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Middle East & Africa-Recovery of loan Interest

A recent judgment of the Federal Supreme Court illustrates the complexities and uncertainties that continue to bedevil litigation over interest bearing transactions in the UAE.

A borrower defaulted in repayment, entered into two settlement agreements with a bank, and then defaulted in respect of the obligations contained in the settlement agreements. The borrower brought suit before the Court of First Instance requesting an accounting and a setting aside of all compound interest, while the bank counterclaimed demanding payment in full. The Court of First Instance issued judgment in favour of the bank, but allowed the bank to recover only the principal plus simple interest. The Court of Appeal, following the same legal principles but a differing view of the facts, awarded a modified amount to the bank. Both parties sought review of the Federal Supreme Court.

In its judgment, the Federal Supreme Court reviewed case law on interest bearing transactions going back to 1980. In a case decided that year, the Federal Supreme Court had considered certain provisions of the Abu Dhabi Code of Civil Procedure that expressly allowed interest. The statutory language under review in 1980 provided that the rate of interest determined by the court may not exceed the rate of interest agreed upon by the parties, or upon the basis of which they transacted, and that in the absence of an agreement the court may determine such rate provided that it may not exceed 12% with respect to commercial transactions and 9% with respect to non-commercial transactions. In its 1980 judgment, the Federal Supreme Court held that these statutory provisions were constitutional, but that banks would not be permitted to charge rates of interest in excess of 12% and that only simple interest would be allowed.

In the current case, the Federal Supreme Court first considered an objection by the borrower that all interest bearing transactions are void pursuant to Article 714 of the Civil Code (promulgated pursuant to Federal Law No. 5 of 1985.) Article 714 provides that if a contract of loan provides for a benefit in excess of the essence of the contract, then such a provision will be void. However, the Federal Supreme Court held that the Civil Code did not apply to banking transactions, which were commercial by their nature and were therefore governed by the Commercial Code. The Federal Supreme Court therefore held that the borrower's challenge to the entirety of the interest owed to the bank could not be sustained.

However, the Federal Supreme Court agreed with the borrower's challenge to the bank's attempt to collect interest in excess of 12%. The UAE Commercial Code expressly allows banks to collect contractually agreed rates of interest and imposes no limitations either with regard to compound interest or with regard to the nominal rate of interest charged. However, the Federal Supreme Court held that the 12% interest rate ceiling instituted by the 1980 judgment continues to apply. It accordingly remanded the case of the Court of Appeal for reconsideration, given that portions of the Court of Appeal judgment awarded interest at a rate in excess of 12%.

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