On October 10, 2022, the United Arab Emirates issued a long-awaited federal law governing commercial transactions (Decree 50 of 2022 governing Commercial Transaction) (the New Law). The New Law came into force on January 2, 2023, and replaced the old UAE Commercial Transactions Law (Law no. 18 of 1993). It is an expansive and important piece of legislation.
The legislature considered industrial and technological developments in the commercial world that have impacted commercial practices. The New Law, therefore, aims to enhance and support commerce, commercial transactions, and the conduct of transactions, whether physical or virtual. This article will consider the significant changes introduced by the New Law.
Modern means of technology
The New Law supports trade, the establishment and conclusion of commercial contracts, and the conduct of transactions, whether physical or virtual.
The modern means of technology embedded within these activities include those related to virtual assets. Article 5 of the New Law outlines the activities which are deemed commercial by nature and added “virtual assets transactions” to the list.
Article 6 also outlines the activities that can be considered commercial only if they are practiced as professions. The New Law added the activities of creating, selling, leasing, and managing electronic platforms, websites, smart applications, and artificial intelligence applications as well as other digital transformation works as commercial activities.
The New Law provides that a commercial business now includes actual or virtual commercial business, whether it’s a business that is being conducted in the technological space, through modern technological means, or through conventional means (Article 10 of the New Law).
Legal age to trade
In an initiative aimed at encouraging innovation, the law has lowered the minimum age for engaging in trade from 21 to 18 years (Article 18 (1) of the New Law).
Article 18 (2) provides that a minor, whether or not subject to a conservatorship or guardianship, who reaches (15) fifteen calendar years of age, may trade on the terms and conditions issued by the resolution of the Cabinet, based on the proposition of the minister of economy. We await further information and legislation on this issue.
Virtual assets
As mentioned above, the New Law also addresses virtual assets. Business assets constitute a group of tangible and intangible property allocated for the practice of physical or virtual commercial activities, whether technological media, via modern means of technology, or using traditional methods (Article 36 of the New Law).
Electronic document retention
The New Law supports electronic and virtual formats for the books of traders and addresses electronic document retention. The New Law provides that a trader or his successors shall keep commercial books and documents corroborating the recorded entries for not less than (5) five years beginning from the date of marking the end of the book (Article 29 of the New Law).
Islamic Finance
Articles 468 – 497 of the New Law apply to commercial transactions and contracts to which Islamic financial institutions are a party. The New Law prohibits Islamic financial institutions from lending, borrowing money with interest or any other charges, or charging interest or other fees on outstanding debt, including arrears interest (Article 473 of the New Law). The New Law sets out the requirements related to Sharia-compliant contracts such as the Murabaha (cost-plus financing) contract, the Istisna (construction/manufacturing financing) contract, the Salam (forward) contract, and the Ijarah (Sharia lease) contract. Under the law, the lessor must first own, lease, or receive the corpus of the Ijarah property before leasing it out and the title transfer must be concluded under a separate contract to be executed on the date of the lease, which can include a lease-to-own clause. It is essential that Islamic banks examine these provisions in light of their obligations set out in the New Law.
Article 477 of the New Law provides that the “burdens of title, consequences of the destruction of the property, or defect for a matter beyond control, shall pass to the contracting party upon the delivery of the property thereto, even if the sale is called a lease by the parties.” Islamic banks will bear the risk and rewards attached with ownership of the property. Article 495 of New Law addresses liability for property-related defects where the property is the subject of an Ijarah contract. Article 495 of the New Law prohibits the lessor (i.e., the 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 dysfunction that may happen to the property that affects benefiting of utilization, whether by the action of, or a reason beyond the control of the lessor.”
Article 495 also provides that “expenses of the basic maintenance and insurance of the leased property against damage shall be incurred by the lessor.” This may lead to extra costs for the Islamic bank. However, given the case law on this issue, it is expected that the expenses of maintenance will be subject to the parties’ contractual arrangement.
Pledging assets
A pledge of assets registered in a register (such as shares in the registrar of companies) still falls under the Commercial Transactions Law. However, this does not apply to movable assets that are governed by the Moveable Assets Security Law (Articles 451- 467 of the New Law).
Adequate security
The New Law requires, in the context of banking activity, that adequate security be obtained against loans. Article 409 of the New Law is broad enough to capture all types of banking facilities, both retail and corporate lending. However, unlike Decree-Law No. 23 of 2022 amending Law No. 14 of 2018 (the “Banking Law”), the New Law does not set out the consequences of having insufficient security or guarantees against loans.” In contrast, Article 121 of the Banking Law applies to individuals and sole proprietorships, and it provides that the courts shall declare that any claim by a financial institution against individuals and sole proprietorships, without adequate security, will be inadmissible.
We await the court’s interpretation of Article 409 of the New Law, especially on corporate lending.
Payment guarantees
Payment guarantees are an important tool in commercial transactions and a bank will usually pay a designated beneficiary if services or goods are not provided as agreed in a contract. The New Law permits banks to reject payment to the beneficiary if there is an attachment order issued by a court over the amount of guarantee with the issuing bank. This is similar to the position in the old law. For the issue of the order or the judgment in this case, the applicant shall, in its application or claim, rely on serious grounds (Article 417 of the New Law).
Statute of Limitations
The statute of limitations about claims involving traders’ obligations has been reduced to five years from 10 years from the due date for payment of a debt (Article 92 of the New Law).
The New Law also regulates passenger carriage contracts and imposes a three-year statute of limitations on an action arising out of the death or personal injury of a passenger, from the date of death or occurrence of the error. Naturally, the statute of limitations may not be invoked where it has been permitted to run because of fraud or gross error. The statute of limitations for an action arising out of passenger carriage and involving contractual rights is one year from the scheduled date of arrival.
Commercial sale contracts
Article 94 of the New Law lists the key information or clauses that a commercial sale contract must contain. The key clauses include a mechanism for the resolution of disputes that aims to promote awareness about the need to make provisions for disputes in all commercial sale contracts, and not just after they have arisen.
The New Law includes an important provision relating to international commercial sale contracts whereby parties can, in lieu of the law, agree on the application of the International Chamber of Commerce’s general conditions of international contracts and codified practice (Article 130 of the New Law).
Summary
In summary, the New Law is a positive step in enhancing the legal framework for commercial transactions. We expect to see the executive regulations to the New Law follow in due course which will address certain areas of enforcement.
