Legal entitlement to interest under UAE law

When pursuing a monetary claim it is common to include a claim for interest. However, the right to claim interest is often an area of misunderstanding in the United Arab Emirates (UAE).

The basis for this confusion is the fact that Shari’a Law, in pursuit of the objective of establishing justice and eliminating exploitation in business transactions, prohibits all sources of unjustified enrichment and dealings that contain excessive risk or speculation (riba). This is commonly thought to include interest of any kind.

To put this in context, Article 409 of the Penal Code, Federal Law No.3 of 1987 (the UAE Penal Code) makes usury between natural persons a criminal offence, with the penalty being possible imprisonment and/or a fine. The term “usury” is widely understood to mean an unreasonably high rate of interest, though the word derives from a Latin term simply meaning interest.

The UAE Civil Code and Commercial Code

Under UAE law, the concept of riba is reflected within the Civil Transactions Law, Federal Law No.5 of 1985 (the UAE Civil Code). Article 714 renders void any provision in a loan contract that would provide a benefit that exceeds the "essence" of the agreement. That would certainly seem to encompass interest. However, in 1981 the Constitutional Department of the UAE Federal Supreme Court - perhaps due to concerns from the banking community - permitted the charging of simple interest in bank transactions, observing that the banking system had become a necessity for the economic existence of the UAE and for the benefit of the public.

The Commercial Transactions Law, Federal Law No.18 of 1993 (the Commercial Code), contains various provisions governing the right to interest. The Commercial Code takes precedence over the UAE Civil Code in respect of commercial transactions, i.e. where at least one of the parties is a trader and/or the transaction concerns “commercial activities”. This suggests that a construction contract, for example, is to be regarded as a commercial transaction, provided that it is entered into in the course of business of at least one of the parties, and various decided cases support this view.

The Commercial Code is clear (via Articles 76, 77, 88 and 90) that, if contractually agreed, a creditor is entitled to interest as compensation for delayed payment either at the rate agreed by the parties or absent agreement, at the prevailing market rate subject to a maximum of 12%. Further, the interest accrues as from the date of the relevant commercial debt “falling due”.

There have been some differences of judicial approach in determining the “due” date. For example, in a Dubai case arising from a construction contract, the Dubai courts at several tiers of appeal, variously awarded interest from different points in time (though all at the same rate of 9%) on different aspects of the contractor’s claims.

The Court of First Instance gave judgment in favour of the contractor for outstanding entitlements for work done under the contract (sum A) and awarded interest on the full amount from the date of commencement of the proceedings.

The Court of Appeal revised those findings:

  • Awarding interest on part of sum A as from the date of completion of the building work
  • Awarding interest on the balance of sum A as from the expiry of the maintenance period
  • Giving judgment for a further sum representing compensation for delay, together with interest as from the date of judgment.

The Court of Appeal’s findings were essentially subsequently upheld by the Court of Cassation. The message is that there is a significant degree of judicial discretion in determining the date from which interest accrues.

Other UAE jurisdictions

The situation in Abu Dhabi differs slightly having enacted specific local legislation giving the courts discretion to award interest in both civil and commercial cases, and guidance as to the interest rate to be applied. The interest rate will be fixed as agreed between the parties, or in the absence of agreement, then at the rate not exceeding 12% for commercial transactions and 9% for non-commercial transactions.

The situation also differs in the Dubai International Financial Centre (DIFC) - essentially a separate ‘free zone’ jurisdiction within Dubai, based on a Common Law model - which specifically allows for interest to be recovered on a judgment for damages, as from the date of the judgment at a rate fixed by the DIFC Courts (currently 9%). Similarly, there are no restrictions on claiming interest under the DIFC Arbitration Law, nor are there any mandatory rates. In practice, arbitral tribunals tend to award interest at between 9 and 12%, but this is matter-specific.

Comment

UAE courts will give effect to contractual provisions for the payment of interest, provided these provisions are within the boundaries prescribed by the applicable legislation referred to above. If contractual provisions are silent on the right to interest, the courts will follow the 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 a claim for interest for delayed payment, it is advisable that they ensure that their contract contains well-defined interest clauses that comply with relevant laws.