Abu Dhabi Court of Cassation judgment- role of the bank when acting as promoter of financial products
Dispute Resolution / UAE
Ibrahim FoudaSenior Counsel,Dispute Resolution
Zane AnaniSenior Professional Support Lawyer Dispute Resolution
In a recent judgment (Abu Dhabi Court of Cassation judgment No. 335 of 2023 dated 10 May 2023), the Abu Dhabi Court of Cassation determined the respondent bank’s obligations in respect of a contract to provide securities custody, clearing, and settlement services.
The Court held that the bank, a sukuk promoter, whom Al Tamimi & Co represented, was not responsible for the validity, value, or genuineness of the securities, nor for any determination or recommendation in connection with them, unless it was grossly negligent or was responsible for willful misconduct.
In this article, we review the background to the case, summarize the first instance and appeal judgments, and analyze the Cassation judgment and the lessons it holds for banks and investors alike.
In this case, a sukuk investment (that is, a Sharia-compliant fixed income capital markets instrument) was the subject of the dispute between a prominent bank in Abu Dhabi (the Bank/Respondent), in its capacity as one of the subscription managers for the sukuk, and an individual investor (Appellant).
The Appellant filed a case claiming that the bank breached its contract with her and violated the SCA Board of Directors Decision No. (3 / R.M) of 2017 concerning the Organization of Promotion and Introduction, which requires prompt disclosure of risk exposures, arguing that the bank was negligent by not informing her that the sukuk in which she invested was categorized as a high-risk product by credit rating agencies at the time she invested, in circumstances where the sukuk became worthless, and claiming material and moral damages.
The Court of First Instance struck out the claim to recover the value of the sukuk and dismissed the remaining claims.
The Appellant appealed the Court of First Instance judgment.
The Court of Appeal appointed an expert in the proceedings. The expert concluded that the Appellant was aware of the market risks involved in the purchase of the product, and that she possessed a high level of investment expertise. She also had knowledge of the potential fluctuations of the value of the sukuk, to which she had attested in her agreement with the bank.
The Court of Appeal set aside the Court of First Instance’s dismissal of the Appellant’s remaining claims. However, the Court of Appeal entered judgment striking out the action as premature because the Appellant's amount of her alleged losses in connection with the sukuk was not certain and the sukuk was not yet due.
The Court thus dismissed the appeal and confirmed that the bank did not breach the terms of its agreement and was not contractually liable as a promoter of the sukuk.
The Abu Dhabi Court of Cassation upheld the judgments of the Court of Appeal and the Court of First Instance.
The Court held that:
The Appellant had agreed that the bank would not be responsible for any loss or damage, howsoever arising, which the Appellant might suffer or incur in connection with the services or the securities except where the Appellant’s loss in the value of the Sukuk resulted directly from the bank’s gross negligence or willful misconduct (as finally determined by a judgment issued by the courts of the Emirate of Abu Dhabi).
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 were simply to provide and enable the Appellant’s access to material events and information that adversely affected the price of the sukuk. There was no evidence that the bank had received notice of a decline or fall in the price of the sukuk. Hence, the bank was not obliged to give notice of the risk to the Appellant nor was it liable for the Appellant's loss of the value of the Sukuk
Sale and purchase decisions were for the Appellant to make, not the bank, whose role is limited to executing the Appellant’s orders. And there was no evidence that the Appellant had given orders to the bank to sell the sukuk.
The case and the Court’s judgment hold important lessons for investors, considering that Appellant’s claim was flawed in several respects. First, a sukuk is an investment agreement between the issuer and the investor. The Appellant should have filed her claim against the issuer not the bank. Secondly, the claim was premature as the sukuk term had not yet expired. Third, 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.
Fourth, according to the terms of its agreement with the Appellant, 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. And fifth, the drop in the sukuk value in the global market could not 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 its agreement with the Appellant.
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 Organization of Promotion and Introduction.
Moreover, the bank was not obliged to give recommendations to the Appellant regarding the sale or purchase of financial products. The bank was only obliged to provide and enable the Appellant’s access to material events and information that the bank had received, which adversely affected the value of the sukuk, as required by the decision of the Chairman of the Board of Directors of the Securities and Commodities Authority No. (03/R.M) of 2017 regarding the Organization of the Promotion and Introduction (which has been replaced by Chairman of the Securities and Commodities Authority's (SCA) Board of Directors' Resolution No. (13 RM) of 2021 on the Financial Activities Rulebook and Mechanisms of Adjustment).
This case also provides a reminder that the courts will consider the investor’s investment experience and whether they agreed to take on the risk of potential fluctuation in the value of their investment.
The judgment provides clarity for both banks and investors with respect to the role and obligations of a bank when it acts as a promoter of financial products in the particular context of sukuks, with reference to the applicable regulatory framework and the contractual arrangements between the bank and the investor.
For further information,please contact Ibrahim Fouda and Zane Anani.
Published in February 2024
