks in financial transactions who may owe a duty of care in certain limited circumstances to holders of Sukuk certificates. It is also a useful reminder that arranging banks must ensure that documents are properly executed and in accordance with the requirements of local laws.

2) Validity and enforceability of English law agreements in Islamic finance transactions

On 17 November 2017, Leggatt J handed down his Judgment in Dana Gas PJSC v Dana Gas Sukuk Ltd & Ors [2017] EWHC 2928 (Comm).

The case considered whether an English law agreement to provide security in a Sukuk transaction (the Purchase Undertaking) would be valid if it turned out that the underlying agreement (the Mudarabah Agreement) was found not to be Sharia’a compliant and therefore unlawful and unenforceable under UAE law by which it was governed.  The case was heard as a preliminary issue in which it was assumed (without finding) that the Mudarabah Agreement was Sharia’a compliant contrary to parties’ belief at the time they entered the transactions.

Background to the dispute

Dana Gas PJSC (“Dana Gas”) is a UAE public company and in 2007 raised US$1 billion through issuing tradable Sukuk certificates. In 2013, the transaction was restructured and new certificates were issued with a face value of $850m. The certificates were issued to raise money for investment which was intended to be made in a Sharia’a compliant manner. The proceeds of the certificates were invested in assets under a Mudarabah Agreement (governed by UAE law).

The certificates were issued by the first defendant (the “Trustee”) who held the certificates on trust for the certificate holders. The Trustee’s powers were exercised under delegated authority by the second defendant (the “Delegate”).

The expectation was that the assets under the Mudarabah Agreement would generate sufficient cashflows to fund distributions to certificate holders throughout the term of the Mudarabah Agreement. To protect the certificate holders against there being insufficient funds to make the distributions Dana Gas entered into a purchase undertaking (the “Purchase Undertaking”). Under the terms of the Purchase Undertaking (which was governed by English law) Dana Gas irrevocably granted to the Trustee rights to oblige Dana Gas to buy all of the Trustees’ rights, benefits and entitlements in the Mudarabah assets. It was said to have the effect of guaranteeing and securing Dana Gas’s obligations under the Mudarabah Agreement.


Dana Gas claimed that the Purchase Undertaking was not compliant with Sharia’a law as it has the effect of guaranteeing to the certificate holders the return from their investment by removing the risk of a loss of capital which is inconsistent with the prohibition of compensation for the use of money under Sharia’a law principles. Dana Gas therefore claimed that the transaction was unlawful and all relevant contractual obligations are unenforceable as a matter of UAE law.

For the purpose of the preliminary issue trial, Leggatt J assumed that Dana Gas’s contention was correct and that as a matter of UAE law the Mudarabah Agreement was unlawful and unenforceable.

The question was whether or not, based on the above assumption, the Purchase Undertaking was valid and enforceable as a matter of English law.


Dana Gas relied on three grounds for arguing that the obligations under the Purchase Undertaking were unenforceable:

  1. The Purchase Undertaking was conditional on the parties being able lawfully to transfer the Trustee’s rights to the Mudarabah assets by entering into a valid sale agreement which they cannot do;
  2. The Purchase Undertaking was void for mistake; and
  3. As a matter of public policy, the English Courts will not enforce the obligations under the Purchase Undertaking because it was entered into for a purpose which is unlawful under the law of friendly foreign state.

Leggatt J found that all three grounds were unfounded and concluded that the Purchase Undertaking was valid and enforceable.

In relation to the first ground, Leggatt J stated that as a matter of construction, the Purchase Undertaking envisaged a two-step process: the purchase by Dana Gas of the Trustee’s rights to the Mudarabah assets followed by the transfer of those assets by means of a sale agreement. Even if the sale agreement was unlawful (as a matter of UAE law) this would not affect the Trustee’s rights to require Dana Gas to perform its purchase obligations.

Leggatt J, in relation to the second ground, found that the case of mistake advanced by Dana Gas failed. Dana Gas claimed the following:

  1. When the parties entered into the Purchase Undertaking it was mistakenly understood that the Mudarabah was lawful;
  2. The parties mistakenly understood that the Trustee’s rights to the Mudarabah assets could be transferred to Dana Gas by the execution of a sale agreement; and
  3. That the parties entered into the Purchase Undertaking on the mistaken belief that the Trustee had rights to the Mudarabah assets.

Leggatt J held that the risk of the transaction being non-compliant with Sharia’a law was a risk that had specifically been contemplated by the Purchase Undertaking which expressly stated that if the Mudarabah agreement turns out to be unlawful the Trustee could rely on the Purchase Undertaking to require Dana Gas to make payment. Accordingly, this ground failed.

In relation to the third ground, Leggatt J held that the Purchase Undertaking was not unenforceable as a matter of public policy. Dana Gas sought, before it amended its claim, to rely on the Ralli Brothers principle that an English Court will not enforce an obligation which requires a party to do something which is unlawful by the law of the country in which the act has to be done. However, performance of the obligations was to take place in London not the UAE so Dana Gas did not pursue the Ralli Brothers claim. At trial Dana Gas instead sought to rely on the more general principle that, as a matter of public policy, the English Courts will not enforce a contract which is entered into for a purpose which is unlawful under the law of a friendly state. Leggatt J found that that there was nothing to indicate that the Purchase Undertaking had as its object and intention the doing of anything unlawful under the laws of the UAE. This is an essential ingredient of the principle and this challenge also failed.

We understand that Dana Gas have applied for permission to appeal to the Court of Appeal.


This case provides welcome confirmation that where contracts governed by Sharia’a law are later found to be non-complaint, and therefore unlawful, the English Courts will nonetheless enforce ancillary agreements that are governed by, and lawful under, English law. But there are some important limitations to be wary of.

The English Courts would not enforce an otherwise valid contract if:

  1. Performance would be unlawful in the place of performance; or
  2. The contract was entered into for the purpose of violating the law of a friendly state.

Also, a mistaken belief by both parties to the ancillary agreement that the underlying contract was lawful (when in fact it is unlawful) might render the ancillary agreement unenforceable. But this will not be the case if the parties have expressly agreed that the obligations under ancillary agreement are intended to come into effect if (contrary to what was believed) the underlying contracts turns out to be unlawful.

The decision reinforces the importance of obtaining reliable opinions and in suitable cases express contractual warranties as to Sharia’a compliance.

It is interesting to note that on 27 December 2017, the Islamic Financial Services Board issued a working paper on recovery, resolution and insolvency issues for institutions offering Islamic financial services. The working paper discusses the need to harmonise Sharia’a recovery, bankruptcy and insolvency frameworks. We will continue to monitor these developments as it is very likely that as the Islamic financial sector continues to grow these issues will become increasingly important.

Druces LLP’s banking and finance team advise on Sharia’a law compliant finance transactions. If you would like to discuss any of the issues raised in this briefing please speak to Chris Axford, Charles Spragge or Chris Louth.

This briefing was posted on 11 January 2018