Factual and Procedural Background
The claimant, a Public Joint Stock Company incorporated under the laws of the UAE ("Plaintiff"), issued certificates in 2007 and restructured the transaction in 2013, raising finance through certificates listed on the Irish Stock Exchange. The certificates, issued by the first defendant ("Trustee"), are governed by English law and held on trust for certificateholders. The transaction involved a mudarabah structure, a Shari'a-compliant joint venture, governed by UAE law, under which the Plaintiff invested the proceeds.
The Mudarabah Agreement anticipated profits sufficient to pay periodic distributions to certificateholders, with arrangements for liquidation and return of capital at maturity. To protect certificateholders against insufficient profits or capital, the Plaintiff entered into a Purchase Undertaking governed by English law, obliging it to purchase the Trustee's rights in the Mudarabah Assets upon certain events, including failure to liquidate assets adequately or default in payments.
The Plaintiff alleges that the Purchase Undertaking effectively guarantees returns, contravening Islamic law principles against usury (riba) incorporated in UAE law, rendering the transaction invalid under UAE law. The defendants deny this and argue that the Purchase Undertaking remains valid under English law regardless of UAE law.
Procedurally, the Plaintiff commenced proceedings in England and the UAE seeking declarations of unenforceability and avoidance. Interim injunctions were granted in various jurisdictions, including an anti-suit injunction by the Sharjah court prohibiting English proceedings, which was countered by an anti-suit injunction in England at the behest of an investor defendant ("BlackRock"). The English court ordered a preliminary issue trial limited to English law questions, assuming in favor of the Plaintiff that the transaction is invalid under UAE law, to determine whether the Purchase Undertaking is nevertheless valid and enforceable under English law.
Legal Issues Presented
- Assuming the transaction is invalid under UAE law, is the Purchase Undertaking governed by English law nevertheless valid and enforceable?
- Whether the obligation to pay the Exercise Price under the Purchase Undertaking is conditional on the lawful transfer of the Trustee's rights to the Mudarabah Assets via a Sale Agreement?
- Whether the Purchase Undertaking is void for mistake based on mistaken assumptions about the validity of the Mudarabah Agreement, the Sale Agreement, and the existence of Trustee rights to the Mudarabah Assets?
- Whether the Purchase Undertaking is unenforceable on grounds of English public policy because its performance would involve unlawful acts under the law of a friendly foreign state (the UAE)?
Arguments of the Parties
Plaintiff's Arguments
- The obligation to pay the Exercise Price is conditional on the ability to lawfully transfer the Trustee's rights to the Mudarabah Assets via a valid Sale Agreement, which is impossible under UAE law.
- The Purchase Undertaking is void for mistake because the parties entered into it under the mistaken assumption that the Mudarabah Agreement and Sale Agreement were lawful and that the Trustee had rights to the Mudarabah Assets.
- The Purchase Undertaking is unenforceable as a matter of English public policy because it requires performance of acts unlawful under UAE law.
Defendants' Arguments
- The Purchase Undertaking's obligation to pay the Exercise Price is unconditional upon delivery of an Exercise Notice and does not depend on the execution of a valid Sale Agreement.
- The risk of invalidity or unenforceability of the Mudarabah Agreement or Sale Agreement was expressly allocated to the Plaintiff in the Purchase Undertaking, precluding any claim of mistake.
- The Purchase Undertaking is valid and enforceable under English law, which governs it, regardless of the invalidity under UAE law of related documents.
- The principle that English courts will not enforce contracts requiring unlawful acts in a foreign country does not apply here because performance occurs in England, not the UAE.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Kleinwort, Sons & Co v Ungarische Baumwolle Industrie AG [1939] 2 KB 678 |
Governing law determines validity and enforceability of contracts under English private international law. |
Confirmed that English law governs the Purchase Undertaking's validity despite UAE law invalidity of related contracts. |
| Bell v Lever Bros [1932] AC 161 |
Doctrine of common mistake and when a contract may be void for mistake. |
Used to analyze whether the Purchase Undertaking is void for mistake; concluded the doctrine applies only in exceptional cases and involves contract construction. |
| Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679 |
Modern approach to common mistake focusing on impossibility of performance and contract construction. |
Supported the court's objective approach to mistake and rejection of mistake claim in this case. |
| Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255 |
Allocation of risk of mistake by contract terms. |
Confirmed that contractual allocation of risk precludes mistake claims; applied to reject Plaintiff’s mistake argument. |
| McRae v Commonwealth Disposals Commission (1950) 84 CLR 337 |
Warranties and allocation of risk in contract formation. |
Illustrated how risk allocation through warranty defeats mistake claims; analogous reasoning applied here. |
| Cavendish Square Holding BV v Makdessi [2016] AC 1172 |
Rule against penalties and contractual consequences. |
Rejected Plaintiff’s argument that contractual consequences for alleging illegality constitute penalties. |
| Ralli Brothers v Cia Naviera Sota y Aznar [1920] 1 KB 614 |
English courts will not enforce contracts requiring unlawful acts in the place of performance. |
Distinguished as inapplicable because performance here occurs in England, not the UAE. |
| Foster v Driscoll [1929] 1 KB 470 |
Contracts intended to effect unlawful acts in friendly foreign states are against public policy and void. |
Applied to assess whether the Purchase Undertaking is unenforceable on public policy grounds; found it was not. |
| Regazzoni v Sethia [1958] AC 301 |
Extension of Foster v Driscoll principle regarding contracts involving unlawful acts abroad. |
Reinforced the requirement that the unlawful act be intended to be performed in the foreign country; applied to reject Plaintiff’s public policy argument. |
| Ispahani v Bank Melli Iran [1998] Lloyds LR (Banking) 133 |
Clarified the necessity of intention to perform unlawful acts within the foreign jurisdiction for public policy invalidation. |
Confirmed the principle that no invalidity arises absent such intention; applied here to uphold enforceability. |
Court's Reasoning and Analysis
The court began by acknowledging the governing law principles under English private international law: contracts are governed by their chosen law, and the Purchase Undertaking is governed by English law. Thus, English law governs its validity and enforceability, irrespective of the invalidity of related contracts under UAE law.
Addressing the Plaintiff’s first argument on construction, the court found the Purchase Undertaking unambiguously obliges the Plaintiff to pay the Exercise Price upon delivery of a valid Exercise Notice, without any condition that a valid Sale Agreement must be executed. The obligation to transfer rights via Sale Agreement arises only after payment, not as a condition precedent. This structure was deliberate to protect certificateholders even if the Mudarabah Agreement or Sale Agreement were invalid.
Regarding mistake, the court reviewed the doctrine as developed in Bell v Lever Bros and Great Peace Shipping. It emphasized the objective approach and the rarity of voiding contracts for mistake. The court found that the Purchase Undertaking expressly allocates the risk of invalidity of the Mudarabah Agreement and Sale Agreement to the Plaintiff via Events of Default and Dissolution Events, which trigger the Trustee’s rights. Therefore, no fundamental mistake voids the contract.
The court rejected the Plaintiff’s argument that contractual provisions penalizing challenges to validity are contrary to public policy, clarifying that such provisions merely provide consequences rather than penalties.
On public policy grounds, the court considered the Ralli Brothers principle and Rome I Regulation article 9(3), concluding that these do not apply because performance (payment of the Exercise Price) occurs in England, not the UAE. The Plaintiff abandoned reliance on these grounds.
The court then analyzed the principle from Foster v Driscoll and related cases, which void contracts intended to effect unlawful acts in friendly foreign states. The court found no evidence that the Purchase Undertaking intended unlawful acts to be performed in the UAE. Even if execution of a Sale Agreement might be unlawful under UAE law, there was no contractual or practical requirement for it to be executed in the UAE. Hence, the public policy argument failed.
The court dismissed other unpursued grounds as without merit.
Holding and Implications
The court DECLARED that the Purchase Undertaking dated 8 May 2013 is valid and enforceable in accordance with its terms under English law, even assuming the transaction is invalid under UAE law.
The direct effect of this decision is that the Plaintiff remains contractually obliged to pay the Exercise Price upon delivery of an Exercise Notice, regardless of the invalidity of related UAE law governed agreements. No broader precedent was set beyond the specific application of English private international law principles and contract construction in this context.