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For almost 30 years, Federal Decree No. 18 of 1993 relating to the Commercial Transactions Law (“Old CTL”) has played a key role in regulating transactions between counterparties in commercial transactions in the United Arab Emirates (UAE). Its replacement is Federal Decree No. 50 of 2022 (“Renewed CTL”), which came into effect on 2 January 2023, with the stated objective of supporting and developing the UAE’s business environment. While many of the provisions of the old CTL are retained, there are many important additions and clarifications in the updated CTL that will have a significant impact on all aspects of financing transactions. We explore five major revisions and their impact on market participants below.
Capped (regular) fallback rates and compounding
Under the old CTL, parties to a business loan were free to agree Applicable interest rate, which, if not expressly stated on the loan instrument, will be calculated based on prevailing market rates at the time of transaction, capped at 12%. This provision has been retained in the updated CTL, but the cap has now been lowered to 9%. Although this maximum amount has changed, it should be noted that this will not necessarily result in the relevant courts choosing this reduced cap rate as the applicable fallback rate. For example, in Dubai, Resolution No. 1 of 2021 issued by the Assembly of the Supreme Court of Dubai requires that in the absence of a mutually agreed contractual rate, the domestic courts apply an annual rate of 5%.
In addition, Article 88 of the updated “Civil Procedure Law of the People’s Republic of China” stipulates that creditors may not claim compound interest. This is a helpful addition, as previously reported conflicting judgments in cases involving conventional loans made the position unclear. This limitation brings the updated CTL into compliance with Section 121(4) of Federal Decree No. 14 of 2018 on the Supervision of Central Banks and Financial Institutions and Activities (as amended, the Banking Act), which imposes a similar prohibition on compound interest.
Islamic finance
During a media briefing by the UAE Ministry of Economy introducing the updated CTL, it was noted that one of the goals of the legislation is to further enhance the country’s position as a market leader in Islamic finance. This move is reflected in a new Part 6 of the updated CTL, which regulates commercial transactions and contracts to which Islamic financial institutions are a party.According to the updated CTL section 468(2), “Islamic financial institution” includes any institution whose constitution or memorandum of association stipulates that it conducts business activities in compliance with Islamic rules Islamic lawIt is understood that this includes Islamic subsidiaries and Islamic banking windows of conventional banks.
and solidify some deep-seated Islamic law principles incorporated into federal law (such as the general prohibition on lending in exchange for interest), Chapter 2 of Part 6 lists some specific provisions relating to certain Islamic contracts and structures, including Murabaha, independent newspaper, Ijala and Salam. in a context Ijala Of particular note is section 495(3), which prohibits the lessor from charging the lessee maintenance and insurance costs incurred by the lessor as part of the periodic rent under the applicable lease. Any agreement that violates this restriction will be void.The practice of charging for repairs and insurance in this way is a common feature Ijala Structures used in the market through service agency structures, which are generally governed by English law.According to the specific features proposed Ijala Financing, practitioners and stakeholders in the Islamic finance industry may need to consider this new regulation, in particular whether any structural or documentation adjustments should be made to balance this limitation, Islamic finance requirements and business risk allocation under the updated CTL Those parties, those parties.
guarantee
The updated wording of Article 69, Paragraph 2 of the updated CTL clarifies that, in addition to joint liability among multiple guarantors for the repayment of related debts, the debtor will also bear joint and several liability with these guarantors. This change is understood to clarify that the principle of joint liability applies to commercial guarantees, i.e. the liability of the guarantor depends on the existence and validity of the liability of the principal debtor. This is similar to the civil transaction position under Section 1080 of Federal Law No. 5 of 1985 on Civil Transactions Act (as amended, “Civil Code”).
Another important clarification concerns payment guarantees issued by financial institutions. Under the updated CTL, the issuing bank can refrain from paying the beneficiary under a payment security if the proceeds of that payment are subject to a garnishment order. This is similar to the situation with the old CTL, however, the revised wording emphasizes the bank’s power to withhold payment to the beneficiary under the security instrument following court seizure, rather than the court’s power to seize the proceeds of the security.
enough security
Section 121(1) of the Banking Act requires licensed financial institutions to obtain adequate guarantees and guarantees for various facilities. Otherwise, according to Article 121, paragraph 2, the relevant financial institution will not be able to file any application, action or defense with the relevant competent judicial authority or the arbitral tribunal. It is worth noting that under the Banking Act, the scope of this requirement is limited to natural customers and private sole proprietorships. The updated Section 409 of the CTL contains similar requirements, but expands its application to all commercial loan borrowers. As this will cover corporate loans, which is an important development, it remains to be seen how the UAE courts will interpret and enforce this requirement.
Statute of limitations
Pursuant to the updated CTL, claims between merchants (ie, any party doing business under the updated CTL) must be brought within five years of the due date for performance of obligations without any lawful grounds. This significantly shortened the 10-year limitation period under the old CTL and widened the gap between the law and Civil Code Section 473, which established a 15-year limitation period for civil contract claims.
summarize
The updated CTL is an important legislative development for the UAE and is part of wider reforms that ensure the UAE maintains its position as a key market for Islamic finance, with a legal infrastructure to support businesses and encourage investment. As outlined, many changes are significant in the context of financing transactions, and it will be interesting to see how market practices and transaction documentation evolve to accommodate the new capabilities of the updated CTL.
We continue to monitor developments in this area. If you have any questions, please contact: Rizwan Kanji or Andrew Heller.
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