United Arab Emirates: Applicability and legal entitlement to interest under UAE law'

Last Updated: 5 March 2019
Article by Mark Wilson and Laurice Elten
  1.                  Introduction

When pursuing a monetary claim, it is common to include a claim for interest.  However, the right to claim interest is often an area of misunderstanding for contracting parties in the UAE.

The basis for this confusion is the fact that Shari'a Law, in pursuit of the objective of establishing justice and eliminating exploitation in business transactions, prohibits all sources of unjustified enrichment and all dealings in transactions that contain excessive risk or speculation (riba).  This is commonly thought to include interest of any kind.

These principles of Shari'a Law are reflected in the UAE Civil Code1 as referred to below.  To put this in context, Article 409 of the UAE Penal Code2 makes usury between natural persons a criminal offence, with the penalty being possible imprisonment and/or a fine.  The term "usury" is widely understood to mean an unreasonably high rate of interest, though it originally meant interest of any kind, and the word derives from a Latin term simply meaning "interest".

This article examines the treatment of interest under UAE law and approach taken by the UAE Courts.

  1.                  The UAE Civil Code

Under UAE law, the concept of riba is reflected within the UAE Civil Code, at least in relation to loan contracts.  Article 714 states:

"If the contract of loan provides for a benefit in excess of the essence of the contract otherwise than a guarantee of the rights of the lender, such provision shall be void but the contract shall be valid."

In practice, this renders void any provision in a loan contract that would provide a benefit that exceeds the "essence" – i.e. the subject matter of the contract, other than securing the lender's right to the amount lent.  That would certainly seem to encompass interest of any nature or amount.

However, perhaps due to concerns from the banking and financial community, the Constitutional Department of the UAE Federal Supreme Court, in its Decision No 14/9, issued on 28 June 1981, permitted the charging of simple interest in bank transactions, observing that the banking system had become a necessity for the economic existence of the UAE and for the wellbeing and benefit of the public.  The same decision was reached by the same Federal Supreme Court in a judgment3 where the Court held that contractual interest received by a bank was lawful, for as long as a compelling need to maintain the system remained.

  1.                  Commercial Code

The UAE Civil Code was amended by Federal Law No. 1 of 1987 to the effect that, whilst the Civil Code would continue to operate in respect of civil transactions, commercial transactions would continue to be governed by the laws and regulations in force until the Commercial Code came into force.  The Commercial Code4 was then introduced in 1993.  It contains various provisions governing the right to interest. 

Pausing here, it is useful to remember the role of the Commercial Code.  The Commercial Code takes precedence over the UAE Civil Code, in respect of the commercial transactions that fall within the former's ambit – i.e., a 'trader' transaction where at least one of the parties is a trader and/or the transaction concerns 'commercial activities'.  This suggests that a construction contract, for example, is to be regarded as a commercial transaction, provided that it is entered into in the course of business of at least one of the parties, and various decided cases support this view.  That is not to say that the UAE Civil Code has no application to commercial transactions, but the Commercial Code should take priority in the event of any conflicting provisions.

Article 76 of the Commercial Code states, in respect of commercial transactions:

"A creditor shall have the right to demand interest on a commercial loan in accordance with the rate stipulated in the contract. If the rate of interest is not stipulated in the contract it shall be calculated in accordance with the rate prevailing in the market at the time of the transaction on condition that in this case it should not exceed (12%) per cent, until full settlement is made."

Article 77 goes on to provide:

"Where the contract stipulates the rate of interest and the debtor delays payment, the delay interest shall be calculated on basis of the agreed rate until full settlement."

Whilst Article 76 expressly refers to "a commercial loan", there are indications that it applies more widely.  Article 88, for example, makes no such restriction.  It states:

"Where the commercial obligation is a sum of money which was known when the obligation arose and the debtor delays payment thereof, he shall be bound to pay to the creditors as compensation for the delay, the interest fixed in Articles (76) and (77), unless otherwise agreed".

Thus, the Commercial Code is clear that, if contractually agreed, a creditor is entitled to interest as compensation for delayed payment either:

  • at the rate agreed by the parties, if any (Article 77); or
  • at the prevailing market rate subject to a maximum of 12% in the absence of agreement (Article 76).

The rate of interest was in issue before the Court of Cassation in case no. 321 of 1999.  The Court was asked to consider whether an agreed rate of 15% per annum was acceptable in the context of Articles 76, 77 and 88.  The Court rejected a "plea of unconstitutionality of Articles 76, 77 and 88 of the Commercial Transactions Law concerning the agreement upon interests according to the agreed price stated in the contract", and decided that the rate agreed between the parties in the contract would not be amended.

As regards the point in time from which interest accrues, Article 90 of the Commercial Code states:

"Interest for delay in payment of commercial debts shall be payable merely upon their falling due, unless it is otherwise provided for by law or agreement."

There have been some differences of judicial approach in determining the "due" date for interest purposes.  The various possibilities can be discerned from a 2009 decision of the Dubai Court of Cassation in case no. 266/2008.  The matter involved claims and counterclaims by a developer and a contractor under a building contract.  The developer's claims were dismissed.  The interest lies in the manner in which the Courts at various tiers of appeal dealt with the contractor's counterclaims.

  • The Court of First Instance gave judgment in favour of the contractor for outstanding entitlements payable for work done under the contract ("sum A").  The Court awarded interest on the full amount at the rate of 9% from the date of commencement of the proceedings.
  • The Court of Appeal revised those findings and:
    • awarded interest on part of sum A as from the date of completion of the building work;
    • awarded interest on the balance of sum A as from the expiry of the maintenance period; and
    • gave judgment for a further sum representing compensation for delay, together with interest as from the date of judgment (all at the rate of 9%).
  • The Court of Cassation in its judgment of 17 March 2009 dismissed the developer's further appeal and essentially upheld the Court of Appeal decision, saying:

"the provisions of Articles 76, 88 and 90 of the Commercial Transaction Law stipulate that if the subject of the commercial obligation is an amount of cash which is known upon the time of the originating of the obligation and if the debtor delayed in the payment of such amount, the debtor shall be required to pay to the creditor the interest by the rate agreed upon by the contract providing not to exceed 12% and if there shall be no indication in the agreement to the interest rate, it is established by judicial custom in the Emirate of Dubai to calculate interest by the rate of 9% per annum5 provided it be calculated as of the date of maturity and it shall be deemed as compensation for the creditor for the delay of the debtor in the settlement of the obligation on the agreed date or the date on which the obligation should have been executed.  It is also established that the debt shall be deemed to be of known amount even if the debtor challenged such amount as long as the judiciary has no absolute power in estimation."

It is worth mentioning that the quantum of sum A was based on the findings of a court-appointed expert.  In awarding interest on sum A, is apparent that the Court of Appeal (and therefore also the Court of Cassation) did not regard this as fatal to the conclusion that payment had fallen "due" as from the date of completion of the construction work and/or the expiry of the maintenance period.

Interestingly, it is not necessary for a party to prove "damage" in order to claim interest, as Article 89 of the Commercial Code states:

"It shall not be a condition of entitlement to the interest for the delay that the creditor prove that he has suffered harm as a result of such delay."

Furthermore, under Article 91 of the Commercial Code, a creditor may claim damages in addition to delay interest and it will not be mandatory nor necessary for a creditor to prove that such damages resulted from fault or cheating on the part of the debtor.

  1.                  Abu Dhabi

The situation in Abu Dhabi differs slightly because Abu Dhabi has enacted specific legislation, in addition to the UAE laws mentioned above, which gives the Courts a discretion to award interest in both civil and commercial cases6, and provides guidance as to the interest rate to be applied.

Articles 617 and 628 of the Abu Dhabi Civil Court Procedure Law No. (3) of 1970 are applicable.  While the Law of Civil Procedure9 repealed all laws concerning civil procedure, provisions on interest such as the Abu Dhabi Civil Court Procedure Law, were specifically excluded and continue to be effective10.

Therefore, if parties conclude a contract which is subject to the laws of Abu Dhabi, they should keep in mind that Abu Dhabi has the aforementioned Emirate-specific law which entitles the Courts in that Emirate to award interest in contracts whether governed by the Civil Code and/or the Commercial Code.

  1.                  DIFC

Interest can be claimed under DIFC law.  Article 39 of the DIFC Law No 10 of 2004 specifically allows for interest to be recovered on a judgment for damages, and interest will start to run from the date of the judgment.  The interest rate shall be fixed as per the rules of the DIFC Court or as determined appropriate by the DIFC Court.  Practice Direction No. 4 of 2017 (Interest on Judgments) provides that any judgment of the DIFC Courts issued after its date carries simple interest from the date the judgment is entered, at the rate of 9% or such other rate as the judge may prescribe.

The Rules of the DIFC Courts (r 45.26) provide that a judgment creditor claiming interest on and seeking enforcement of a judgment debt must include certain information in the application or request to issue enforcement proceedings, including the amount of interest claimed, the rate, and the dates from and to which interest has accrued.

Similarly, there are no restrictions on claiming interest under the DIFC Arbitration Law, nor are there any mandatory or customary rates. In practice, arbitral tribunals tend to award interest at between 9 and 12 per cent per annum, but this is matter specific.

  1.                  Conclusion

In summary, courts and legislators in the UAE have provided for a well-balanced and measured regime in relation to entitlements to interest, meeting the needs of the economy, but in doing so have endeavoured to recognise and work within Shari'a.

The UAE Courts will give effect to contractual provisions for the payment of interest, provided these provisions are within the boundaries prescribed by the applicable legislation referred to above.  If contractual provisions are silent on the right to interest, the Courts will follow the applicable laws and determine whether the parties are entitled to interest, taking into account the facts of each individual case.

In practice, if contracting parties wish to include a claim for interest for delayed payment, it is advisable that they ensure that their contract contains well defined interest clauses that comply with relevant laws.


Note: an earlier version of this article first appeared in Mondaq on 9 August 2016

2 Federal Law No. 5 of 1985, the Civil Transactions Law

3 Federal Law No. 3 of 1987 promulgating the Penal Code

4 Federal Supreme Court of Abu Dhabi, case no. 245 of 2000, judgment (7 May 2000)

5 Federal Law No. 18 of 1993, the Law of Commercial Procedure

6 It is not clear from the judgment whether the contract contained any agreed interest provision.

7 The interest rate will be fixed as agreed between the parties or if the parties did not agree on the interest rate, then at the rate not exceeding 12% for commercial transactions and 9% for non-commercial transactions.

8 Article 61 of the Abu Dhabi Civil Court Procedure Law authorises the Abu Dhabi Courts to award interest from the date the debt falls due:

" The Court may impose an interest on the awarded amount in accordance with the provisions hereof, and order such interest rate to be calculated from the date of maturity or any later date to the date of payment or any earlier date. It may also impose an interest rate on the Lawsuit expenses or any part thereof."

9 Article 62 of the Abu Dhabi Civil Court Procedure Law gives guidance to the Court on the rate of interest to be applied:

"1. The interest rate determined by the Court may not exceed the interest rate agreed upon by the Litigants or the one they applied at any stage before filing the Lawsuit.

2. If the Litigants fail to agree on an interest rate, then the Court may determine an interest rate that does not exceed 12% in commercial transactions, and 9% in non-commercial transactions.

3. In specifying the interest rate, the Court shall be bound by what the Litigants agreed upon or applied before the institution of the Lawsuit. This applies to the period preceding such institution. As for the period that follows the filing of the Lawsuit, the Court shall apply the average interest rate between banks during the duration of the proceedings, provided that the same does not exceed 9% in all transactions, in which case the interest shall be charged on the basis of simple interest only.)

4. In all cases, the interest may not exceed the principal amount".

10 Federal Law No. 11 of 1992

1 Article 1 of the UAE Civil Procedure Code states:

"The attached law concerning civil procedures before the courts shall take effect, and all laws, decrees, orders, measures and directives in force pertaining to civil procedures are repealed, with the exception of provisions relating to interest on commercial transactions, which shall remain in force until they are regulated by law;"

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.

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