The Federal Supreme Court overturned an appeal ruling that had ordered a client and a guarantor to jointly pay AED 4.4 million to a bank.

The court affirmed the prohibition on licensed financial institutions charging interest on accrued interest (compound interest) in connection with customer credit facilities. It overturned the previous decision—which had obligated the two individuals to pay AED 4,414,734—due to the lower court's failure to examine their defence regarding the debt calculation and breach-of-contract notification, referring the case back to the issuing court for reconsideration.

According to case details, the bank had filed a lawsuit against the client and the second defendant, explaining that it had entered into a "lease of an asset ending with ownership" contract with the former. Under the agreement, it leased him a 56.82% share of a property comprising a ground floor, six repeated floors, and a roof-level shed floor.

The bank stated that the 10-year lease was agreed in exchange for a fixed monthly rent of AED 7 million, alongside a variable rent calculated according to the six-month EIBOR index plus 3.5%, with a minimum rate of 6%. This was in addition to a supplementary rent equivalent to the costs of insurance, major maintenance, and taxes incurred by the bank during the relevant lease period.

The bank added that the customer breached his obligations by failing to pay regularly and only settling portions of the variable rent, despite being granted payment facilities and having three instalments postponed at his request. Relying on a contract clause stipulating that any late instalment renders all remaining instalments immediately due without notice or warning, the bank pursued full settlement.

It specified its claim at AED 4,868,680, comprising AED 4,792,676 in overdue fixed rent and AED 76,003 in variable rent, in addition to amounts accruing until full payment.

The bank also demanded 1% of the monthly instalment value as compensation and a charitable donation for instalments overdue by more than seven days, in accordance with the Sharia regulations approved in the contract. It further requested that the second defendant be held jointly liable as the guarantor of all the client’s obligations.

The Court of First Instance ruled that the defendants were jointly obligated to pay AED 4,414,713, along with court expenses, fees, and AED 1,000 in legal fees—a decision subsequently upheld by the Court of Appeal.

The defendants appealed the ruling, arguing that the case was inadmissible because they had not been legally notified of the breach. They also objected to the financial expert's method of calculating interest and allocating repayments first, contending that this approach inflated the principal debt and constituted compound interest.

They requested that the principal debt be determined by deducting repayments from withdrawals, with payments directed towards the principal alongside simple interest until the balance reached zero, after which interest calculations would cease and subsequent payments would cover any remaining interest and bank fees.

The Federal Supreme Court explained that Article 21 of Federal Law No. 32 of 2023 on Financial Leasing requires the affected party to notify the defaulting party of the breach, enforcement, or termination, and to inform them of the opportunity to rectify it, unless the lessor and lessee agree otherwise.

The court also cited Paragraph Four of Article 121 of the legislation regulating the Central Bank and financial institutions and activities—as amended by Federal Decree-Law No. 23 of 2022—which prohibits compound interest, as well as Article 88 of the Commercial Transactions Law issued by Federal Decree-Law No. 50 of 2022, which prohibits claiming it even as supplementary compensation.

The court concluded that the lower court's ruling failed to examine objections to the expert report or verify the plea regarding the case's inadmissibility, despite the necessity of establishing the facts through proper evidentiary and investigative procedures. Finding this constituted a deficiency in reasoning and flawed inference that led to a misapplication of the law, the Supreme Court overturned the ruling and referred the case back without examining the remaining grounds of appeal.