This content is from: Local Insights

UAE judicial acceptance of ijara contracts

Mian Muhammad Nazir
The judgment of the Dubai Court of First Instance, in a case involving an ijara contract (lease contract), contemplates the UAE courts' level of familiarity with complex Islamic finance contract instruments. Though the court decision may be subject to appeal, but as it stands, it reveals an evidence of adequate judicial recognition for Islamic finance contracts.

Although it is not the first case that recognises the application of principles of Shariah and Islamic contracts and instruments, the decision will nevertheless confirm the UAE legal and judicial systems' readiness to dispense justice and adjudicate civil and commercial disputes strictly in accordance with the terms and conditions of the underlying contracts and the governing law of such contracts.

The court decision has also affirmed the obligations of each of the parties in its respective capacity under the transaction documents; such clarity, from the court, was very much needed to strengthen the Shariah-compliance aspect of the underlying transaction. In ijara contracts for off-plan properties, the financiers are required to buy the properties in their own names and lease them, under a forward ijara contract (ijarah mawsufah fi al-zimmah), to the customers for an agreed finance period. Under this arrangement, the financiers are exposed to construction risks and, under the principles of Shariah, they are not allowed to shift this risk to the customers. The financiers have to make sure that they are well-covered against the developers' default.

It is expected that the relevant financial institutions will appeal against the decision. Irrespective of the possible outcome of the appeal, the financiers should revisit their arrangements with the developers in respect of the properties which are the subject matter of forward ijara contracts and the Shariah structure for financing such properties in consultation with Shariah and legal advisers.

Mian Muhammad Nazir

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