One of the most contentious issues in banking disputes in the UAE is the matter of late payment interest on commercial loans: Is the court obliged to apply the interest agreed upon in the contract? Or does it have the right to estimate a different interest? The Federal Supreme Court decisively resolved this issue in appeal number 21 for the year 2024 Commercial during the session on February 21, 2024. Our office team reviews the content of this important ruling and its practical impact on banks and borrowers in this article.

Is the bank entitled to claim the contractual interest when the loan payment is delayed?
Regulations on late payment interest in UAE commercial law

Firstly: What is contractual interest and what is its legal basis?

Contractual interest is the rate agreed upon by both parties in the loan contract and is binding when there is a delay in payment. The Federal Decree-Law No. (50) of 2022, which issued the Commercial Transactions Law, established the legal basis for this right:

Articles (84), (85), and (86) of the same law confirm that if the obligation involves a known amount of money and the debtor delays payment, they are obliged to pay the specified interest as compensation for the delay,without the creditor needing to prove damage,provided that the debt is commercial.

Secondly: What did the Federal Supreme Court decide?

In appeal number 21 for the year 2024 Commercial, the appealing bank had lent its client three loans:

The debtor refrained from payment, and a lawsuit was filed to claim an amount of 833,324.04 dirhams along with the agreed-upon interest. However, the first instance court and the appellate court ruled for a flat interest of 5% instead of the agreed contractual interest.

Third: The legal controls for late interest

The Federal Supreme Court established a set of essential controls:

Fourth: Why is this ruling important?

This ruling established two highly significant legal principles:

The first principle: Mandatory contractual interest

The court has no discretionary authority to determine a different interest rate if the contract includes an explicit contractual interest. Ruling for a flat interest in this case is a legal error that necessitates annulment.

The second principle: The necessity of reasoning in rulings

The court confirmed that rulings must be based on clear and sufficient reasons that prove the court examined the dispute thoroughly and that the truth it derived was based on the required legal evidence. Violating this is considered a shortcoming that necessitates annulment.

Fifth: The practical impact on banks and borrowers

For banks and creditors

• They insisted on explicitly stating the contractual interest rate in the loan agreement.
• They maintained the demand for the contractual interest from the first session in the lawsuit.
• They documented the terms and conditions of credit cards and their interest rates in an indisputable manner.

For borrowers and debtors

• The contractual interest is legally binding and cannot be ignored by claiming there is no harm.
• The interest must be simple, not compound — this is an important defensive weapon in banking disputes.
• The total interest must not exceed the principal — a guaranteed right that can be invoked.

Important legal advice

• Before signing the loan agreement:Check the stated contractual interest rate, its type, and the method of calculation in case of delay.
• In case of delayed payment:Do not wait — contact the bank immediately to avoid the accumulation of interest.
• If a lawsuit is filed against you:Check the accuracy of the interest calculation — is it simple or compound? Has it exceeded the principal?
• If you are a creditor:Maintain the contractual interest from the first session and do not accept a reduced flat interest.
• In all cases:Consult a lawyer specialized in banking disputes to accurately assess your position.

The role of the lawyer in banking disputes

• Review loan contracts and accurately determine the due contractual interest.
• Verify the accuracy of reports from banking experts and challenge any violations.
• Uphold legal rights before the courts at all levels of litigation.
• Defend debtors against claims of compound or excessive interest.
• Follow up on appeals before the Federal Supreme Court when necessary.

Frequently Asked Questions

Summary

• Contractual interest in a commercial loan agreement is binding on the court and cannot be replaced by arbitrary interest.
• It is not required to prove damage to be entitled to late interest in commercial debts.
• Interest must be simple and the total cannot exceed the principal of the debt.
• Interest after filing the lawsuit is calculated at the average bank rate, with a maximum of 12% annually.
• Judging with arbitrary interest despite the existence of contractual interest is a legal error that necessitates the annulment of the ruling.