Abu Dhabi Court of Cassation Judgment: Court held that a bank was not liable for the loss or damage resulting from the loss in value of sukuk investment

Al Tamimi & Company successfully represented a bank in a recent Abu Dhabi court proceedings concerning an investment in a Sukuk and a bank’s obligations with regards to a securities custody, clearing, settlement and services agreement. The bank was one of the subscription managers for said Sukuk. In this case, the Appellant filed a case claiming that the bank was in breach of their contract with the Appellant and in violation of the SCA Board of Directors Decision No. (3 / R.M) of 2017 concerning the Organisation of Promotion and Introduction, which requires prompt disclosure of risk exposures. In her claim, the Appellant argued that the bank was negligent by not informing her that the Sukuk she invested in was categorized as a high-risk product by credit rating agencies at the time she purchased the Sukuk. The value of the Sukuk dropped significantly. The SCA resolution requires prompt disclosure of any material information and verification that the promoted financial product is compatible with the level of risk which the local investor is willing to take.  The Appellant lost the money she invested in the Sukuk, which became worthless following manipulation by the Sukuk issuer in their financials, disclosed to the stock market and she suffered material and moral damages.

Abu Dhabi Court of Cassation Judgment

The Abu Dhabi Court of Cassation held that the bank, when acting as a promoter, had no obligation to give recommendations to the Appellant regarding the sale or purchase of financial products nor to monitor the products following purchase. The bank’s continuing obligations are simply to provide and enable the Appellant’s access to material events and information that adversely affect the price of the Sukuk. Sale and purchase decisions are for the Appellant to make, not the bank, whose role is limited to executing the Appellant’s orders. There was no evidence that the Appellant had given orders to the bank to sell the Sukuk.

The court confirmed that there was no evidence on record that the bank received any notice of a decline or fall in the price of the subject Sukuk, which negates their obligation to give notice of the risk to the Appellant and their liability for the Appellant’s loss of the value of the Sukuk. The Appellant had accepted the terms of her agreement with the bank. The agreement provided that the bank will not be responsible for any loss or damage, howsoever arising, which the Appellant may suffer or incur in connection with the services or the securities unless finally determined by a judgment issued by the courts of the Emirate of Abu Dhabi that the Appellant’s loss (in this case of part) of the value of the Sukuk results directly from the bank’s gross negligence or willful misconduct.

Key takeaways in our claim, we highlighted the following:

1. The Sukuk is an investment agreement between the issuer and the investor. The Appellant should have filed her claim against the issuer not the bank;
2. The claim was premature as the Sukuk term had not yet expired.
3. The bank was only the promoter and had no responsibility in relation to the advice provided to the Appellant to sell or buy the Sukuk which was her responsibility;
4. Pursuant to the Agreement, the bank was not a financial adviser nor a broker. Its role was to process the Appellant’s instruction to sell or purchase the Sukuk;
5. At the time the Claimant purchased the Sukuk, the rating of the Sukuk was of medium grade by the credit agencies; and
6. The drop in the Sukuk value in the global market cannot be attributed to the bank, but rather to third party actions and market conditions that were not relevant to the bank’s role as a promoter pursuant to the Agreement.

The Court of Cassation held that there was no fault on the bank’s part for the Appellant’s loss and her compensation claim (for the damage she suffered in terms of the value of the Sukuk) was dismissed.

The judgment provides clarity with respect to the role of the bank when it acts as promoter of financial products. In this case, it was clear that the bank had given the Appellant timely access to material disclosures, information and financial reports and provided her with mechanisms and means for obtaining necessary data and information relative to the promoted Sukuk pursuant to the SCA Chairman’s Decision 3/R.M concerning the Organisation of Promotion and Introduction. The bank had no right to give recommendations to the Appellant regarding the sale or purchase of financial products. The bank’s continuing obligations are basically to provide and enable the Appellant’s access to material events and information that the bank had received and adversely affect the price of the Sukuk.

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Al Tamimi & Company’s Banking and Finance and Dispute Resolution Practices regularly advise and represent banks and financial firms in their transactions and disputes related to financial products, either conventional or Islamic. Should you have any questions, please contact one of our key contacts below.