The Federal Supreme Court recently held it improper to disallow contractually agreed interest owed by a bank to a depositor.
The rules in the UAE concerning interest bearing transactions are fairly complex, with different substantive rules applying in different emirates, and different substantive rules applying to different classes of plaintiffs. Usury is prohibited under the traditional rules of Islamic Shariah, although some scholarly debate continues over the definition of usury. The Abu Dhabi Code of Civil Procedure, introduced in 1970, contained express provisions permitting banks to charge interest subject to percentage limitations. In a 1980 judgment of the Federal Supreme Court, these provisions of the Abu Dhabi Code of Civil Procedure were held to be constitutional, subject to the limitation that no compound interest could be awarded by the courts of the UAE as a matter of constitutional law. The Civil Code and the Penal Code of the UAE contain provisions which are hostile to interest bearing transactions. The Commercial Code of the UAE liberalized the scope within which interest bearing transactions could be properly performed, by permitting interest bearing transactions at contractually agreed rates in commercial dealings.
In this case, a depositor sued a bank for default on a Dh30 million ($8 million) deposit. The Court of First Instance appointed an accounting expert to investigate the issues of fact in the case, and the expert reported that the bank indeed owed the depositor Dh30 million plus a substantial sum of interest. The Court of First Instance issued judgment in favour of the depositor for Dh30 million, but declined to award interest on the grounds that it was prohibited by the Shariah. This was affirmed by the Court of Appeal on the grounds that only bans could charge interest.
The Federal Supreme Court reversed the judgment, holding that interest could properly be awarded to the depositor given that the deposit with the bank was a commercial transaction and that contractually agreed interest was properly chargeable in commercial transactions. The Court observed that the depositor placed funds with the bank expecting to earn a contractual rate of return, and that the bank could not be permitted to escape these contractual obligations. On remand, the Court of Appeal rendered judgment in favour of the depositor for both the principal and the interest amount..
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