Following the previous article entitled "Assignments in the
United Arab Emirates" (published in the November issue of the
Law Update) explaining the general conditions and requirements of a
valid assignment in the UAE, this article oulines the prevailing
jurisprudence with respect to assignment of rights in the
UAE.
Given the absence of a separate legal regime for an assignment of
rights under UAE law, UAE Courts have decided cases on assignment
of rights based on existing commercial common practices and
comparative law. In the following Dubai Court of Cassation case,
the Courts are guided by the provisions of the UAE Civil Code
relating to 'assignment of debts / obligations' in
determining the validity of an 'assignment of right'.
Dubai Court of Cassation Case No. 188/2006
Issued on 13th March 2007
Claim
A civil action was filed before the Dubai Court of First Instance by a commercial bank (the "Bank") against a corporate borrower (the "Borrower") for non-payment of the latter's obligations under a term loan facility.
Facts of the Case
The Bank granted a term loan facility for the amount of
AED7,469,602.09 to the Borrower under the terms of a facility
agreement ("Facility Agreement"). Subsequently, the
Borrower defaulted on its installment payments. This prompted the
Bank to declare an acceleration event pursuant to the terms of the
Facility Agreement and making the full amount of the loan
immediately due and payable. The Borrower was served a notice of
acceleration but failed to settle the outstanding amount of the
loan.
Hence, an action was filed in the Court of First Instance for
collection.
Court of First Instance
The Court of First Instance ruled in favour of the Bank and
ordered the Borrower to settle the full outstanding amount plus
interests from due date until actual receipt of payment, together
with costs and minimal advocate's fees.
The Borrower consequently appealed the decision to the Court of
Appeal.
Court of Appeal
On appeal, the Borrower argued, inter alia, that the Court of
First Instance failed to determine the correct amount outstanding
under the Facility Agreement.
The Borrower alleged that the Court of First Instance failed to
appreciate that the right of the Borrower to receive payments under
a contract in relation to a certain project
("Receivables") was assigned in favour of the Bank. It
was claimed by the Borrower that since the Bank had been assigned
the right over the Receivables, the amounts pertaining to the said
Receivables should have been deducted from the outstanding amount
of the loan. Further, it was asserted that the amount of
Receivables assigned to the Bank was reflected on the
Borrower's book of accounts and, therefore, should have been
considered by the Court of First Instance when it rendered its
decision as to the judgment amount.
The Court of Appeal did not find merit in the allegations and
upheld the decision of the lower court in toto, hence, the Borrower
brought the action to the Court of Cassation.
Court of Cassation
The Court of Cassation ruled that no assignment of right had
been perfected between the parties.
The Court held that an assignment of right takes place by agreement
between the obligee (assignor) and another party to whom the
obligee transfers its right (assignee) as against the obligor. An
assignment in that respect is a contract between the assignor and
the assignee, which must satisfy all of the necessary elements
including consent, subject matter and cause.
It is settled law that in order for a contract to be concluded,
there must be a corresponding offer and acceptance, and the link
between them. What is meant by an offer is an offer whereby the
person who makes it conclusively expresses his intention to enter
into a specific contract, in such a way that if it is accompanied
by acceptance, the contract will be concluded. The exchange of
offer and acceptance should indicate mutual consent of the
parties.
The Court referred to Article 1109 (1) of the Civil Code which
requires consent of the parties for an assignment to be valid.
Article 1109 (1) states that:
"In order for an assignment to be valid, there must be
consent of the transferor and the transferee, and the
creditor."
In this case the Court held that whilst there was an intention on
the part of the Borrower to assign its rights over the Receivables,
the consent of the Bank (as assignee) to the assignment was not
present.
The Court held further that in order for an assignment to be valid
the requirement of Article 1113 of the Civil Code should be
met.
Article 1113 provides that:
"In addition to the general conditions, the following
conditions must also be satisfied in order for an assignment to be
valid:
a. It must be completed and dependent on no condition other than an
appropriate or customary condition, nor must any future contract be
dependent on it;
b. The performance thereof must not be deferred to an unknown
future date;
c. It must be limited in time to a specific time limit;
d. The property transferred must be a known debt which is capable
of being satisfied;
e. The property transferred to the transferee in a restricted
transfer must be a debt or specific property which cannot be
compounded, and both types of property must be equal in type,
amount and description; and
f. It must not involve any conditional or substantial additional
consideration in favour of any of the parties, and the assignment
shall be unaffected by such additional consideration agreed upon
after the assignment was made, and it shall not be
payable."
The Court held that in order for an assignment of right to be
valid, the subject matter of the right should be specified as to
type and amount. In addition to the general conditions, the
property assigned must be a debt of known amount, and capable of
being substituted. This means that the subject matter of the
assignment, which is the property assigned, must be particularised
as to type and amount. Where the property consists of money, it
must be of a specified amount, failing which the assignment is
void.
Assuming that there had been a valid assignment of right, the Court
ruled that there was no proof that payments were indeed made by the
third party contractor (being the counterparty to the original
contract) to the Bank.
In light of the above, the Court of Cassation upheld the findings
of the lower courts in dismissing the claim of the Borrower that an
assignment of right had been granted in favour of the Bank as
security for the obligations under the Facility Agreement.
Conclusion
The Court of Cassation in the foregoing case made a significant
point in relation to Article 1113(d) of the UAE Civil Code as
applied to assignment of rights. For an assignment of right to be
valid and enforceable, the type and quantity of the assigned right
(arising from a contract; payment obligations or receivables)
should be certain and identifiable, and where the assigned right
relates to a sum of money, the amount should be fixed at the time
of execution of the assignment agreement. The same is equally
applicable where the right being assigned relates to receivables at
some future date.
With the foregoing decision, it should be noted that where the
right consists of a sum of money, certainty in the subject matter
of the assignment lies not only upon the relevant contract (under
which such right is being assigned) being identifiable, but also
for that sum of money to be fixed at the time of perfecting the
assignment.
In taking an assignment of right as a form of security, parties
should bear in mind the important components constituting a valid
assignment in the UAE including the present position on the matter
as clarified by this case.
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.
