REUTERS | Toby Melville

Have you lost interest? Right to recover interest for late payment

A claim for interest will often be the first remedy sought in the event of late payment. As such, it is an issue close to the hearts of contracting parties. It is also often an area of confusion in the Gulf region given the general prohibition on the levying of interest under Islamic Sharia law, the underlying framework of the Gulf legal system.

In this final part of a three-part blog series, considering some key issues in the context of the Qatari and UAE construction markets, we look at how interest is dealt with under UAE and Qatari law. We have previously looked at liquidated damages (LDs) and time bars.

Subject to exceptions on the amount of interest that can be levied, in both the UAE and Qatar the Courts will give effect to contractual provisions for the payment of interest. This is in spite of the fact that Sharia law forbids the charging of interest. But what if the contract is silent on the right to claim interest in the event of late payment: will the Civil Code fill the gap? In this respect, the two jurisdictions diverge.

UAE law allows for interest in commercial contract

UAE law expressly allows for the right to levy interest. A party may be entitled to interest even where there is no contractual provision for the levying of interest, provided that the parties have not agreed to forgo interest. Article 88 of the Commercial Code states that where a “debtor is late in settling, he shall be obliged to pay the creditor compensation for the delay the interest specified in Articles 76 and 77, provided no alternative agreement is made.” Articles 76 and 77 restrict the rate of interest that can be levied, where no contractual rate has been set. The prevailing market rate will apply, provided this does not exceed 12% per annum.

Some suggest that in this respect the UAE Civil Code does not sit well with Sharia principles. The UAE Civil Code expressly provides that a judge is to pass judgment according to Islamic Sharia[where] there is no provision in the Civil Code covering the issue to be determined’. Thus, where there is an express provision of the Civil Code or any other codified piece of applicable legislation, the UAE Federal Supreme Court has settled on the principle that such provision or legislation is to be read as being in accordance with Sharia.

In the UAE, the rate of interest was considered by 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 Article 76. The Court found that insofar as the rate charged is “not contrary to public order“, the rate agreed between the parties in the contract would not be amended. The Court may have found otherwise had the contract stipulated an interest rate of, say, 25%. By the same logic, provisions for compound interest rather than simple interest may be held to be null and void by the courts.

Different Qatari approach

The Qatari Civil Code does not include equivalent provisions. Therefore, it is essential that parties expressly incorporate a right to interest for late payment within their contract in Qatar. While an agreement to this effect will be upheld as a matter of law, this will be subject to the court’s overriding jurisdiction to nullify provisions it considers contrary to public policy or law. For example, a Qatari Court may nullify a provision where it considers the interest rate to be exorbitant.

As such, the parties may have to be slightly more creative and consider other options for securing payment in the absence of an express contractual right to claim interest for late payment. For example, a party could consider whether it has a right to suspend or terminate the contract, or it could seek damages pursuant to Article 268 of the Qatari Civil Code to compensate for any harm suffered, such as  in relation to overdraft facility fees.

England and Wales compared

Contrast this with the position in England and Wales. Under the Late Payment of Commercial Debts (Interest) Act 1998 (Late Payment Act 1998), as amended, a right to interest on late payment will be implied into most business-to-business contracts, for the supply of goods or services, including many construction contracts. A creditor will have a right to simple interest of at least 8% a year on the price of goods or services, plus a fixed sum and its reasonable costs of recovering the debt.

Parties to commercial contracts can exclude the right to interest under the Late Payment Act 1998, but only if the contract provides a substantial alternative remedy for late payment. This remedy must be sufficient enough to compensate, deter late payment and be fair and reasonable. If a clause provides for interest that is too high, it may be found to be a penalty and therefore be treated as unenforceable. In this event the statutory interest under the legislation would apply. If it is too low, it will be ineffective to displace the statutory provisions on interest. Therefore, a court’s ability to override interest provisions in a commercial contract is different from, but comparable to, the discretion of the UAE and Qatari Courts to nullify a provision it considers contrary to public policy or law.

Omit express obligation at your peril

The message to take away is that in the UAE and Qatar a party fails to include a right to interest for late payment in its contract at its own peril. In the UAE, a failure to do so will leave the parties at the mercy of the courts. In Qatar, a party may well be left out of pocket entirely for the cost of late payments.

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