International banks should bear in mind what can be achieved from a legal perspective in the UAE. By Owain Jones of Denton Wilde Sapte

The United Arab Emirates, for centuries at the crossroads of trade between Europe and Asia, now finds itself at another crossroads: it is fast becoming a regional financial centre, but with increasingly sophisticated deals being undertaken against a background of laws that might not be quite as certain as would ideally be the case.

The legal system

China coined the phrase “one country, two systems” to describe its relationship with the Hong Kong SAR and the interplay between the laws of the two jurisdictions. The UAE could also lay claim to that description, or even “one country, three systems” because, in considering the laws that apply to a transaction involving the UAE, regard must be had to three sources: UAE federal law; in respect of each emirate within the UAE, the laws of that emirate, decrees of the ruler of the emirate and orders made pursuant to a decree; and where a special free zone is involved (such as the Dubai International Financial Centre (the DIFC)), the laws of that zone.

Federal, emirati and free zone law

The Constitution provides the legal framework for the federation of the seven constituent emirates and is the basis of all legislation promulgated both at federal and at emirate levels.

The federal government has exclusive jurisdiction in various substantive matters, including the supervision of banking. Legislation passed at a federal level has primacy over the local laws of each emirate.

The local government of each emirate is, however, permitted under Article 113 of the Constitution to regulate all local matters that are not subject to federal legislation or matters that are not expressly reserved in the Constitution to the Federation. So the government of each individual emirate retains substantial powers to regulate commercial activities, issue commercial licences and effect the incorporation of corporate entities to the extent that these activities are not already regulated under federal legislation.

The DIFC was established pursuant to a decree of the Ruler of Dubai but is almost a self-contained jurisdiction. The DIFC promulgates its own laws and has set up its own court system, with the intention of creating a business environment modelled on international best practice. Generally, the laws that have to date been implemented by the DIFC are based on those found within established common law jurisdictions and were prepared by common law lawyers.

General legal considerations

The UAE is a civil code jurisdiction. However, Article 7 of the Constitution confirms that underpinning the legal system are Islamic Shariah considerations, providing:

“The Islamic Shari’a shall be a principal source for legislating [in the Federation].”

Article 2 of Federal Law 5 of 1985 (the Civil Code) also provides that the rules and principles of Islamic fiqh (jurisprudence or learned writing) should be resorted to in the understanding, construction and interpretation of the provisions found in the Civil Code. Federal Law 10/73, which relates to the Federal Supreme Court (which has jurisdiction in Abu Dhabi, Sharjah, Ajman, Umm Al Quwain and Fujairah), provides:

“The Supreme Court shall apply the provisions of the Islamic Shari’a and Federal laws and other laws in force in the Emirate members of the Union which accord with the Islamic Shari’a. It shall also apply those rules of custom and principles of natural law and comparative law as are not inconsistent with the provisions of the Shari’a.”

That said, the courts have shown a willingness to allow certain matters that would normally be prohibited under the Shariah. For example, the concept of interest and the precepts of the Islamic Shariah directed against it have been the subject of close scrutiny by the courts, particularly in the light of Article 7 of the Constitution and other relevant legislative provisions, such as those relating to interest in Federal Law 18 of 1993 (the Commercial Code). In the jurisprudence it has now become settled that certain forms of interest are considered permissible or lawful (qanooniyya), while other forms are not (ribawiyya). The Federal Supreme Court and the Dubai Court of Cassation have upheld the provisions of the Commercial Code relating to interest, for instance Article 76, which provides:

“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.”

Compound interest, however, has generally been considered unacceptable.

Deciding commercial disputes

Article 2 of the Commercial Code sets out the hierarchy of sources for the commercial judge: first, the parties’ contract, which failing, the provisions of the Commercial Code or other commercial laws, which failing, commercial custom (with special custom ranking ahead of general custom), which failing, the Civil Code provisions consistent with the general principles of commercial activity.

Generally, there are difficulties in opining with precision as to the interpretation of applicable laws. This is not only because there is no binding system of judicial precedent as is understood in common law jurisdictions, but also because the procedure for reporting court decisions is not as developed as in some other jurisdictions.

Banking law and issues

The Civil Code and Commercial Code form the backbone of UAE law under which banking transactions are conducted and set out the laws relating to areas such as the formation of contracts, bank loans, guarantees, interest, pledges and the right of set-off. However, as transactions have become more sophisticated, the areas where the application of current law is unclear have increased.

Asset security

Under the Commercial Code, a commercial pledge may be taken over identifiable moveable assets. Such a pledge, however, requires that the pledgee possesses (it is not particularly clear what constitutes possession) the pledged asset and retains possession until the debt has been repaid. In some jurisdictions, possession can be established by registering the pledge on a specified register. But in the UAE there is no general register for pledges.

Consider, then, the position of a financier looking to finance, say, an aircraft registered in the UAE. It is clearly achievable, bearing in mind the growth in recent years of airlines such as Emirates and Etihad Airways. Actual possession of the asset by the financers is clearly not an option; so how can financiers obtain asset security with which they are comfortable?

There is an argument that, if the validity of the pledge is not free from doubt, then it is not worth taking. However, it is generally accepted that financiers will take a mortgage or pledge (in Arabic, rahn) over the aircraft. The owner and operator will be expected to give consent to future deregistration of the aircraft, together with a deregistration power of attorney. The General Civil Aviation Authority (GCAA) will accept and place this documentation on its files (although this does not constitute a formal registration of the security) and is also accustomed to giving an undertaking to the financiers to deregister the aircraft from the GCAA register upon request (although, as the GCAA does not have a published code of practice, this would need to be checked on a case-by-case basis). However, to date there has not been, as far as we are aware, a recorded case of a forced repossession and deregistration of a UAE-registered aircraft, so there is no certainty that these arrangements would prove effective.

Security over bank accounts

Given that there are no statutory provisions dealing specifically with a pledge over a bank account, can the general provisions relating to commercial pledges be applied to bank accounts?

First, an identifiable asset is needed. A fixed deposit is an identifiable asset but there is doubt as to the effectiveness of a pledge over an account that has a fluctuating balance – there is no identifiable fixed deposit constituting the pledged asset. It can, however, be argued that, if enforcement were to occur, the amount standing to the credit of the account on the date of enforcement can be identified and, therefore, should be subject to the pledge.

What, then, of the need for possession? For physical assets, this might be achieved either by appointing a bailee or some other method agreed by the parties to let third parties know that the assets are pledged, for example by affixing plaques on the asset.

The application of these general principles to bank accounts is not straightforward. Possession would seem to be achieved by the fact that the bank holds the funds but it is also important to consider the need to be able to show third parties that the bank account and the funds in it are pledged.

There is no consensus on these issues and the reported decisions on pledges over bank accounts have not formed a settled position.


Article 1092 of the Civil Code obliges a creditor to claim against a guarantor within six months of the date the guaranteed debt became due. It is not certain whether or not the parties can validly contract out this rule.

Article 73 of the Commercial Code provides that, unless the law provides otherwise or unless it is otherwise agreed, a guarantee will be commercial if the guarantor is guaranteeing a debt deemed to be commercial with respect to the debtor or if the guarantor is a trader with an interest in guaranteeing the debt.

However, various decisions of the Federal Supreme Court have held that the provisions of Article 1092 of the Civil Code do not apply to a commercial guarantee. The safest approach would be to state that a demand under any guarantee must be made within six months of the guaranteed debt falling due.


Many financing arrangements require an assignment of either receivables or rights under contracts as security.

Neither the Civil Code nor the Commercial Code contains express general rules governing the assignment of a right (as opposed to an obligation where, as might be expected, the consent of all parties is required). However, Federal Supreme Court and Dubai Court of Cassation judgments hold that, in commercial matters and in the absence of express contractual provisions to the contrary, a counterparty’s consent to the assignment of a right is not necessary, although evidence will be required that the obligor has been put on notice of the assignment. Where closing arrangements do not involve the delivery of a signed acknowledgement by the counterparty as a condition precedent to funding, the delivery by registered mail of a notice to the counterparty will be acceptable evidence of delivery.

Governing law and jurisdiction

Syndicated international deals often require documentation to be governed by English or New York law and for borrowers to submit to the jurisdiction of foreign courts – for example, to the jurisdiction of the English or New York courts. What would be the position as regards a UAE borrower required to make such a submissions?

Article 19 of the Civil Code permits parties to choose the governing law of an agreement. If the parties are not domiciled in the same state, then the governing law is that of the state in which their contract was made, unless they agree, or unless the circumstances indicate, that a different law is intended to apply.

If the UAE courts were considering foreign law, Article 27 of the Civil Code provides that the provisions of a governing law cannot be applied if they are contrary to the Islamic Shariah, public order or morals of the UAE.

If a valid choice of a foreign law has been made, to what extent would the submission to the jurisdiction of a foreign court be upheld?

Article 20 of the Civil Procedures Code provides:

“Except for actions in rem relating to real property abroad, the courts shall have jurisdiction to hear cases brought against a [UAE] national and actions brought against a foreigner who has domicile or a place of residence in the State.”

There are also circumstances in which, pursuant to Article 21 of the Civil Procedures Code, the UAE courts have jurisdiction even if a non-UAE national is the borrower, for example, if an action involves assets within the UAE or obligations to be performed within the UAE.

Any agreement made in violation of these Articles is deemed null and void. Consequently, there can be no guarantee that an exclusive jurisdiction clause in favour of lenders would exclude the jurisdiction of the UAE courts.

Foreign judgments

Even though an agreement may contractually provide for the governing law to be that of a foreign jurisdiction and for the submission to the jurisdiction of the courts other than the UAE, automatic enforcement of a judgment will not follow. If there is no treaty in place between the UAE and the jurisdiction in which the judgment is obtained (such as, for example, between the UAE and France), Article 235 of the Civil Procedure Code would apply: this sets out the conditions that must be satisfied before a foreign judgment is enforced.

The main obstacle to automatic enforcement is that the UAE courts must have no jurisdiction over the claim the subject matter of the judgment: if a judgment involves a UAE party, the UAE courts will have jurisdiction. In addition, the judgment must not contain anything that is contrary to the morals or public order of the UAE. In practice, therefore, there is no certainty that a foreign judgment would be enforced without reexamination of the case in the UAE.

The UAE recently acceded to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards, meaning that foreign arbitral awards will be enforceable in the UAE subject to the limited grounds for non-enforcement found in that convention. Whether this is helpful to lenders, in any particular circumstance, would need to be considered on a case-by-case basis.

Old-fashioned integrity

The UAE is a jurisdiction in which the personal reputation and integrity of borrowers is an important factor in lending decisions. Despite the increasing sophistication of deals, this remains the case and issues regarding the availability of some types of security might not assume the importance that one might expect. This might, of course, change but for the time being, foreign banks will need to understand what is possible and make their risk assessments accordingly.


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