Federal Supreme Court and Local Judicial Principles Unification Authority - Unification of Judicial Principles on Cheque Enforcement in the UAE
Dispute Resolution / UAE
Stephany MalhameSenior Counsel,Dispute Resolution
Elias AttiehSenior Associate,Dispute Resolution
Dina AssarProfessional Support Lawyer,Dispute Resolution
On 21 December 2023, the Federal and Local Judicial Principles Unification Authority (FLJPUA) of the Union Supreme Court issued a significant decision on application no. 1/2023 which held that a cheque returned due to a “closed account” should be treated the same as a cheque returned due to “Insufficient Funds” and considered both as execution writs in the context of Article 667 of the Commercial Transactions Law No. 50 of 2022 (“CTL”) which stipulates in its paragraph 1 that: “1. The cheque on which the drawee states that it has no or insufficient funds shall be considered as an execution writ. The bearer of a cheque may request the compulsory execution of the cheque, in whole or in part.”
The FLJPUA’s decision established a new approach with respect to cheque enforcement in the UAE. As a result, in both situations, the cheque will be enforceable as execution writs.
The FLJPUA, established by Law No. 10 of 2019, has jurisdiction to consider applications to unify conflicting judicial principles when issued by different UAE high courts.
The FLJPUA was faced with two conflicting principles on the same legal issue due to two conflicting judgments issued by the Dubai and Abu Dhabi Courts of Cassation. The FLJPUA decision resolved and unified the legal principle as discussed below.
The decision was issued in response to an application filed by the Federal Public Prosecutor (FPP) to unify conflicting judicial principles issued by the two high courts, on the same point of law. The application was based on two cases that involved returned unpaid cheques due to a closed account and the different approaches by the two courts on whether such cheques were execution writs.
In the first case, a Substantive Cheque Enforcement Dispute was commenced in 2022. The drawer sought a stay of enforcement and ultimately the dismissal of the Execution Judge’s decision in Execution Action No. 645-2022 Cheques Enforcement (“Dubai Courts Execution Action”) approving to enforce two cheques totalling AED 12 million, which were returned unpaid due to account closure.
The drawer argued that he had no relationship with the executing party, and that the latter acquired the cheques via breach of trust and there was no substantive court judgment ordering the drawer to pay the value of the cheques. The drawer also argued that, according to Article 635 bis of the Old CTL, a cheque is considered a writ of execution if it is dishonoured due to lack of or insufficient funds. The two cheques in question were returned unpaid due to account closure, thus not meeting the criteria for exequatur as established by Article 635 bis of the old UAE Commercial Transactions Law No.18 of 1993, as amended by Decree-Law No. 14 of 2020 (“Old CTL”), that was replaced by Article 667 of the CTL, which stipulated that: “A cheque, which bears the drawee’s stamp as non-paid for unavailable or insufficient funds, shall constitute an execution writ as per the Executive Regulation of the Federal Law No. (11) of 1992 and its bearer shall have the right to demand coercive enforcement, wholly or partially.”
Despite such arguments, the Court of First Instance dismissed the action in April 2022 (“First Instance Judgment”).
In June 2022, the Court dismissed the appeal filed by the drawer (Appeal No. 111 of 2022- Enforcement Commercial) (“Dubai Courts Appeal”) and upheld the First Instance Judgment. Subsequently, in July 2022, the drawer resorted to the Court of Cassation.
The Dubai Court of Cassation reversed the lower courts' decisions and the decision granting exequatur to the holder of the two cheques that were dishonoured due to account closure, and set aside the enforcement procedures taken against the drawer.
The Dubai Court of Cassation adopted a conservative interpretation of Article 635 bis of the Old CTL. The Dubai Court of Cassation stated that a dishonoured cheque stamped "no funds" or "insufficient funds" operates as a writ of execution that can be enforced coercively. However, if a cheque is dishonoured for other reasons, it is not eligible for compulsory enforcement. The lower court's denial of the drawer's action to suspend enforcement operations was declared a legal mistake.
In the second case relating to Execution Action No. 107 of 2023 (Cheques Enforcement), the drawer filed a substantive execution objection No 25 of 2023 to cancel a decision enforcing a cheque drawn in May 2020. The drawer contended that the cheque, intended as security for a land transaction, did not fulfil the requirements for a writ of execution since it was dishonoured due to account closure rather than insufficient funds. The drawer further argued that the sale contract was defective, rendering the exequatur illegal. The Execution Judge rejected the objection, and allowed the enforcement procedures to continue. In this case, the court held that a cheque drawn on a closed account cannot be cashed, which is equivalent in effect to a lack of funds and its holder may seek its enforcement, coercively, in whole, against the drawer as a writ of execution.
The drawer appealed the Execution Judge’s decision and in April 2023, the Court of Appeal upheld the initial decision. The Claimant then filed a further appeal before the Abu Dhabi Court of Cassation.
The Claimant argued that the Court of Appeal's ruling was in breach of Article 667 of CTL, stating a cheque must be labelled "no funds" or "insufficient funds" to qualify as a writ of execution.
In June 2023, the Abu Dhabi Court of Cassation dismissed the appeal and upheld the lower courts' decisions allowing the enforcement proceedings to continue.
The Abu Dhabi Court of Cassation held that the term "closed account" meant that the cheque cannot be cashed. The court concluded that this was equivalent in effect to the terms "no funds" and "insufficient funds" and therefore, the holder can enforce the cheque against the drawer coercively. The cheque was therefore deemed enforceable as a writ of execution.
It is also worth noting that in October 2023, the Abu Dhabi Court of Cassation’s General Division issued a principle interpreting Article 667 of the CTL, and held that only cheques marked “no funds” or “insufficient funds” constitute writs of execution.
In August 2023, the FPP filed an application with FLJPUA addressing the conflicting principles from the Dubai and Abu Dhabi Courts of Cassation regarding the conditions for exequatur on cheques and the interpretation of Article 667 of the CTL, specifically whether a cheque returned due to a "closed account" qualifies as a writ of execution as those returned for "no funds" or "insufficient funds”.
The FLJPUA noted that a "no funds" or "insufficient funds" cheque is considered a writ of execution under Article 667, and enforceable by the cheque holder. It further acknowledged that the terms "blocked cheque" or "closed account" should be interpreted in a manner consistent with the legislative intent to promote stability in commercial and banking transactions. The FLJPUA emphasized that allowing debtors to avoid liability by closing accounts could undermine the legislator's intent and harm creditors and the economy.
Based on the above, the FLJPUA revoked the Dubai Court of Cassation's interpretation that only cheques marked “no funds” or “insufficient funds” are writs of execution. It upheld the Abu Dhabi Court of Cassation's interpretation that a cheque returned due to a "closed account" is equivalent to a cheque returned due to “no funds” or “insufficient funds” and all such cheques qualify as writs of execution . This unified legal principle ensures that closing an account cannot be used to evade cheque liabilities under Article 667 of the CTL.
The FLJPUA advocated for a broad interpretation of Article 667 of the CTL, emphasizing the impact of a dishonoured cheque. This method is consistent with the legislator’s intent and promotes business, economic and banking stability. Literal interpretations may result in protracted legal proceedings that favour debtors (that may be acting in bad faith) to the detriment of creditors. Closing accounts to avoid payment has risks that may hurt creditors and the economy in general.
The FLJPUA's ruling represents a substantial divergence from the Dubai Court of Cassation's earlier stance on cheque enforcement. While Dubai Court’s restricted enforcement to cheques returned for "no funds” or “insufficient funds," the FLJPUA followed Abu Dhabi Court of Cassation's wider interpretation. This united approach emphasizes a purposeful legal position, prioritizing the protection of business transactions and creditors' rights across the UAE, hence improving the country's economic and legal stability.
The FLJPUA ruling clarifies the legal repercussions of dishonoured cheques from closed accounts and provides a single enforcement structure.
For further information,please contact Stephany Malhame, Elias Attieh and Dina Assar.
Published in September 2024
