Dana Gas Sukuk: Legal Silos and Potential Lessons for Deal Teams (Islamic and Conventional)
June 30, 2017 | Author: Hdeel Abdelhady
Dana Gas’ statement that its own sukuk are not Shari’ah compliant and therefore are unlawful under UAE law has cast a spotlight on Shari’ah issues. News articles and commentators have taken notice of the detrimental impact that Dana Gas’ move might have on the sukuk market and the Islamic Finance industry more generally.
These issues are indeed relevant and weighty. But the Dana Gas matter—even in its infancy—may offer potential lessons for legal and business teams on transactions that involve multiple legal systems and jurisdictions, as borne out by the apparent uncertainty around governing law and jurisdiction that have emerged as critical issues.
This post discusses these issues in Dana Gas sukuk matter and offers some observations and lessons that can be drawn from the governing law and forum selection questions raised by the Dana Gas sukuk matter. As this post entails post hoc discussion of the Dana Gas sukuk offering based on publicly available information, there is an element (or more) of Monday morning quarterbacking, and this should be borne in mind. Nevertheless, the general observations and potential lessons—which are not unique to the Dana Gas sukuk or Islamic transactions—should be read for their generality.
Apparently Competing Views of Governing Law and Jurisdiction
Dana Gas’ statement indicates that the company believes (or desires) that UAE law, and more particularly the law of the Emirate of Sharjah,[1] governs the essential question of sukuk legality.
For the sukuk holders [2], a clear and swift solution that does not involve the multi-jurisdictional legal chess game put in motion by Dana Gas’ preemptive injunction strategy [3] would presumably be preferable, as would avoiding adjudication on the merits under Shari’ah in a Sharjah court. A statement from legal counsel to the “Dana bondholders” printed by The National newspaper says as much.
From the perspective of Dana bondholders and capital markets investors generally, it seems regrettable that the company has decided to refute a structure the company itself endorsed as Sharia law-complaint, ignore the English law provisions which govern the claims of bondholders, and embark upon costly multi-jurisdictional litigation which poses a serious threat to the entire sukuk market.
The statement of the Dana Gas sukuk holders’ suggests that English law categorically governs the sukuk holders’ claims and that the application of English law will have practical effect insofar as any judgments produced through adjudication under English law will be enforced in relevant jurisdictions (e.g., where Dana Gas assets are located).
However, a Dana Gas sukuk offering circular (which *appears* to be a relevant document) contains governing law, forum selection, and risk provisions that create a zone of ambiguity as to the extent to which English law will apply to sukuk holders’ claims and, if English law does apply, whether English law judgments will be enforceable overseas. Read separately and together, these provisions, on their face, give rise to the kind of uncertainty that can create openings to muddy legal waters through multiple and competing legal actions and claims in different jurisdictions at pre-litigation, litigation, and post-judgment enforcement stages. An example of such language appears under the heading “Governing Law and Jurisdiction,” and provides that:
The Declaration of Trust, the Agency Agreement, the Purchase Undertaking, the Sale Undertaking, the Security Agreement, the Security Agency Agreement, the Ordinary Certificates and the Exchangeable Certificates will be governed by English law and subject to the non-exclusive jurisdiction of the English Courts. The Mudarabah Agreement, the UAE Share Pledges and the UAE Mortgage will be governed by the laws of the UAE. [4]
Non-Exclusive Jurisdiction of English Courts and Mudaraba Governing Law Clauses Open Door for Competing Litigation
The above provision for the “non-exclusive” jurisdiction of the English courts stands out. As discussed in an earlier MassPoint blog post, prior English court decisions issued well before the Dana Gas sukuk instruments were issued in 2013—including The Investment Dar and Shamil-Beximco cases—would have put parties on notice that governing law and forum provisions play a critical role in the substantive outcome of cases involving Islamic banking/finance/transactional disputes. Arguably, investors or other parties having an interest adjudication of disputes under English law (or law other than Shari’ah) and before specific courts (e.g., English courts), would opt, to the extent practicable in a specific transaction, for forum clauses providing for exclusive jurisdiction, rather than non-exclusive jurisdiction.
Moreover, for the sukuk holders, having the mudaraba agreement governed by English law, rather than by UAE law—as noted in footnote 1 below, the approach a UAE court might take is not certain—may have been preferable as English or other courts outside of the UAE can adjudicate claims under a mudaraba agreement, as they have in the cases of Islamic finance and banking agreements at issue in other cases. By having the mudaraba agreement governed by UAE law—and there may, of course, be specific and compelling reasons for this approach—key obligations of Dana Gas as mudarib will be decided under separate, non-English law. This division of governing law, particularly if not necessary, does not appear to be helpful at the dispute (pre- or post-litigation) phase.
Substantive and Project Management Lessons for Transactions Involving Multiple Jurisdictions and Legal Systems (Islamic and Conventional)
Drafting governing law and forum selection clauses that are suitable for Islamic (or other multi-law and jurisdiction) transactions requires substantive and tactical knowledge of the relevant different legal systems and issues and how they might intersect in contract drafting and in disputes. Assembling and coordinating the right teams is essentially a project management function that is not consistently framed as such by or within deal teams/legal teams (except, perhaps in some contexts such as major M&A transactions that involve the management of large groups of supervised individuals handling structured tasks (such as document review and management)).
Parties engaged in transactions involving multiple jurisdictions and legal systems, including Islamic transactions, should, as far as practicable, ensure that governing law, forum selection and other provisions are not addressed late in the drafting process or in isolation (as often happens in transactions, conventional and Islamic) and that legal and business professionals with the necessary substantive knowledge and tactical awareness are working together to formulate optimal provisions based on, inter alia: available information, the legal status quo, known and potential legal ambiguities and risks, and strategic and tactical considerations.
Most legal and business professionals will not (and need not) possess all of the knowledge and experience needed to develop a coordinated approach that is legally and tactically optimal. In such cases, the involvement of advisors or others professionals who can flag issues, bridge knowledge gaps, and help to coordinate the efforts of subject matter experts (e.g., disputes and transactional lawyers on the legal side) would add value at the front end of the transaction. In other words, deal teams should include at least one fox to bridge knowledge and work flow gaps between and among hedgehogs.
About the Author. Hdeel Abdelhady is Founder and Principal of MassPoint PLLC. She has cross-practice experience handling banking/finance (conventional and Islamic), transactional, and cross-border disputes matters. Hdeel is also an Adjunct Professor at The George Washington University Law School, where she teaches Transactional Islamic Law.
NOTES
[1]Dana Gas’ statement that its sukuk instruments are now unlawful under UAE law appears to rely on assumptions that may not hold, particularly with respect to future proceedings in the Sharjah, UAE court. Among these assumptions are that: (1) a Sharjah court will apply Shari’ah (partly or exclusively), (2) a Sharjah court’s interpretation and application of Shari’ah will be consistent with Dana Gas’ position as to Shari’ah and its applicability, and (3) the Shari’ah compliance of the sukuk instruments is the only Shari’ah issue that is relevant or would be entertained by a Sharjah court applying Shari’ah. All three apparent assumptions (and there are others implicit in the Dana Gas statement) may not hold if a Sharjah court adjudicates the sukuk matter on the merits (there’s a good chance that the case—for commercial and/or legal reasons—may never make it to the merits stage in Sharjah, where the court that issued an injunction will, according to Dana Gas, turn to the merits in December 2017).
[2] The sukuk holders (referred to as bondholders in some news articles) may also be called “investors,” a status distinct from “sukuk holder” (or “bondholder”) that, in principle and in the context of the 2007/2008 pronouncements on sukuk mentioned in footnote 4 below, might have real or perceived implications as to the parties’ respective rights, obligations, and recourse.
[3] Presumably, the Shari’ah/UAE law validity of the sukuk and the pendency of litigation in the Sharjah courts were lynchpins in Dana Gas’ successful applications for injunctions from courts in the British Virgin Islands and England, if those injunctions were issued in support of proper foreign proceedings (such as in the case of a “Black Swan” injunction in the BVI).
[4] As discussed in an earlier MassPoint blog post, some Shari’ah legality issues surrounding sukuk on the market as of 2007 and 2008 were addressed in a very public manner by Sheikh Taqi Usmani, a prominent Shari’ah scholar, and later memorialized by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in a 2008 statement on sukuk that was issued in response to Sheikh Usmani’s legal and policy analysis.[/vc_column_text]