UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for March 16, 2010

Commercial Paper in The UAE Commercial Transactions Law, Federal Law No. 18 of 1993

 

 

The Commercial Transactions Law, Federal Law No. 18 of 1993  (the “Law”):

Definition of Commercial Papers and Their Types

Article 478 of the Law:

Commercial papers are bonds written according to forms specified by law, representing a right, the subject of which is a certain amount of money, due for payment at sight or after a fixed or determinable time.  They are commercially negotiable and customarily acceptable as an instrument of payment instead of money.

Article 479 of the Law:

Commercial papers include bills, promissory notes, bearer bonds, cheques and other papers drawn up for commercial purposes which are customarily acceptable as instrument of payment in transactions.

Article 480 in the Law:

The bill (drawing bill) is a commercial paper containing an order from teh drawer to the drawee for payment of a certain amount of money at sight or within a specified or determinable date in favor of the payee.

Article 481 of the Law:

The promissory note is a commercial paper under which its maker undertakes to pay a certain amount of money at sight or at a specified or determinable date to the beneficiary.

Article 482 of the Law:

A bond to the bearer is a commercial paper, according to which, its maker undertakes to pay a certain amount of money at sight or at a specified or determinable date to the bearer of the paper.

Article 483 of the Law:

The cheque is a commercial paper containing an order issued by the drawer to the drawee bank to pay on the day shown as the date of issue, a sum of money to a third party who is the beneficiary or to the bearer of the bond.

Bill of Exchange

Article 484 of the Law:

The bill of exchange shall contain the following information:

  1. The word ‘bill’ shall be written in the deed in the language in which the deed is written.
  2. An order to pay a certain sum of money, unconditionally.
  3. Place and date of drawing up of the bill.
  4. Drawer’s signature.
  5. Drawee’s name and surname.
  6. Name of the party to whom or to the order of whom the bill value must be paid, (the beneficiary).
  7. Date of maturity and place of payment.

Article 485 of the Law:

A deed which does not contain any of the details, mentioned in the preceding Article  shall not be considered a bill of exchange except in the following cases:

  1. If a bill does not specify the date of maturity, it shall be considered due for payment at sight.
  2. If a bill does not specify the place of payment, the place shown against the name of the drawee shall be considered as the place of payment and the drawee’s place of residence at the same time; and the bill shall be payable at the drawee’s place of residence, if its payment is not stipulated elsewhere.
  3. If a bill does not include the place of drawing up, it shall be considered as drawn up at the place shown against the name of the drawer; and if such place is not mentioned expressly, the place of its drawing up shall be the place where it has been signed by the drawer.

Article 486 of the Law:

  1. A bill of exchange shall be signed or thumb printed.
  2. Two witness shall testify that the thumb printer has put his thumb print before them, fully aware of what he has signed.

Article 487 of the Law:

  1. If the amount of the bill is written both in words and figures, the amount written in words shall prevail if a difference arises.
  2. If the amount is written several times in words and figures, the lesser amount shall prevail if a difference arises.

Article 488 of the Law:

  1. A bill of exchange shall not contain more than one amount.
  2. Where a bill is drawn in a currency bearing a name which is common between the country of drawing up and the country of payment without specifying the intended currency, the currency of the country of payment shall prevail.

Article 489 of the Law:

  1. A bill of exchange may be signed by more than one drawer.
  2. A drawer may entrust a third party to sign the bill on his behalf, in which case, the said third party must show his capacity on signing the bill.

Article 490 of the Law:

  1. Interest on the amount stated in the bill of exchange may not be stipulated unless the bill is payable at sight or after a certain time from sight.
  2. The interest rate must be stated on the bill itself, otherwise the condition shall be null and void.
  3. The interest shall come into effect from the date of drawing up on the bill, if no other date has been specified.

Article 491 of the Law:

  1. Whoever signs a bill of exchange on behalf of another without authorization from him shall be personally liable under it.  However, if it is honored by him, the rights which were to be conferred on the person whom he assumes to represent, shall pass on to him.
  2. This provision shall apply to the representative if he exceeds the limits of his authority.

Article 492 of the Law:

  1. If a bill carries forged signatures or signatures of fictitious persons or persons having no legal capacity to undertake liability or if the signatures are not binding upon the signatories for other reasons, or not binding upon those on whose names the bill is signed, the obligations of the remaining signatories shall still remain valid.

Article 493 of the Law:

The obligations of a person having no legal capacity who is unauthorized to practice business and a person who lacks competence, resulting from their signatures on the bill in any capacity, shall be invalid with regards to them only and they may insist on such invalidity towards each holder of the bill.

Article 494 of the Law:

  1. A bill of exchange may be drawn to the order of the drawer himself.
  2. It may be drawn on the drawer.
  3. It may be drawn in favor of a third party.

Article 495 of the Law:

  1. The form of the bill of exchange shall be governed by the law of the country where it is drawn up.
  2. In determining the competence of obligation under the bill of exchange, it shall be referred to the law of the obligor’s nationality and if this law refers to the law of another country, such alw shall become applicable.
  3. If the applicable law considers the obligor incompetent, his obligation under the bill shall remain valid if he has put his signature thereon in a country whose law considers him fully competent.

Article 496 of the Law:

A bill of exchange may be payable at the place of residence of another person whether at the place of residence of the drawee or elsewhere.

Article 497 of the Law:

  1. The drawer of the bill of exchange shall warrant its acceptance and its payment.
  2. He may have the option to stipulate his exemption from warranting the acceptance; and any condition by which he relinquishes the warranty of payment shall be treated as if to have never existed.

Negotiation of Bill of Exchange

Article 498 of the Law:

  1. Every bill of exchange shall be negotiable by endorsement even if it is not expressly drawn to order.
  2. No bill, in whose text, the drawer makes any expression indicating that it is not to order, may be negotiated except by enforcing the provisiosn concerning the transfer of right.
  3. Endorsement may be made to a drawee whether or not he has accepted the bill.   The bill may also be endorsed to a drawer or to any other obligor and all such persons may re-endorse the bill. 

Article 499 of the Law:

  1. Without prejudice to the provisions of Article 503 the endorsement shall not depend on a condition and any condition governing endorsement shall be treated as if to have never existed.
  2. Partial endorsement shall be considered null and void.
  3. Endorsement to the bearer shall be made in blank.

Article 500 of the Law:

  1. The endorsement shall appear in writing on the face of the bill of exchange itself or on a paper attached thereto and shall be signed by the endorser.
  2. Endorsement may be restricted to the signature of the endorser only (endorsement in blank); however, for validity of the endorsement, in this last case, it is stipulated that it must be written on the back of the bill or on the paper attached thereto.

Article 501 of the Law:

Endorsement shall transfer all the rights ensuing from the bill of exchange to the endorsee.

Article 502 of the Law:

If the endorsement is made in blank, the bearer shall have the right to:

  1. Fill in the blank by writing his name or the name of another person.
  2. re-endorse the bill in blank afresh or to another person.
  3. hand over the bill to another person with out filling in the blan and without endorsing it.

Article 503 of the Law:

  1. The endorser shall warrant acceptance and payment of the bill of exchange unless otherwise stipulated.
  2. He may prohibit the re-endorsement of the bill and in this case he shall have no liability towards to whomever the bill passes by a subsequent endorsement.

Article 504 of the Law:

A possessor or a bill of exchange shall be considered a legal bearer thereof, whenever he proves his entitlement thereto by successive endorsements even if the last endorsement is in blank.  The deleted endorsements in this respect shall be treated as if to have never existed.  If an endorsement in blank is followed by another endorsement, the signatory on this last endorsement shall be considered as the one to whom the title to the bill has passed by endorsement in blank.

Article 505 of the Law:

If a person loses possession of a bill of exchange, its bearer shall not be obliged to relinquish it when he proves his title thereto according to the preceding Article unless it is obtained by him in bad faith or he has committed a serious fault for obtaining it.

Article 506 of the Law:

Without prejudice to the provision of the Article 493, the debtor, against whom an action for a bill of exchange has bene filed, shall not protest against its bearer by pleadings based on his personal relationships with its drawer or any of its previous bearers, unless the intention of the bearer at the time of obtaining it is to inflict harm on the debtor.

Article 507 of the Law:

  1. If an endorsement contains an expression e.g. (value for collection) or value for receipt or any other expressions indicating procurement, the bearer may use all rights arising from the bill of exchange including the right of filing action in his personal name and may not endorse it except by way of procurement.
  2. In this case, those under obligation shall not protest against the bearer except by pleadings by which they may protest against the endorser.

Article 508 of the Law:

If an endorsement contains an expression like the value for security or any other expression indicating mortgage of the right established in the bill of exchange in favor of the endorsee, the bearer may exercise all the rights arising from the bill; however, if a bearer endorses the bill, the endorsement is considered to have occurred as procurement.

Those liable under the bill in this case shall not protest against the bearer by pleadings based on their personal relationships with the endorser unless the intention of the bearer at the time of obtaining the bill is to inflict harm on the debtor.

Article 509 of the Law:

  1. Any endorsement subsequent to the date of maturity shall produce the effects of the endorsement precedent thereto; however, any endorsement subsequent to a protest of dishonoring or that occ uring after expiry of the legal period for making such protest, shall produce only the effect of the transfer right.
  2. Any endorsement without date, is assumed to have taken place prior to the expiry of the period specified for making a protest unless otherwise provided.

Article 510 of the Law:

The date of endorsement may not be brought forward and if it so occurs, it shall be considere forgery.

Funds for Honoring of the Bill of Exchange

Article 511 of the Law:

A drawer of the bill of exchange or any one in whose favor the bill is drawn shall make available with the drawee, funds for honoring it.  However, a drawer in favor of a third party shall be personally responsible only towards the endorsers and the bearer of the bill for making available the honoring funds.

Article 512 of the Law:

The funds for honoring of payment shall be deemed to be available if a drawee is indebted to the drawer or to the orderer of drawing, at the time of maturity of the bill, for an amount of money which is due for payment and which is at least equal to the amount of the bill.

Article 513 of the Law:

  1. Acceptance of a bill of exchange shall be deemed evidence to availability of the funds for payment to the acceptor, and such evidence shall not be refuted by the relationship of the drawee with the bearer.
  2. In case of denying, the drawer alone, whether the bill is accepted or not, shall prove that the drawee was in possession of the honoring funds at the date of maturity.  If he fails to prove that, he shall be a guarantor of the honoring even if the protest is made after the period prescribed by even if the protest is made after the period prescribed by law; and if the drawer proves availability of the funds and the continuation of its availability up to the date when the protest ought to have been made, he shall be discharged to the extent of the amount of such funds unless it has been used up in his favor.

Article 514 of the Law:

  1. Title to the honoring funds shall by law be transferred to the successive bearers of the bill of exchange.
  2. If the honoring funds are is less than the value of the bill, the bearer shall have on such insufficient funds, all the rights due to him on the full funds.
  3. The provision shown in the preceding paragraph shall apply if the honoring funds are a debt disputed, unrealized or undue, at the time of maturity of the bill.

Article 515 of the Law:

A drawer, even if a protest is made by him after the time specified by law, shall hand over to the bearer of the bill of exchange, the necessary documents for obtaining the honoring funds.  If the drawer becomes bankrupt, the bankruptcy trustee shall be liable therefore and the expenses shall be incurred by the bearer of the bill in all cases.

Article 516 of the Law:

A drawer’s bankruptcy shall result in invalidating the duration and the date of maturity for payment of the bill and its bearer alone exclusive of other creditors, shall be entitled to receive the honoring funds available with the drawee.

Article 517 of the Law:

  1. If a drawee is declared bankrupt and the honoring funds are is a debt owed thereby such debt becomes part of the assets of the bankruptcy.
  2. If a drawer has with the bankrupt drawee goods, securities or bank notes or other properties that may be recovered under bankruptcy provisions and such properties are allocated explicitly or implicity for honoring the value of bill of exchange, the bearer shall have priority to receive his right from the value thereof.

Article 518 of the Law:

  1. If several payable bills of exchange crowd together against one honoring amount which is insufficient to satisfy all of them, priority for receiving their values shall be in the order of their drawing dates.
  2. However, if bills are drawn on one date, the bill carrying the acceptance of the drawee shall be given priority and if no bill carries the acceptance of the drawee, the bill for which the honoring consideration has been allocated shall be given priority and the bills containing non-acceptance condition shall be last.

 

Acceptance of A Bill of Exchange

Article 519 of the Law:

A bearer of a bill of exchange or any possessor thereof during the period of its drawing up and up to its date of maturity may submit it to the drawer at his place of residence for the acceptance thereof.

Article 520 of the Law:

  1. A drawer of a bill of exchange may stipulate its presentation for acceptance at a certain date or without specifying a date.
  2. He may also stipulate that it should not be presented for acceptance, unless it is due for payment to a party other than the drawee, or elsewhere other than his domicile, or if it is payable after a specified time from sighting.
  3. He may also stipulate that it shall not to be presented for acceptance before a designated time.
  4. Every endorser may stipulate that a bill of exchange shall be presented for acceptance at a specified date or without specifying a date, unless the drawer has stipulated that it must not be presented for acceptance.

Article 521 of the Law:

A bill which is payable after the elapse of a certain time from being sighted shall be presented for acceptance within one year from its effective date.  However, the drawer shall have the right to make such time shorter or longer, and every endorser shall have only the right to make the time shorter.

Article 522 of the Law:

  1. A drawee may request presentation of the bill of exchange once again for acceptance on the day following the first presentation and the allegation by interested parties that such request has been refused shall not be acceptable unless such request is stated in the protest.
  2. The bearer of a bill of exchange presented for acceptance shall not be under obligation to assign the bill to the drawee.

Article 523 of the Law:

  1. Acceptance shall be on the fce of a bill of exchange by writing the word (accepted) or any other expression indicating this meaning and shall abe signed by the draweee.
  2. The mere signature by the drawee on the face of the bill of exchange shall be considered as acceptance.
  3. The date of acceptance must be shown as the day on which such acceptance occurs if the bill is payable after a fixed period from sighting or if it is presentable for acceptance within a fixed period in accordance with a clause related thereto unless it is the bearer’s demand that the date of acceptance must be shown as the date of presentation of the bill.
  4. If the acceptance doesn’t show a date, the bearer, in order to safeguard his interest in recoursing to the endorsers and the drawer, may prove that by making a protest at such time when it is vital.

Article 524 of the Law:

  1. The acceptance shall not be subject to any condition.  However, the drawee may restrict it to a part of the amount of the bill.
  2. Any amendment on the details of the bill occurring in the acceptance text, shall be considered as rejection of acceptance.  Nevertheless, the acceptor shall remain liable on the contests of the acceptance form.

Article 525 of the Law:

  1. If a drawer designates a place for payment other than the drawee’s place of residence without designating the name of the person at whose place the payment must be made, the drawee may designate it at the time of acceptance; and if he doesn’t designate it at the time of acceptance, the acceptor drawee shall be liable for payment at the place of payment.
  2. If the bill is payable at the drawee’s place of residence, the drawee may designate in the acceptance form an address at the location where the honoring is to be made. 

Article 526 of the Law:

  1. The drawee shall be liable to honor the value of the bill of exchange at its date of maturity, if he has accepted it.
  2. In case of non-payment, the bearer even if he is the drawer himself shall recourse to the acceptor drawee by a direct claim ensuing from the bill for whatever is permissible to be claimed by law.

Article 527 of the Law:

  1. If the drawee deletes his acceptance written on the bill before returning in, the acceptance shall be considered as rejected and the deletion shall be deemed to have taken place before the redemption of the bill unless otherwise proved.
  2. However, if the drawee notifies the bearer or any other signatory in writing of his acceptance he shall be liable towards them for such acceptance.

 

Reserve Security for Bill of Exchange

Article 528 of the Law:

  1. Payment of the value of a bill of exchange may guaranteed in whole or in part by a reserve security.
  2. Such security may be offered by any person even if he is one of those who have signed the bill.

Article 529 of the Law:

  1. The reserve security shall be written on the bill itself or on a paper attached thereto in any form denoting reserve security and shall be signed by the guarantor.
  2. The mere signature by the guarantor on the face of the bill shall validate the said security unless such signature is made by the drawee or the drawer.
  3. The name of the guaranteed shall be mentioned in the form of the guarantee otherwise it shall be considered as occurring to the drawer.

Article 530 of the Law:

  1. The reserve guarantor shall comply with the manner observed by the guaranteed.
  2. The liability of the reserve guarantor shall be valid if the liability guaranteed by him is invalid for any reason other than a defect in form.
  3. If the reserve guarantor honors the bill of exchange, the rights arising therefrom to the guaranteed and to any one who is liable to the guaranteed under the bill shall pass on to him.

Article 531 of the Law:

  1. A reserve security may be given on a separate piece of paper showing the place where it has been drawn up.
  2. The reserve guarantor who gives a guarantee on a separate piece of paper shall not be liable except towards the person to whom he has given the guarantee.

 

Maturity of Bill of Exchange

Article 532 of the Law: 

  1. A bill of exchange must include one date for maturity.
  2. The drawer may specify the date for maturity of the bill in any of the following ways:
    •            On sight; After lapse of a certain period from sighting; On a fixed date;   Upon the lapse of a certain period from the date of its making.
  3. A bill of exchange that contains dates of maturity other than those stated in the two preceding clauses shall lose its character as a commercial paper.

 Article 533 of the Law:

  1. A bill of exchange which is payable at sight shall be payable upon its presentation, and msut be presented for payment within one year from the date of its making.  The drawer shall have the option to make such period shorter or longer and the endorsers shall have the option to make it shorter only.
  2. The drawer shall have the right to stipulate that a bill payable at sight must not be submitted before the lapse of a certain period; and this case calculation of the submission date shall as from the day when such time falls due.

 Article 534 of the Law:

  1. The maturity date of a bill of exchange payable after a certain period from sight shall be calculated as from the date of acceptance or from the date of protest.
  2. If the protest is not made, the undated acceptance shall be considered as to have occurred with regard to the acceptor on the last day of the date prescribed for presenting the bill for acceptance according to Article 521.

 Article 535 of the Law:

  1. The maturity of a bill of exchange drawn for one month or more from its date or from the date of sighting it, shall fall due on the corresponding date of the month in which payment must be made; however, if there is no corresponding date in the month in which payment must be made, the maturity shall fall due on the date day of the month.
  2. If a bill of exchange is drawn for one and a half months or for several months and half month as of its date or as of the date of sighting thereof, computation shall begin with full months; and the expression (half a month) means fifteen days.

 Article 536 of the Law:

  1. If a bill of exchange is due for payment on a certain day and in a country whose calendar differs from that of the country of issue, the maturity date shall be determined according to the calendar of the country of payment.
  2. If a bill is drawn between two countries with different calendars and is payable after a period from its effective date, the date of its issue shall be emended according to the corresponding day in the calendar of the country of payment and the date of maturity shall be determined accordingly; and in this manner, the submission date of the bill shall be determined.
  3. The foregoing provisions shall not apply if it appears from a clause in the bill or from its mere details that the intention is to follow contrary provisions.

 

Discharge of Bill of Exchange

Article 537 of the Law:

  1. A bearer of a bill of exchange shall present it for payment t the date of maturity.
  2. Presentation of the bill to any clearing house recognized by law shall be considered as presentation thereof for payment.

Article 538 of the Law:

  1. If a bill of exchange is honored by a drawee, he may recover it from the bearer duly signed with indication of payment.
  2. The bearer may not refrain from accepting a partial payment.
  3. If the payment is made partially the drawee may seek a record thereof to appear on the bill, and to obtain a discharge therefor; and the drawer, endorses and other parties liable under the bill shall be discharged to the extent of what is paid from the original value thereof, and the bearer shall make a protest for the unpaid amount.

 Article 539 of the Law:

  1. A bearer of a bill of exchange shall not be forced to receives its value before the date of maturity.
  2. If a drawee makes payment of the value of a bill before the date of maturity, he shall bear the consequences resulting therefrom.

Article 540 of the Law:

Whoever pays the value of a bill of exchange at the date of maturity without valid objection, shall be acquitted of liability unless fraud or a grave error is committed by him and he shall ensure that endorsements are in serial order, but he shall not be bound to verify the validity of the endorsers signatures.

Article 541 of the Law:

  1. If payment of the value of a bill of exchange is to be made in the UAE in a currency other than that officially in circulation therein such payment shall be made in the national currency according to its rate of exchange at the day of maturity.  However, if payment is not made on the day of maturity, the bearer shall have the choice whether to claim payment of the value of the bill computed in the national currency according to its rate of exchange on the day of maturity, or on the day of payment; and the customary practice prevailing at the place of payment shall be followed in determining the rate of exchange of the foreign currency unless the rate according to which the payable amount must be calculated is specified by the drawer on the bill.
  2. The provisions of the preceding paragraph shall not apply if the drawer has expressly stipulated that payment of the bill must be made in the kind of the foreign currency indicated therein; subject, however, to the rules governing the currency and foreign exchange control.
  3. If the amount of the bill is fixed in a currency having a common name and its value in the country of issue differs from that in the country of payment, it shall be presumed that the currency of the country of payment is the one intended.

Article 542 of the Law:

  1. If a bill of exchange is not presented for payment on the day of maturity, any one indebted with its value may deposit its amount with the treasury of the compotent court in whose jurisdiction the place of payment is located.  The deposit shall be made at the expense of the bearer, under his responsibility and in accordance with an instrument delivered to the depositer stating the deposited amount, the date of construction of the bill as well as it date of maturity and the name of the person in whose favor it has originally been made.
  2. If a bearer makes a claim against a debtor for payment, the latter shall deliver the deposit document to him against receipt of the bill from him marked with payment according to the said document; and the bearer shall have the right to receive the amount deposited with the court under the said document and if the debtor fials to deliver the deposit document to the bearer, he must pay the value of the bill.

Article 543 of the Law:

Objection to or refrainment from payment of a bill of exchange shall not be accepted except when it is lost or swwhen the bearer becomes bankrupt.

Article 544 of the Law:

  1. If an unaccepted bill of echange drawn up in several copies is lost, whoever is entitled to the value thereof, may claim payment on the basis of any one of the other copies;
  2. If a bill is drawn up in several copies and the copy bearing the acceptance is lost, no claim for payment thereof on the basis of any of the other copies may be made, except by an order from the president of a competent court and subject to presentation of a guarantor.

Article 545 of the Law:

Whoever loses a bill of exchange, whether accepted or unaccepted and fails to present anyone of the other copies, may seek from the  president of the competent court, an order for payment of its value, provided that he proves his title thereto and presents a guarantor.

Article 546 of the Law:

  1. In case of refusal of payment of the value of the lost bill of exchange, after claiming it in accordance with the provisions of the two preceding Articles, its holder shall confirm that in a protest to be made on the day following the date of maturity; and he shall notify the drawer and endorsers in the manner and at the times prescribed in Article 560.
  2. The protest shall be made at the time stated in the preceding paragraph, even if obtaining a decision from a competent court in due course be comes impossible.

 

Article 547 of the Law:

The debtor shall be acquitted from liability upon payment of the value of the bill of exchange at the date of maturity according to an order from the court in the cases referred to in Articles 544, 545.

Article 548 of the Law:

The guarantor’s liability referred to in Articles 544, 545 shall expire after the lapse of three years if no claim or action is filed during such period.

Article 549 of the Law:

  1. The holder of a lost bill of exchange may obtain a copy thereof by referring to whoever endorsed the bill to him and such endorser shall assist him and allow him to use his name in requesting the former endorser, and the title holder shall move on from one endorser to another until he reaches the drawer.
  2. Each endorser shall write his endorsement on the copy of the bill of exchange delivered by the drawer after stating remarks thereon indicating that it is a replacement for the missing original copy.
  3. A claim for payment may not be made under this copy except by an order from the president of the competent court, and subject to supply of a guarantee.
  4. All expenses shall be borne by the holder of the bill of exchange.

Commercial Paper in the UAE

 

 

Commercial papers are instruments written in forms defined by law representing the right to a sum certain in money payable on sight or after a fixed or determinable period. They are negotiable trading instruments acceptable in commercial practice as an alternative to payment in cash.

Commercial papers include bills of exchange, promissory notes, bearer bonds, cheques and other instruments drawn for the purpose of carrying on commercial activity and recognized in commercial practice as acceptable forms of payment for transactions.

Bills of Exchange

A bill of exchange (draft bill) is a commercial paper, which contains an order issued by the drawer requesting the drawee to pay a sum certain in money on demand or at a fixed or determinable future date to the order of the payee.

Creation of Bills of Exchange

A bill of exchange must contain the following particulars:

• The expression “Bill of Exchange” must be written in the body of the instrument in the same language as the instrument itself.

• An unconditional order to pay a sum certain in money.

• The place and date of creation of the bill.

• The signature of the drawer.

• The name and surname of the drawer.

• The name of the person to whom or to whose order the bill is drawn payable.

• The due date and place of payment of the bill.

Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum donated by the words shall be the amount payable. If the sum payable is specified more than once, whether in words or figures, the lowest amount shall be payable in case of any discrepancy.

Claims and Recourse Against the Parties Liable on a Bill of Exchange

In the event of failure to honor a bill of exchange on maturity, the holder of the bill shall have the right of recourse against the endorsers, the drawee and any other parties liable on the bill. The holder of a bill of exchange may bring an action against the parties liable on the bill prior to the maturity date in the following cases:

1. In the event of partial or total acceptance being refused.

2. If the drawee is bankrupt or insolvent, whether he has accepted the bill or not, even if no order has been issued declaring him bankrupt or if a garnishing order proves ineffective.

3. In the event of bankruptcy of the drawer of a bill, which is subject to a non-presentment for acceptance provision.

A guarantor against whom an action is brought in accordance with one of the cases stipulated in points b and c of the preceding paragraph may within three days of the date of the action being brought, ask the court of first instance with jurisdiction over his place or residence to grant him a grace period for payment of the bill. If the court finds the request justified, it shall issue a decision determining the period within which the payment is to be effected provided that the said period does not extend beyond the date of maturity of the bill. The decision of the court in this regard shall not be open to appeal. Refusal to accept or honor a bill of exchange shall be established by way of a protest for non-acceptance or a protest for non-payment.

The protest shall be drawn up by the competent notary public who shall be responsible for delivering a copy of the said protest to the party concerned. The protest must include a verbatim copy of the bill of exchange, together with all the particulars specified therein regarding acceptance, endorsement, guarantee, payment in case of need, etc.   The protest must also include a warning of non-payment of the bill, confirmation of the presence or absence of the party liable for acceptance or payment, the reasons for acceptance or payment being refused, the inability or refusal to sign and in case of partial payment, the portion of the amount, which has already been paid.

The party liable for payment of the bill of exchange shall be notified of the protest for non-acceptance or non-payment at his domicile or at his last known domicile. The competent notary public shall make a full entry of each protest in a special, duly signed register with numbered pages. Care must be taken that each protest is entered as and when it is made. A list of the protests for non-payment drawn up each month must be sent to the competent Commercial Register by the notary public concerned within the first ten days of the following month. The Commercial Register shall keep a special register for this purpose. Any person may inspect the said register or obtain copies thereof upon payment of the statutory fees. A list of all the said protests shall be published by the office of the Commercial Register.

Where the drawee is insolvent, whether the bill has been accepted by him or not or if the attachment imposed on his assets proves ineffective, the holder of the bill may have recourse against the guarantors only after presentment of the bill for payment to the drawee and after a protest for non-payment has been made.

In the event of the drawee of a bill of exchange being declared bankrupt, whether he has accepted the bill or not or in the event of the drawer being declared bankrupt in the case of a bill of exchange in respect of which it is stipulated that it must not be presented for acceptance, submission of the bankruptcy order shall be sufficient for the holder of the bill of exchange to exercise his right of recourse against the guarantors.

The drawer, endorsers and any precautionary guarantors may exempt the holder from lodging a protest for non-acceptance or non-payment when having recourse to law, if it is stipulated and signed on the bill of exchange that ‘recourse is without expense’ or that it is ‘without protest’ or any other expression to that effect.

The courts are not permitted to grant a grace period for payment of a bill of exchange or for taking any other measures relating to it except in cases provided for in law. If a bill of exchange is not presented for acceptance on the date stipulated by the drawer, the holders’ right of recourse shall be extinguished whether this is for non-acceptance or non-payment unless it can be shown from the wording of the clause that the drawer intended only to exempt himself from guaranteeing acceptance. If the force majeure lasts for more than thirty days after the due date, recourse may be had against the parties liable without need for presentment of the bill or for a protest.

Promissory Notes

A promissory note is a commercial paper in accordance with which the maker of the note undertakes to pay a sum certain in money on demand or at a fixed or determinable future date, to antoher person, i.e. the payee. A promissory note contains the following particulars:

a. a promissory clause or the expression ‘promissory note to or to the order of’ written on the face of the note in the same language as the note itself.

b. an unconditional undertaking to pay a sum certain in money to be written in figures as well as words.

c. the maturity date.

d. the place of payment.

e. the name of the person to whom or to whose order payment must be made.

f. the place and date the note was created. e.g. the signature of the maker of the note.

Promissory notes shall be subject to the provisions relating to bills of exchange regarding capacity, multiple duplicates or copies, endorsement, due date, payment, recourse for non-payment, prohibition of granting a grace period for payment, attachment, protest, computation of time, and working days, recourse by way of drawing a recourse bill, payment for honor and timebarred legal action in so far as these do not conflict with the tenor of the notes.

A promissory note is an evidence of debt and a promise to pay a certain sum of money to the promise at a certain date. A promissory note may be signed in blank by the promisor whereby the promise may insert the outstanding amount and the payment date. A promissory note amounts to balance confirmation and balance confirmation is an irrebutable admittance of a debt. Therefore, the bank should always obtain a promissory note from its customers.

Cheques

The provisions concerning bills of exchange shall apply to cheques in so far as they do not conflict with the tenor of the said cheques. Cheques shall contain the following particulars:

  • The word ‘cheque’ shall be written in the body of the cheque in the same language in which the cheque is written.
  •  The name of the person liable for payment.
  • The name of the person to whom or to whose order payment must be made.
  • The place of payment.
  • The date and place of drawing the cheque.
  • The signature of the drawer of the cheque.

The issuing of cheques is not permitted unless at the time of issuing the cheque, funds belonging to the drawer are held by the drawee, which can be disposed of by the drawer through the use of cheques in accordance with an express or implied agreement. It is up to the drawee of a cheque or to the person on whose authority and for whose account a cheque is drawn to provide value for the payment. However, a person drawing for the account of a third party shall be personally liable to the endorsers and bearer of the cheque to the exclusion of any others for providing value fo the payment. In the event of denial, it is up to the drawer alone to establish that the person on whom the cheque is drawn was in possession of value for payment at the time the cheque was issued. If the drawer does not establish this, he shall be held as guarantor for payment of the cheque, even if he protests for non payment after the legally stipulated periods.

Types of Cheques:

1. Bearer cheques which are negotiable by mere delivery;

2. Order cheques which are negotiable by endorsement and delivery and;

3. Cheques to a specific party and not to order, which are transferable by way of assignment of rights subject to consent of the paying (drawee) bank.

Admissibility of Negotiability in Law

With the exception of cheques makred non-negotiable or by any other mode of restriction or a cheque which is reported lost or in the case of bankruptcy of the payee/endorser adjudicated before endorsement or through a court order, all uncrossed or crossed cheques are negotiable in the manner outlined above.

Responsibility of the Paying (Drawee) Bank in Respect of Endorsements (negotiability)

Responsibility of the paying (drawee) bank in payment of an endorsed cheque, whether at the counter or through collection, depends on two factors:

1. Endorser having an account with the paying (drawing) bank:

In this case the paying bank is obliged to verify the signature of the endorser and the authority and legal capacity of the signatory to endorse if the cheque is endorsed by a person other than the principal (account holder).

2. Endorser not having an account with the paying (drawee) bank:

In this case, the paying bank is not obliged to verify the endorsement or establish the authority or the endorsing signatory because verification cannot be exercised in the absence of specific instructions/mandates and documentation establishing the authority of the signatory and especially in the absence of cheque stop payment order on the basis of cheque lost report or a court order.

The paying bank is under no obligation to rely on verification and establishment of mandate through the endorser’s bank.

Partial Payment of Cheques:

Unlike the familiar practice under the UAE laws, partial payment of a cheque is allowed at the payee’s request in case of insufficiency of funds in the drawer’s account. In such cases, the drawee bank is obliged to make partial payment upon a written request from the payee. The drawee bank should endorse the amount paid on the back of the cheque and give the payee a certificate showing the remaining balance due to him as an evidence of recourse by the payee against the drawee by way of civil action. The cheque itself should not be released to the payee.

Presentment of Cheques and Stale Cheques

Any cheque payable in the UAE, whether drawn in or outside the UAE, must be presented for payment within six months from the date of issue of the cheque. A drawee may effect payment of the cheque even after expiry of the period stipulated for presentment. A recent judgment rendered by the Dubai Supreme Court on this issue may be viewed from two different baselines derived from the court findings and rulings:

 a.) a cheque marked or certified ‘good for payment’ by the drawee bank:

According to the verdict, the validity of such cheque is not restricted by the period of six months for presentation and it will not be treated or considered as a ‘stale cheque’ in this respect.

This is based on Article 618(3) of the UAe Commercial Code, which stipulates that presentation of the cheque to the drawee bank for its ‘certification’ or ‘good for payment’ purposes is considered as presentation for payment and the date of presentation beomces the due date of the cheque.

According to the said Article, the drawee bank shall have to freeze the cheque amount until it is claimed by the payee.

The six month period shall not apply in this respect as long as the cheque is certified or marked ‘good for payment’ by the drawee bank.

Ordinary Cheques

According to the court verdict, the six months period to convert a cheque into ‘stale’ as prescribed by UAE Bank circulars should not affect the validity of cheques because such circulars are of a regulatory nature rather than being mandatory and as such the validity of cheques goes beyond any restrictive or limited periods prescribed by such circulars.

However, there was a misapplication of the law in this respect which may lead to confusion in the banking system and practice. The concept of a stale cheque does not arise from abstract. It aims to protect both drawers and drawee banks against any difference in drawers signatures on cheques, lack of means of verification by lapse of time, and change of specimen signatures and authorities by drawers during long courses of business. It’s also tantamount to punishing relaxed holders of cheques negligent in presenting them for payment within the period. The general rule is that it is mandatory according to the said article that a cheque must be presented within six months and the exception to this rule is that the drawee bank may honor a cheque even if presented after expiry of the period. The word ‘may’ in the above sentence, by analogy, means ‘may not’ also as an option and not as an obligation to honor whereas in all cases, a credit which has been opened for an unspeicified period shall be deemed cancelled upon the expiration of six months from the date on which the beneficiary was notified of the opening of the credit if he has not used it unless otherwise agreed.

A bank may only cancel a credit before the termination of its specified period if the beneficiary dies, loses competence, or ceases to pay even if there has no adjudication in bankruptcy with respect to him, or if he is grossly at fault in using the credit which has been opened in his favor. If the customer in whose favor the credit has been opened is a company, the credit shall also lapse upon the invalidation or expiration of the company.

Stop Payment of Cheques and Duties of A Drawee Bank

The drawee bank is bound to honor cheques and stop payment instructions should not be effected in cases of loss of the cheque or bankruptcy of the cheque holder. The drawee bank may rely on a mere report from the drawer or the holder of the cheque as sufficient evidence for stop payment. Bankruptcy of the holder will be determined by a final judgment from a competent court. If the drawer of the cheque dies or is incapacitated or adjudged bankrupt after issuance of the cheque, this will not have any effect on the rights and obligations arising from the issue of the cheque.

If a bearer cheque is lost, its owner may report to the drawee bank to stop its payment. The report would include the number, amount and drawer of the cheque and any other information assisting in recognizing the cheque and the circumstances surrounding or behind its loss. If the reporter fails to provide any of these details, he should state the reasons behind such failure. If the reporter has no place in the residence in the country, he should nominate a place of residence to the drawee bank for the purposes of his report. If the drawee bank received the report as above, it should refuse to honor the cheque and should freeze the amount of the cheque until the dispute is resolved. The drawee bank, at the expense of the reporter, should publish details of the lost cheque its number amount name of the drawer name and address of the reporter in one of the Arabic newspapers published in the UAE and any transaction of such cheque after such publication is null and void.

*Emirates Institute for Banking and Financial Studies, Legal Environment in the United Arab Emirates, Laws Relating to Banking

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance