Introduction

In a significant commercial ruling issued on July 23, 2025, the Dubai Court of Cassation has reinforced the principle that contractual terms represent binding law between parties. Case No. 503/2025 involved a dispute over a commercial loan agreement, addressing critical issues related to contractual interest, late payment penalties, and recovery of attorney’s fees. This ruling offers valuable insights into how UAE courts interpret commercial agreements and the importance they place on contractual autonomy.

Case Background

The case involved a commercial loan agreement between the appellant (lender) and two respondents (borrowers), who had entered into a loan arrangement with clearly defined terms regarding repayment, interest, and consequences of default. The lender sought to recover:

1. The principal amount of USD 468,298.63 (equivalent to AED 1,718,655.97)
2. Contractual interest at 20% annually
3. Late payment penalties of USD 2,200 per day starting from December 19, 2023, until full payment
4. Attorney’s fees as stipulated in the loan agreement

Procedural History

The case followed a complex procedural path through the UAE court system:

Court of First Instance: The court partially granted the lender’s request, awarding AED 1,139,985 (approximately two-thirds of the claimed amount) but rejected claims for attorney’s fees and certain interest calculations.

Court of Appeal: Under Commercial Appeal No. 389/2025, the appellant challenged the lower court’s ruling, particularly regarding the rejected elements. On March 27, 2025, the Court of Appeal upheld the first instance judgment.

Court of Cassation: The lender filed a cassation appeal on April 28, 2025, arguing that the lower courts had misapplied the law regarding contractual terms, particularly those concerning attorneys’ fees and interest calculations.

The Court’s Analysis

The Dubai Court of Cassation delivered a nuanced ruling that addressed several key legal principles:

1. Sanctity of Contract

The Court emphasized that under Article 246 of the UAE Civil Transactions Code, contracts must be performed according to their terms and in a manner consistent with the requirements of good faith. The judgment reinforced that a contract represents the law between parties and must be enforced as written, provided it does not violate public order or morals.

2. Attorney’s Fees Provisions

Significantly, the Court found that the lower courts erred in dismissing the appellant’s claim for attorney’s fees. The loan agreement explicitly provided that in case of default and subsequent legal action, the defaulting party would bear all costs, including attorney’s fees. The Court noted that Clause 12 of the agreement specifically addressed the recovery of legal costs incurred in enforcing the agreement.

The Court of Cassation criticized the lower courts for dismissing the claim on the basis that there was “no evidence of the amount incurred” when the agreement itself had established the obligation and specified the amounts (AED 50,000 for first instance proceedings, AED 20,000 for appeal proceedings, and AED 10,000 for cassation proceedings).

3. Interest and Late Payment Penalties

The Court also found fault with the lower courts’ handling of interest calculations. The loan agreement stipulated:

• A base interest rate of 20% annually
• Additional penalties of 10% every six months in case of delayed payment
• Daily late payment fees of USD 2,200

The Court ruled that the lower courts erred in limiting the interest calculation to a specific date (September 12, 2023) without considering ongoing interest accrual as stipulated in the contract.

The Court’s Decision

The Court of Cassation partially overturned the appealed judgment, specifically regarding:

1. The rejection of the attorney’s fees claims
2. The calculation of interest and late payment penalties

The case was remanded to the Court of Appeal to be heard by a different panel of judges, with instructions to properly apply the contractual terms regarding attorney’s fees and interest calculations. The respondent was ordered to pay cassation costs and AED 2,000 in attorney’s fees for the cassation stage.

Legal Significance

This ruling has several important implications for commercial contracts in the UAE:

Contract Supremacy: The judgment reinforces that UAE courts will generally uphold contractual terms as written, particularly in commercial contexts between sophisticated parties.

Attorney’s Fees Provisions: The ruling confirms the enforceability of contractual provisions regarding attorney’s fees, providing greater certainty for parties who include such terms in their agreements.

Interest Calculations: The Court affirmed that contractually agreed interest rates and penalty provisions should be enforced according to their terms, even when they result in substantial financial obligations.

Judicial Review Standards: The case illustrates the Court of Cassation’s approach to reviewing lower court decisions, particularly its willingness to intervene when contractual terms have been incorrectly applied or ignored.

Conclusion

Case No. 503/2025 represents an important affirmation of contractual freedom and the binding nature of commercial agreements in the UAE. The Court of Cassation’s emphasis on enforcing contractual terms as written provides valuable guidance for businesses and legal practitioners drafting and enforcing commercial agreements in the UAE.

This ruling underscores the importance of carefully drafting contractual provisions, particularly those relating to remedies, interest, and cost recovery, as UAE courts appear increasingly willing to enforce such provisions according to their terms.

For lenders and financial institutions operating in the UAE, the judgment offers reassurance that properly documented loan agreements, including provisions for interest, penalties, and recovery of legal costs, will generally be upheld by the courts.

Having said that, contact Khairallah Advocates & Legal Consultants and benefit from our free 30-min legal consultation.