Abu Dhabi: The Federal Supreme Court upheld a bank’s appeal against an appellate ruling regarding the calculation of a debt owed by a client amounting to Dh5.786 million, deciding to overturn the ruling and refer the case back to the Court of Appeal for reconsideration.
The court stated in its reasoning that the appealed ruling excluded the result of the first final expert report, even though it settled the account on the basis that the financing was Islamic and applied the rules established for its calculation, while the ruling adopted the result of the second expert, in which the expert applied the judicial interpretation established for bank loans in which, interest is calculated and repayment payments are directed towards the principal of the debt, without the ruling showing its basis for that, even though the financing that is the basis of the lawsuit is Islamic financing in the form of ‘lease ending with ownership’.
In the details of the case, a bank filed a lawsuit against a client, requesting a ruling obligating him to pay it the sum of Dh5.786 million in addition to a profit margin of 9.875% annually from the date of filing the lawsuit until full payment.
The bank said that the defendant obtained Islamic real estate financing in the form of a ‘lease ending with ownership’ contract in the amount of Dh5 million, with the profit margin mentioned, with the payment to be made through instalments paid every three months in the amount of Dh99,315 per instalment.
The bank indicated that the financing amount was transferred to the defendant’s account and the property subject to the financing was received, but he failed to pay the instalments due, and the amount claimed was recorded against him.
The court of first instance had obligated the defendant to pay the full amount claimed plus 5% interest, but the Court of Appeal overturned the ruling and obligated him to pay the bank the sum of Dh4.817 million, based on a second finding in the report of the banking expert, which calculated the client’s payments at the value of Dh1.1 million instead of the Dh241,000 fixed in the account statements, without stating the bond.
The bank appealed the ruling, pointing out that the ruling excluded the expert’s initial finding that settled the account according to the rules of the Islamic system, on which the facility was granted, in which the profit becomes part of the value of the financing and all instalments and profits are due upon default, stressing that the ruling erred in applying the law and did not respond to the bank’s defence, which is flawed and warrants its reversal.
The Federal Supreme Court upheld the bank’s appeal based on the Commercial Transactions Law No. (50) of 2022, confirming that the ‘lease ending with ownership’ contract is an Islamic financing in which the predetermined profit margin is considered an integral part of the sale and a debt owed by the buyer or lessee for the purpose of ownership as soon as he benefits from the leased property until he owns it by a contract independent of the lease contract.
It stressed that the ruling’s failure to address the bank’s defence results in invalidity if this defence is substantial and influential on the outcome reached by the court, because this constitutes a deficiency in the factual grounds of the ruling.
It pointed out that the expert appointed in the case confirmed that the bank granted the client financing in the form of a ‘lease-to-own contract’ to purchase a share of the company's capital through 80 quarterly instalments until 2040.
The expert concluded in his final report with two findings: the first, according to the bank's records (Islamic financing), showed a debt of Dh5,786,767; the second, based on the system of directing actual repayment instalments to settle the principal debt first, showed a debt of Dh4,817,499, based on a calculated payment of Dh1,161,923.
The bank objected to this in its defence memorandum, asserting that the actual payment was only Dh241,367. However, the appealed judgment adopted the second finding and rejected the first without addressing the bank's substantive defence. It applied the judicial precedent for conventional commercial loans instead of the established rules for Islamic finance without providing any justification, thus rendering the judgment flawed. The application of the law and the deficiency in the reasoning necessitate its reversal.