12 Jan 2022

Hadef successfully obtained a judgment in relation to the applicability of a Bank’s General Terms & Conditions to a party’s right to apply set-off

Authored by: Howrey Kamal

In brief

The case Hadef & Partners handled relates to:

  • enforcement of provisions incorporated in a contract by reference to a Bank’s General Terms & Conditions;
  • application of the principle of set-off; and
  • the requirement of express authority.

Background

The principle of set-off under the UAE law is governed by Articles 368 to 377 of the Civil Code. A key provision of set-off is set out in Article 370 of the Civil Code which requires what is known as the condition of mutuality of claims and debts before set-off can be exercised – this means the parties must be both creditors and debtors of each other.

In the case Hadef & Partners handled, a UAE bank (Bank) applied set-off against funds available in the account of a corporate customer of the Bank (Company A) which the Bank claimed to be an affiliate of another corporate entity (Company B). The Bank claimed that Company B defaulted under a facility agreement.

The Bank claimed that General Terms & Conditions (GTCs) applicable to Company A’s operating bank account allowed the Bank to apply set-off against the funds held in Company A’s account where an affiliate of Company A owes money to the Bank.

Hadef & Partners successfully argued before the Courts that the set-off applied by the Bank was unlawful on the basis, inter alia, of the following grounds:

  1. that the legal conditions of set-off were not met; and
  2. that the GTCs were arbitrary and cannot bind Company A.

The Court of First Instance

The Court of First Instance appointed an expert to determine, inter alia, whether the Bank was entitled to apply set-off and deduct the funds from the bank account belonging to Company A. The expert carried out his mandate and concluded in his report that Company A did not owe money to the Bank and it had not given any express authority to the Bank to deduct funds from its bank account in order to discharge the obligations of Company B.

The Court of First Instance issued its judgment and concluded that Company A did not expressly agree for the Bank to deduct the funds from its account to discharge the obligations of Company B, in relation to Company B’s default under a facility agreement, which the Bank claimed had occurred. Further, the Court of First Instance said that the set-off provisions in the GTCs (published on the Bank’s website) cannot be relied upon by the Bank because such GTCs can be amended unilaterally by the Bank and the issue as to whether the customer (Company A) has agreed to be bound by such GTCs is a matter for the Court to decide upon, under its discretionary powers.

The Court of Appeal and the Court of Cassation

The Bank appealed to the Court of Appeal and the Court of Cassation. Both Courts discussed the set-off issue in detail and decided that in order for set-off to apply, the parties must be creditors and debtors of each other and at the same time the debt must be undisputed. In addition, the Courts said that since: (a) Company A did not owe money to the Bank; (b) Company A was not party to any facility arrangement; and (c) both Company A and Company B are two separate legal entities, the Bank cannot rely on the set-off provision contained in its GTCs published on the Bank’s website.

Legal significance

Although GTCs are usually intended to apply to a large number of customers without the need to incorporate such terms directly into each individual contract, it is worth noting that a simple reference to such GTCs may not bind the customer and may not impose a legal obligation where the customer has not expressly agreed to be bound by them. Finally, as stated above, it is important to note that the principle of set-off can only be applied if the strict conditions set out in the UAE Civil Code are met, namely, mutuality, and the debt must be undisputed.

Conclusion

If you would like more information or have any question on the above, please contact Howrey Kamal, Trainee Solicitor.