It is common in contracts where an Abu Dhabi entity is a party to the contract for it to be specifically governed by the laws of Abu Dhabi and the laws of the UAE as applied in Abu Dhabi. What many parties do not realise is that in invoking Abu Dhabi law in their contract they are importing specific provisions relating to interest that do not apply in the wider UAE. This article will look at the status of interest in the UAE and focus on how it differs in Abu Dhabi.

The general position under UAE Law

UAE Law allows for interest in commercial dealings. Constitutional Petition 14 confirms that the award of interest is not contrary to the constitution of the UAE (given the primary source of legislation is the Islamic Shari'ah), and the legislation can provide for interest where necessary.
The UAE Code of Commercial Practice (the "Commercial Code") specifically allows interest.

"A Creditor shall be entitled to charge interest on a commercial loan according to the rate provided in the contract. If the rate of interest is not specified in the contract, it shall be reckoned according to the market rate prevailing at the time of the transaction, but in this case shall not exceed 12% until payment is made." Article 76

The Commercial Code is clear that a debtor is obliged to pay interest as compensation for the delay in settling the debt due. Article 88 states:

"If the subject of a commercial obligation is a sum of money in an amount known at the time the obligation arose, and the debtor delays in making settlement, he shall be bound to pay the creditor the interest specified in Articles 76 and 77 as compensation for the delay unless otherwise agreed."

The Civil Code does not specifically allow for interest. Article 714 states that a provision in a contract that provides for a benefit in excess of the essence of the contract (otherwise than a guarantee of rights of the lender) shall be void but the contract shall remain valid.

In Dubai judicial custom has established that a delay penalty of 9% may be added to civil debts unless the parties have agreed otherwise. The situation in Abu Dhabi differs as legislation specifically allows for and governs the amount of interest that may be awarded by a Court in both Civil and Commercial cases.

The position under the laws of Abu Dhabi

In Abu Dhabi, Articles 61 and 62 of the Civil Courts Procedures of Abu Dhabi are applicable. While the Civil Procedure Code repealed all laws concerning civil procedure, provisions on interest were specifically excluded and continue to be effective. Article 1 of the Civil Procedure Code makes this clear:

"All applicable laws, decrees...concerning civil procedure are hereby repealed with the exception of the provisions on interest in commercial transactions which shall continue to be effective until they are regulated by a law;"

Article 61 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."

Article 62 gives guidance to the Court on the rate of interest to be applied:

"Interest rate may not be raised:

62

  1. The interest rate determined by the Court may not exceed the rate agreed upon by the parties or that on the basis on which they entered into dealings at any stage prior to filing the claim.
  2. If the parties did not agree on an interest rate, the Court might set a rate provided that it shall not exceed 12 per cent for commercial transactions and 9 per cent for non-commercial transactions.
  3. The Court shall be bound, while determining the interest rate, by the rate convened to between the parties or the rate to which their transactions were accustomed before filing the claim, and that applies to the period preceding the claim. As for the duration following the claim, the Court shall apply the banks average interest rate in play during the time of the proceedings, and not to exceed 9% on all transactions. And in that case, interest shall be calculated on the basis of the simple interest only.
  4. In all cases, the interest shall never exceed the amount of the original debt."

Article 62 (3) was added to the Abu Dhabi Procedural Code by Law 3 of 1978. In our experience however, the Abu Dhabi Courts will usually award interest at the rate of 9% in civil cases and 12% in commercial cases (unless the parties have agreed different terms in the contract).

The relationship between the Abu Dhabi Procedural Code and the Commercial Code was considered in Federal Cassation Decision 130/19 in which it was held that the right to apply interest was constitutional by virtue of Articles 6/31 and 6/32 of the Civil Procedures of Abu Dhabi. The Civil Procedures of Abu Dhabi do not conflict with the Federal Commercial Code because the Code provides for the right to claim interest on commercial transactions.

A further Federal Cassation decision later that year held that the use of simple interest is permissible as it is vital for the business of banks.

Summary

In summary, parties concluding contracts under the laws of Abu Dhabi and UAE Law as applied in Abu Dhabi should be aware that Abu Dhabi has specific emirate level law relating to the court's entitlement to award interest in both contracts governed by the Civil Code and the Commercial Code. At a practical level the Abu Dhabi Courts will usually award interest of 9% for civil transactions and 12% for commercial transactions. Parties wishing to agree a different rate of interest should specifically record it in their contract while bearing in mind courts are unlikely to award higher that 12% and that usury constitutes an offence under the UAE Penal Code.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.