<p>Impact of recent legislative changes on the retail and consumer sector in the UAE</p>
<p><b>Retail & Consumer Focus</b></p>
Impact of recent legislative changes on the retail and consumer sector in the UAE
On 10 October 2022, the UAE legislature issued (amongst other major UAE Federal legislation, including the new Civil Procedures Law) the following long-awaited legislation:
The above laws entered into force on 2 January 2023, and they repealed existing laws governing commercial transactions and evidence.
Changes under the Commercial Law
The newly introduced Articles 468 to 497 of the Commercial Law are singled out for commercial transactions of Islamic financial institutions to cope with rapid developments in this sector. Islamic financial institutions are prohibited from lending or borrowing with interest or any other charges or benefit by any means on an overdue debt including delay interest even by way of compensation. Accordingly, any claim made by an Islamic financial institution against a debtor must be for no more than the actual and direct expenses incurred.
The Commercial Law sets out the requirements related to Sharia-compliant contracts such as Murabaha (cost-plus financing), Istisna (construction/manufacturing financing), Salam (forward), and Ijarah (Sharia lease) contracts.
One of the articles that attracted criticism is Article 495, which addresses liability for property related defects where the property is the subject of an Ijarah contract, and it prohibits the lessor (Islamic bank) from waiving liability for latent defects in the leased property. Islamic banks now bear the burden of inspecting property to ensure that there are no defects or any property dysfunction that affects utilization, whether by action of, or a reason beyond the lessor’s control. The lessor is also required to pay basic maintenance costs of the leased property and insurance against damage and may not stipulate that such costs are to be paid by the lessee or initially agree to add the same to the rent. Any agreement to the contrary shall be null and void, and this may lead to extra costs for the Islamic bank.
It is essential for Islamic financial institutions to examine their obligations under such provisions.
Adequate security requirement
In the context of banking activity, the Commercial Law requires obtaining adequate security against loans. Article 409 is broad enough to capture all types of banking facilities, both retail and corporate. However, unlike Decree-Law No. 23 of 2022 amending Law No. 14 of 2018 (“Banking Law”), which also entered into force on 2 January 2023, the Commercial Law does not set out the consequences of not having sufficient security or guarantees against banking facilities nor does it define or provide any guidance on what is considered ‘adequate security’. In contrast, the newly added Article 121 bis of the Banking Law that is applicable to individuals and sole proprietorships provides that Courts shall declare financial institution claims against individuals and sole proprietorships, in relation to banking facilities that are not supported with adequate security (assessed based on customer’s income, security in question and size of the facilities), inadmissible. Furthermore, execution shall be restricted to the extended security.
We await the Courts’ interpretation of Article 409 on corporate lending, noting that the Abu Dhabi Court has on few instances applied Article 121 bis retrospectively on facilities extended before 2 January 2023. However, recent Abu Dhabi Court of Cassation judgments held that Article 121 bis does not apply retrospectively.
Regarding the execution of a debt judgement relating to banking facilities, Abu Dhabi Judicial Department Explanatory Circular No. 3 of 2023, linked to Circular No. 9 of 2022 restricting enforcement on security accepted by financial institutions regarding banking facilities, clarifies that the relevant execution restriction guidelines are applicable on all disputes relating to banking facilities irrespective of the date of entry into the facility agreement. The guidelines are also applicable on all borrowers irrespective of their nature. Hence, enforcement of such debt judgments via the Abu Dhabi Execution Court shall be restricted to the relevant security that is granted to the bank irrespective of the date of the facility agreement or nature of the borrower. In this respect, the Abu Dhabi Court of Appeal has recently extended the application of the above execution restriction on a DIFC bank executing a judgment against a corporate borrower, and upheld the Abu Dhabi Execution Judge’s order, which cancelled Abu Dhabi execution proceedings until the bank specifies the security granted to the bank that may only be enforced upon. This is an evolving area that many legal practitioners are watching.
Legal trading age
The minimum age for engaging in trade was reduced from 21 to 18 years. A minor, subject to guardianship, who reaches 15 years of age, may trade on terms to be issued by a Cabinet resolution, based on the Minister of Economy’s proposition. We await further updates in this respect.
Reduced statute of limitations
The statute of limitation in relation to commercial claims has been reduced to 5 years from the debt due date. A lawsuit filed before the onshore UAE Courts following the lapse of the time bar, will be held inadmissible notwithstanding the validity of the underlying claim.
Considering the above, financial institutions are advised to assess the risk of inadmissibility of their claims against defaulting customers, upon extending new facilities, and should ensure that such facilities are secured by proper and sufficient guarantees. Prompt action should also be taken upon an event of default.
Changes under the Evidence Law
The Evidence Law now allows litigants to agree on certain rules of evidence (e.g. IBA Evidence Rules), provided their agreement is in writing and is not contrary to UAE public order.
The law also stipulates that the court must take into consideration the parties’ agreement on any method of proof. Hence, parties shall be able to agree on the means of proof that govern their relationship, subject to adhering to UAE public order.
New evidence means
The Evidence Law introduced new evidence means, including:
Proof by custom or prevalent usage, which represents the traditional and widely accepted behavior that is specific to the parties’ dealings. The law clarifies that private custom shall prevail over public custom. Furthermore, the court is entitled to appoint an expert (such as a banking expert) to verify a custom or usage between the litigants.
Electronic evidence, defined as evidence derived from any data or information that is created, stored, extracted, copied, sent, communicated, or received through information technology means, on any medium. The Evidence Law grants electronic evidence the same power as written evidence, and it also regulates official electronic evidence and grants it the same power of official documents upon meeting certain conditions.
Written witness evidence is now acceptable after obtaining the judge’s direction. The court may also hear witness testimonies virtually, and it may also delegate other courts to hear witnesses, including foreign courts through judicial delegation in accordance with bilateral or multilateral treaties. However, witness evidence is not accepted, including in commercial cases, if the claim value is more than AED 50,000, unless the parties agree otherwise.
The Evidence Law introduced a new rule whereby an adversary may - after the consent of the court or supervising judge - directly question or examine the other party. Cross examination of witnesses remains available, but practically rare. The parties are now allowed to cross examine experts.
New rules specific to document production were introduced in connection with commercial disputes, whereby it is possible to compel a litigant to produce a document, after specifying (i) the document, (ii) its relevance to the underlying commercial transaction, and (iii) that the document’s production should not infringe trade secrets or related rights. This gives a broader right to parties of commercial disputes to seek production of documents. If a party fails to comply with a production order, the court may presume that the other party’s allegations are true. Article 18 of the old evidence law that dealt with production of documents in general remains largely unchanged and the parties are still allowed to request document production in limited cases.
The Evidence Law introduced few changes pertaining to expert evidence and conduct, which we summarize as follows:
New obligation on the expert to disclose conflict of interest.
Court ability to rely on an expert report submitted in another lawsuit, without prejudice to the opponents’ right to discuss the report.
Express reference to international experts.
Court appointed expert’s ability to rely on other experts.
New objections on expert findings are no longer allowed after the report is submitted to the court, unless they are based on new evidence.
Parties may agree in advance that expert opinion is binding on them.