Abu Dhabi Court of Cassation- the exercise by a bank of set-off rights and the enforceability of banking general terms and conditions
Dispute Resolution / UAE
Set-off (or offsetting) is the settlement of a debt due to a creditor, against a debt owned by him to his debtor (Article 368 of the UAE Civil Code).
Law Update: Issue 365 - Financial Services Focus
Stephany MalhameSenior Counsel,Dispute Resolution
Dina AssarProfessional Support Lawyer, Dispute Resolution
Set-off (or offsetting) is the settlement of a debt due to a creditor, against a debt owed by him to his debtor (Article 368 of the UAE Civil Code). It may be (i) compulsory, taking place by the power of law, (ii) facultative, that is to say, conducted by agreement of both parties, or (iii) by decision of a judge (Article 369). A forced offset requires that each of the parties be a creditor and debtor for the other, and that both debts be similar in kind, description, maturity, force and weakness, and further provided that applying such offset does not prejudice the rights of third parties regardless of whether the two debts have the same cause or different ones (Article 370).
In its judgment no. 998 of 2021, the Abu Dhabi Court of Cassation considered the exercise by a bank of set-off rights and the enforceability of banking general terms and conditions against one of its corporate customers. In this article, following a review of the background to the judgment and an overview of the findings of the Courts of First Instance and Appeal, we review the Court of Cassation’s ruling and the lessons it holds for the exercise of set off under UAE law.
The case involved a dispute between a bank (Appellant/Bank) and a customer company (Respondent/Company”) concerning the action of the Bank in unilaterally deducting from the Respondent Company’s account with the Bank an amount which the Bank claimed was owed by a third party (“Related Party”) related to the Respondent Company. The Bank claimed the Related Party defaulted under the terms of a facility agreement entered into with the Bank. The Company filed a lawsuit demanding the Bank return the deduction on the basis that it lacked any legal grounds to make the deduction.
The Bank claimed that it had the right to set-off the amount it deducted from the Company's account against a debt owed to the Bank by the Related Party. The Bank relied on a clause in the general terms and conditions of the account on the Bank's website, which it asserted that the Company had accepted upon opening the account. This clause gave the Bank the right to set-off any debt due to it by any company related to the account holder.
The Court of First Instance appointed an expert to examine the relationship between the Bank and the Company and whether the Bank was entitled to deduct funds from the Company's bank account. In his final report, the expert determined that the Company was not indebted to the bank. Furthermore, the court-appointed expert confirmed that the Bank had failed to prove a link between the Related Party and Company.
The Court of First Instance issued its judgment and found that the requirements for legal set-off were not satisfied. In particular, the mutuality of debt condition was not met because the Company and the Bank were not mutual creditors and debtors. The Court also held that the Bank failed to establish the relationship and affiliation between the Company and the Related Party.
The Court of First Instance also stated that the general terms and conditions of the account did not apply to the set-off claim because they were only relevant to the contractual relationship between the Bank and the Company and did not grant the Bank the right to withdraw funds from the Company's account without serving notice on the Company or without its consent.
The court also considered that the Bank's conduct violated the principle of good faith, which requires the parties to perform their contractual obligations in accordance with law, custom, and nature of the transaction.
The Bank appealed the Court of First Instance judgment, and the Court of Appeal judgment affirmed the lower court’s ruling in favour of the Company, following which the bank appealed to the Court of Cassation
The Court rejected the Bank's appeal and upheld the lower courts’ judgments for a number of reasons. First, in considering Articles 369, 370 of the UAE Civil Code (see above), the Court of Cassation (as well as the Court of Appeal) concluded that in order for a bank to exercise the right of legal set-off, a reciprocal creditor-debtor relationship must exist between the parties, and the debts involved must be undisputed.
Second, in reliance on the report of the court appointed expert, the Courts observed that considering the Company (i) had no financial obligations due to the Bank, (ii) was not involved in any facility arrangement, and (iii) was not proven to be linked to the Related Party, the Bank's reliance on the set-off provision in the general terms and conditions published on its website was incorrect.
Hence, Bank's unilateral action in withdrawing funds from the Company's account constituted a breach of the banking services agreement, especially since the Bank did not prove the link between the Company and the Related Party.
Third, the Bank's justification, based on general terms and conditions associated with account opening was deemed insufficient to establish a legal basis for such an action.
The Court thus awarded damages to the Company (in addition to interest) because of the financial harm caused by the Bank's actions in deducting the amount owed to it by an unrelated third party.
The judgment is significant as it sets out clear and valuable guidelines for the exercise of set-off rights in the context of banking arrangements. It holds valuable lessons for banks and their corporate customers alike and underlines the prudence of seeking legal advice when effecting set-off, especially for debts owed by seemingly related parties.
For further information,please contact Stephany Malhame and Dina Assar.
Published in February 2024
