By Andrew MacCuish and Sai Dandekar
When pursuing a debt, it is common to add a claim for interest on the monies due. However, the right to claim interest is often an area of confusion for contracting parties in the UAE, since Sharia Law prohibits the payment of interest (termed “Riba”), whether compound or simple.
The basis for this is the fact that Sharia Law, in pursuit of the objective of establishing justice and eliminating exploitation in business transactions, prohibits all sources of unjustified enrichment and all dealings in transactions that contain excessive risk or speculation.
These principles of Sharia Law, reflected in the UAE Federal Civil Code1 and Article 409 of the UAE Penal Code2, make usury between natural persons a criminal offence, with the penalty being possible imprisonment and/or a fine.
This article examines the statutory status of interest (or Riba) and the UAE Courts’ approach to it.
The UAE Civil Code
Under UAE law, the concept of Riba is addressed within the ambit of Federal Law 5 of 1985 (“UAE Civil Code”).
Article 204 of the UAE Civil Code states:
“If the subject matter of the disposition or the consideration thereof is money, its amount and type must be specified without any increase or decrease in the value of that money at the time of payment having any effect.”
Therefore, on the face of it, there is a prohibition on any increase or decrease in the value of the money lent by way of interest.
Article 714 of the UAE Civil Code contains anti-usury provisions in respect of lending and states:
“If the contract of loan provides for a benefit in excess of the essence of the contract otherwise than a guarantee of the rights of the lender, such provision shall be void but the contract shall be valid.”
In practice, this renders void any provision in a loan contract that would provide a benefit that exceeds the “essence” – i.e. the subject matter of the contract, other than securing the lender’s right to amount lent.
However, perhaps due to concerns from the banking and financial community, the Constitutional Department of the UAE Federal Supreme Court, in its Decision No 14/9, issued on 28 June 1981, permitted the charging of simple interest in connection with banking operations, stating that this was a necessity for the economic existence of the UAE and for the wellbeing and benefit of the public. The Court held that contractual interest received by a bank was lawful, for as long as a compelling need to maintain the system of interest remained, and would only remain lawful until such a time when the need was eliminated by a new banking system.
Commercial Code
Perhaps taking the lead from the Federal Supreme Court, the UAE Federal Law No. 18/1993 (‘Commercial Code’) was introduced to expressly permit interest on delayed payment. It is generally accepted that the prohibition in Article 714 of the UAE Civil Code does not apply to matters governed by the Commercial Code.
Pausing here, it is useful to remember the role of the Commercial Code. The Commercial Code takes precedence over the Civil Code, in respect of the commercial transactions that fall within the former’s ambit – i.e., a ‘trader’ transaction where at least one of the parties is a trader and/or the transaction concerns ‘commercial activities’. One consequence of this is the possibility that certain construction contracts are governed by the Commercial Code.
Article 76 of the Commercial Code states, in respect of commercial transactions:
“A creditor shall have the right to demand interest on a commercial loan in accordance with the rate stipulated in the contract. If the rate of interest is not stipulated in the contract it shall be calculated in accordance with the rate prevailing in the market at the time of the transaction on condition that in this case it should not exceed (12%) per cent, until full settlement is made.”
Further, Article 77 of the Commercial Code states:
“Where the contract stipulates the rate of interest and the debtor delays payment, the delay interest shall be calculated on basis of the agreed rate until full settlement.”
Thus, the Commercial Code is clear that, if contractually agreed, a debtor is obliged to pay interest as compensation for the delayed payment, on the rate agreed to by the parties.
Similarly, Article 88 of the Commercial Code states:
“Where the commercial obligation is a sum of money which was known when the obligation arose and the debtor delays payment thereof, he shall be bound to pay to the creditors as compensation for the delay, the interest fixed in Articles (76) and (77), unless otherwise agreed”.
In this context, it is worth noting that the Abu Dhabi Court of Cassation has set out certain criteria, which must be met if Article 88 of Commercial Code is to be applicable3. These are: the subject matter of the obligation must be a sum of money; at the time of demand for payment, the sum must be an ascertained amount; and, the obligor (i.e. the debtor) must have delayed payment.
In addition, Article 90 of the Commercial Transaction Code states:
“Interest for delay of payment of commercial debts shall accrue on mere maturity of such debts, unless it is otherwise provided for by law or agreement.”
This position is confirmed further in Article 409(3) of the Commercial Code which states:
“The borrower shall be bound to repay the loan and its interest to the bank within such time limits and according to such conditions as are agreed.”
The Dubai Court of Cassation in its judgment of 17 March 2009 in case 266/2008 held:
“the combined effect of the provisions of Articles 76, 88 and 90 of the Commercial Code is that if the subject matter of the commercial obligation is a sum of money determined at the time the obligation arises and the debtor delays the payment, he will be obliged to pay an interest at the rate agreed under the contract provided it does not exceed 12% per annum. If there is no agreement in the contract for the payment of interest then the judicial practice in the Emirate of Dubai is that interest will be calculated at the rate of 9% per annum, with effect from the date the debt fell due for payment. This is regarded as the compensation to the creditor for delay made by the debtor in satisfying his obligation on the date agreed or on the date on which the obligation should have been implemented.”
Therefore, it is clear that such interest is categorised as damages, and is not regarded as an ‘unjust gain’ under the contract. Interestingly, it is not necessary for a party to prove “damage” in order to claim interest, as Article 89 of the Commercial Code states:
“For the accrual of delay interest, it is not a condition that the creditor proves that he sustained damages as a result of such delay.”
Furthermore, under Article 91(1) of the Commercial Code, a creditor may claim damages in addition to delay interest and it will not be mandatory nor necessary for a creditor to prove that such damages resulted from fault or cheating on the part of the debtor.
Abu Dhabi
The situation in Abu Dhabi differs slightly because Abu Dhabi has enacted specific legislation, in addition to the UAE laws mentioned above, which provides for the amount of interest that may be awarded by a Court in both Civil and Commercial cases4.
In Abu Dhabi, Articles 615 and 626 of Civil Court Procedure Law No. (3) of 1970 (“Abu Dhabi Civil Court Procedure Law”) are applicable. While the Civil Procedure Law No. 11 of 1992 (“the UAE Civil Procedure Code”) repealed all laws concerning civil procedure, provisions on interest such as the Abu Dhabi Civil Court Procedure, were specifically excluded and continue to be effective7.
Therefore, if parties conclude a contract which is subject to the laws of Abu Dhabi, parties should keep in mind that Abu Dhabi has the aforementioned Emirate specific law which entitles the Courts in Abu Dhabi to award interest in contracts which are governed by the Civil Code and the Commercial Code.
DIFC
Interest can be claimed under DIFC law. Article 39 of the DIFC Law No 10 of 2004 specifically allows for interest to be recovered on a judgment for damages and interest will start to run from the date of the judgment. The interest rate shall be fixed as per the rules of the DIFC Court or as determined appropriate by the DIFC Court.
Similarly, there are no restrictions on claiming interest under the DIFC Arbitration Law, nor are there any mandatory or customary rates. In practice, arbitral tribunals tend to award interest at between 9 and 12 per cent per annum, but this is matter specific.
Conclusion
In summary, courts and legislators in the UAE have provided for a well-balanced and measured application of interest, meeting the needs of the economy, but in doing so have endeavored to recognize and walk within Sharia.
The UAE courts will give effect to contractual provisions for the payment of interest, provided these provisions are within the boundaries prescribed by the Commercial Code. If contractual provisions are silent on the right to claim interest, the Court will follow applicable laws and determine whether the parties are entitled to interest, taking into account the facts of each individual case.
In practice, if contracting parties wish to include the right to interest for delayed payment, it is advisable that they ensure that their contract contains well defined interest clauses that comply with relevant laws.
Footnotes
[1] Federal Law No: 5 of 1985 as amended by Federal law 1 of 1987
[2] UAE federal law no (3) of 1987
[3] Decision dated 12 June 2008 of 212/Judicial Year 2
[4] The interest rate will be fixed as agreed between the parties or if the parties did not agree on the interest rate, then at the rate not exceeding 12% for commercial transactions and 9% for non-commercial transactions.
[5] Article 61 of the Abu Dhabi Civil Court Procedure Law authorises the Abu Dhabi Courts to award interest from the date the debt falls due:
“The Court may in determining the interest on an adjudged amount order the calculation of the interest from the date such amount fell due or any later date until the date of payment or any prior date. It may further charge interest on the costs of the claim or any part thereof.”
[6] Article 62 of the Abu Dhabi Civil Court Procedure Law gives guidance to the Court on the rate of interest to be applied:
1 “Interest rate determined by the court shall not exceed the price accepted between the parties or dealt with such in any stage before instituting the proceeding.
2 If the parties did not agree on the interest rate, the court may determine the rate, provided that it shall not exceed 12 percent in commercial formalities and 9 percent in the un- commercial formalities.
3 In all cases, the benefit shall not exceed the amount of debt origin.”
[7] Article 1 of the UAE Civil Procedure Code states:
“The attached law concerning civil procedures before the courts shall take effect, and all laws, decrees, orders, measures and directives in force pertaining to civil procedures are repealed, with the exception of provisions relating to interest on commercial transactions, which shall remain in force until they are regulated by law;”
Mondaq
Dear Author,
Thank you for such a nice and well written Article.
You have excellently explained the interest rate and its applicability in the UAE courts.
Best Regards
Aws M. Younis