Payment order claims: a setback to creditors’ position before the Dubai summary judge
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The right to claim interest has been well established in UAE law since 1981, when the Constitutional Department of the UAE Federal Supreme Court permitted simple interest to be charged in banking transactions.
In 1993, the UAE Commercial Code (Federal Law No 18 of 1993 Issuing the Commercial Transactions Law) recognized the right to interest in commercial transactions. Articles 76 et seq. of the Commercial Code provide that a creditor is entitled to claim interest at the contractually agreed rate. In the absence of a contractual rate, Article 76 of the Commercial Code provides that a creditor shall be entitled to claim interest “calculated according to the rate of interest current in the market at the time of dealing, provided that it shall not exceed 12% until full settlement”.
While market rate of interest is limited to a maximum interest of 12% per annum by virtue of Article 76 of the Commercial Code, contractual interest has subjective limits in that: (i) it cannot be “usury” within the meaning of Article 409 of the Penal Code (Federal Law No 3 of 1987); and (ii) it cannot otherwise violate public policy. For example, in a judgment rendered in 1996 the Dubai Court of Cassation (Dubai’s highest civil court) reversed the judgments rendered by the lower courts and considered that a contractual interest rate of 15% per annum was legitimate in the then prevailing circumstances. The Dubai Court of Cassation also accepts that compound interest is legitimate, subject only to the public policy yardstick.
For over the last decade, the Dubai Courts have applied interest at the simple rate of 9% per annum as the market rate in cases where the parties are not bound by a mutually agreed rate.
On 9 June 2021, the practice of applying market interest at the annual rate of 9% changed in Dubai. The General Assembly of the Dubai Court of Cassation issued Resolution No 1 of 2021 binding the Dubai onshore courts (excluding the DIFC Courts) to apply interest at the annual rate of 5% on outstanding debt in the absence of a contractual rate. The change is effective from the date of the resolution.
The change acknowledges that the previous rate no longer accords with current market conditions.
While the resolution does not apply to the courts of the UAE in the other six Emirates, prior to the resolution the UAE courts adopted a uniform approach in applying market interest of 9% per annum. On this basis and considering that the Commercial Code is a Federal law applicable throughout the UAE, it is reasonable to expect the other UAE courts to follow suit by lowering from 9% to 5% the market rate of interest applied to outstanding debt.
The resolution also has an impact on arbitration proceedings in circumstances where the provisions on interest set out in the Commercial Code apply to the transaction in dispute. While the resolution is not binding on arbitral tribunals, the change is relevant to the determination of the market rate of interest to be applied by arbitral tribunals with reference to the Commercial Code.