assignment of debt under uae law

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UAE clarifies factoring and assignments of receivables

The recently enacted Federal Decree-Law No. 16 of 2021 on Factoring and Transfer of Civil Accounts Receivable (the New Law) which enters into force on 8 December 2021, being the first federal regulation in the United Arab Emirates (the UAE) dealing specifically with factoring and the assignment of receivables, has ushered in some much-needed clarity as to how these arrangements should work in the UAE. Specifically, the New Law provides a new regulatory framework which sets out the basic legal requirements for assignments and transfers of receivables, validity and perfection requirements, as well as the rules for determining priority amongst competing claims over assigned receivables.

Historically, this had been viewed as something of a 'grey' area of the law – governed in a piecemeal way, with Federal Law No. 5 of 1985 (as amended, the Civil Code) governing the assignment of debt and Federal Law No. 4 of 2020 (the Moveable Assets Mortgage Law) governing assignments over receivables which are taken by way of security. This had created some uncertainty as to which regulation should apply in particular circumstances, as well as uncertainty regarding the relationship between the different laws. The fact that the New Law seeks to provide a unified framework in relation to this area is a very welcome development. There are, however, certain key aspects of the New Law which may require further clarification as market participants seek to rely upon this new framework.

Scope of the New Law

The New Law applies broadly to any assignment of receivables made as part of commercial or civil transactions. Notable exclusions from this new law are assignments in the context of:

• personal / family transactions;
• financial contracts regulated by clearing agreements;
• foreign exchange transactions;
• interbank payment systems, net-based clearing systems and settlement related to securities, assets or other financial instruments;
• repurchase of securities, assets or financial instruments deposited with a broker;
• the right to financial payments fixed in endorsable bonds;
• the right to payments deposited in credit accounts with banks; and
• the right to payments under securities, documentary credits and letters of guarantee.

What is an Assignment?

The New Law governs " Assignments ", which is defined to cover an arrangement where " contractual rights to settle a cash sum owed by the Debtor are transferred to the Assignee, and the Assignment constitutes the agreement to create a security right on the Debtor's debt, transfer it as a security, and sell it in a final sale ". One possible interpretation of this particular definition would be that the New Law only governs arrangements which not only assign a debt but which also create a security interest over that debt. However, many factoring arrangements and debt assignments simply involve a debt being assigned absolutely and do not necessarily involve a security right being created over that debt. The New Law also does not elaborate on the different types of factoring arrangements that can exist, such as the purchase or sale of receivables, discounting and reverse factoring.

Given that the New Law appears (on the face of it) to be intended to cover all factoring arrangements and assignments of debts, the prudent course of action for market participants would be to ensure that all of their factoring arrangements and assignments of debt comply with the New Law, regardless of whether those arrangements involve security being created.

Form of Assignment

When it comes to the form that an assignment of receivables should take, the New Law is not prescriptive, and simply provides that an assignment shall be considered effective provided that the receivables that are subject to the assignment are described in a general or specific manner in order to allow for their identification.

Importantly, the New Law goes on to clarify some of the key points around how to describe the receivables being assigned (in relation to which there previously was some uncertainty). Specifically, we highlight the following:

• It is acceptable for the purposes of the New Law to describe the assigned receivables generally, for example by simply saying that the assignment is of all receivables that are currently owed by a debtor, all receivables that will be owed by a debtor in the future, or a specific class or specific or general type of such receivables.
• The New Law therefore appears to confirm that, in an assignment agreement, it is not necessary to individually list out each particular contract under which a debt is assigned.
• The New Law confirms that if the subject of the relevant assignment is receivables which are owed by a debtor in the future, then that assignment may be effective without the need to enter into any new transaction to assign each future debt in due course.

Effectiveness and Priority

One key point which the New Law clarifies is in relation to the effectiveness of debt assignment agreements against third parties: with specific provisions of the Moveable Assets Mortgage Law being incorporated by reference in order to establish that such assignments, in order to be effective towards third parties, must be declared on the electronic register created under the Moveable Assets Mortgage Law (which is currently operated by the Emirates Integrated Registries Company (EIRC)). While, prior to the introduction of the New Law, it was common for market participants to register assignments of receivables with the EIRC, it was not previously clear whether this was strictly necessary with respect to absolute assignments of receivables under the Civil Code which did not create security interests.

Regarding any specific requirements which need to be met in order for an assignment of receivables to be effective against a debtor (which have traditionally been governed by the Civil Code and relevant cases), the New Law does not specifically repeal or replace the Civil Code in this respect, and so the prudent course would be for market participants to continue to satisfy the applicable conditions derived from the Civil Code. This essentially means that, in order for an assignment of receivables to be enforceable against a debtor, notice of the assignment is required to be provided to the relevant debtor and (depending on the exact circumstances) with it also being advisable for the assignment of receivables to be acknowledged by the relevant debtor. The New Law does however give an assignee the clear right to send a notification and payment instructions to the relevant debtor in relation to receivables that have been assigned to that assignee (even if that notification gives rise to a breach of the underlying contract as between the assignor and the debtor), and does also seem to indicate that the debtor must agree to the assignment particularly in the context where the underlying contract is being amended.

Similar to what we see with registration, when it comes to determining priority among competing claims over receivables, the New Law relies on the Moveable Assets Mortgage Law to allocate the priority (determined by the date and time of registration) of the rights of assignees over the accounts receivable, to determine the priority of the assignor's obligation and to determine the priority of the assignment towards non-contractual rights.

To conclude, the New Law has clarified certain key issues regarding the assignment of receivables, and in doing so has created a more unified framework. It is now clear that any receivables which are subject to an assignment (which may include future receivables) need only be described in the assignment in general terms, and it is also now clear that certain elements of the Moveable Assets Mortgage Law apply to assignments of receivables (such as the registration requirements and rules regarding priority). Question marks do, however, remain over how the New Law treats certain types of debt assignments and factoring arrangements (particularly ones that involve absolute assignments and not security rights), as well as the question of how a court would interpret the relevant provisions of the Civil Code in light of the New Law.

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12 Jan 2022

New Federal Decree Law No. (16) of 2021 on Assignment of Receivables and Factoring

Authored by: Howrey Kamal

In Brief: This article discusses the recent enactment of Federal Decree Law No. (16) of 2021 on Assignment of Receivables and Factoring ( Assignment and Factoring Law ) and in particular it discusses:

• assignment under the Civil Code;
• assignment and factoring under the Assignment and Factoring Law; and
• priority and enforcement.

Assignment under the Civil Code

Historically, the law relating to assignment in the UAE has been governed by Federal Law No. 5 of 1985 on the Civil Transactions Law (the Civil Code ). The Civil Code deals with assignment in detail through Article 1106 to Article 1132.

Article 1106 of the Civil Code defines assignment to mean “an assignment of debt and claim from the liability of the assignor to the assignee”. An important note to make here is that the assignment provisions under the Civil Code only deal with assignment of ‘debt and claim’; that is, assignment of obligations rather than assignment of rights.

In an assignment of an obligation, A assigns to C its obligation to discharge a contractual claim or its obligation to pay B, whereas in an assignment of rights, A assigns to C its right to receive payment from B. One of the key provisions of assignment is that in order for it to be perfected or valid, notice has to be served to the counterparty and acknowledgment must be obtained. Article 1109 of the Civil Code states that “the validity of an assignment is conditioned upon the acceptance of the assignor, the assignee and the counterparty.” This means an assignment of an obligation (whether debt or claim) is not enforceable against the counterparty unless it agrees to it.

Assignment of rights has been governed by case law. The UAE Courts have been consistent in ruling that ‘consent’ or ‘acknowledgment’ in an assignment of rights from the ‘payor’ is not required and notice to the payor will suffice to perfect the assignment. The rationale for this is that in an assignment of rights no additional burden is imposed on the payor. For example, the Abu Dhabi Court of Cassation in Case No. 597 of 2012 stated that “an assignment of rights shall be established by mutual consent between the assignor and the assignee without the need to obtain the debtor’s consent. If the debtor has not been served with notice of assignment, the debtor can deal with its original creditor as the sole creditor.” The Court further stated that the counterparty will be bound by the assignment once it has become aware of the assignment.

Assignment and Factoring Law

The Assignment and Factoring Law was published on 9 September 2021, the first federal law in relation to assignment of right to payment and it came into force on 7 December 2021. As noted above, previously there was no UAE law on assignment of rights.

Assignment is defined in the Assignment and Factoring Law to mean “an agreement whereby the assignor assigns to the assignee its contractual rights for collecting a monetary amount owed by the Receivable's Debtor. The assignment involves an agreement to create a security interest over the receivable, to assign as a collateral and irrevocably sell the same.”

Article 2(2) of the Assignment and Factoring Law says that it applies to all commercial and civil transactions except for assignment of receivables that arise out of the following situations:

• a transaction carried for personal, family or household purposes;
• financial contracts regulated by netting agreements;
• foreign exchange transactions;
• systems and agreements of interbank payment, netting systems and adjustment relating to securities, assets or other financial instruments; and
• buyback of securities, assets or financial instruments deposited with a broker.

Article 2(3) of the Assignment and Factoring Law further says that it shall not apply to the following cases:

• the right to payments proven under endorsable instruments;
• the right to payments deposited into the credit accounts with banks; and
• the right to payments under securities, documentary credits and letters of guarantee.

Key provisions of the Assignment and Factoring Law

• The receivables must be generally or specifically described so that they can be identified (Article 4(4) of the Assignment and Factoring Law).
• Assignment of receivables can apply to future receivables (Article 4(5) of the Assignment and Factoring Law).
• Assignment will be effective regardless of any contractual agreement obliging the assignor not to assign its right to payment under the original agreement (Article 5(2) of the Assignment and Factoring Law).
• The counterparty will enjoy the same rights it has against the assignor under the original agreement and this includes right of set-off, however this can be contracted out (Articles 16 and 17 of the Assignment and Factoring Law).
• Once payment is made to the assignee the counterparty cannot claim it back from the assignee even if the assignor is in breach of the original contract (Article 19 of the Assignment and Factoring Law).
• Existing assignments can be registered in the Moveable Collateral Register within six months from 7 December 2021.

Enforceability of assignment and notice requirements

Article 4(2) of the Assignment and Factoring Law says that an assignment will be enforceable, once executed, between the assignor and the assignee even if notice has not been served on the counterparty (payor). This implies that if notice is not served on the counterparty, the assignment is still valid but in order for the assignment to be binding on the counterparty notice must be served, otherwise the counterparty will continue to pay the assignor.

As noted above, the Courts in the UAE have historically been consistent in ruling that an assignment of right does not requires consent of the counterparty and notice will suffice to perfect an assignment. The Assignment and Factoring Law maintains this position and does not require the counterparty to provide consent. However, the counterparty will only be bound by the assignment once notified and when payment instructions are received in accordance with Article 14 of the Assignment and Factoring Law.

Article 11(1) of the Assignment and Factoring Law provides that the assignor and the assignee may each serve notices and payment instructions to the counterparty and once notice is served, the counterparty is obliged to take payment instructions only from the assignee.

Priority and third-party rights

Articles 7 and 8 of the Assignment and Factoring Law provide that in relation to priority, the relevant provisions of the Federal Law No. (4) of 2020 on Securing Interest in Movable Property ( Movable Pledge Law ) will apply. Article 7(2) of the Assignment and Factoring Law particularly says that an assignment is not enforceable against third-parties (in other words, against competing creditors) unless it is registered in the Movable Collateral Register which is currently managed by Emirates Integrated Registries Company.

Under Article 10(1) of the Movable Pledge Law, a security right is effective against third-parties if:

• it is registered in the Movable Collateral Register;
• possession has been transferred to the pledgee; and
• the pledgee has taken control of the security assets.

The above priority in relation to assignment means that once an assignment of the right to receive payment is perfected by registration in the Movable Collateral Register, it will be binding against any subsequent assignment of the same right. This means a creditor under an assignment by way of security should immediately register the assignment in the Movable Collateral Register, in order to ensure priority over competing claims.

Factoring is defined in the Assignment and Factoring Law to mean a “transaction whereby the assignor assigns the current and/or future receivables to the assignee, or an agreement between the parties that the assignor shall retain the entries relating to and collect the receivable transferred and to afford protection to the assignee in case the Receivable's Debtor defaults on payment.”

A significant point to make is that the Assignment and Factoring Law provides that factoring can only be exercised by entities licensed by the UAE Central Bank. Although further guidance is anticipated from the UAE Central Bank in accordance with Article 25 of the Assignment and Factoring Law, no such guidance has been issued as at the date of the publication of this article. For any entities wishing to carry out factoring activities, it is important that they monitor any updates on this point and seek the relevant licence from the UAE Central Bank at the appropriate time.

Enforcement

The Assignment and Factoring Law does not provide a specific mechanism for enforcement should the counterparty refuse to pay the assignee upon receipt of payment instructions. However, Article 21 of the Assignment and Factoring Law says that the assignee can enforce its rights in accordance with provisions of the assignment or alternatively can take enforcement action under Chapters 7 and 8 of the Movable Pledge Law.

Chapter 7 of the Movable Pledge Law provides that the assignee can enjoy self-help (out of court enforcement) subject to notice being served on the counterparty and Chapter 8 of the Movable Pledge Law provides for an expedited court enforcement process. Under Chapter 8 of the of the Movable Pledge Law, the enforcement application is made to the Judge of Urgent Matters and the matter is considered by the Judge within a short timeline as set out in detail therein.

For enquiries in relation to the Assignment and Factoring Law, please contact the Banking & Finance team.

This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances or facts. A writer's view may differ from views of colleagues and/or the firm. You should seek legal advice on each specific matter. Access to this article does not form an attorney-client relationship.

Howrey Kamal

Senior associate, +971 2 205 5300, [email protected].

In this Article, Howrey Kamal, Trainee Solicitor, discusses Federal Decree Law No. (16) of 2021 on Assignment of Receivables and Factoring which came into force on 7 December 2021.

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

In this article, Howrey Kamal, Trainee Solicitor Dispute Resolution, discusses a significant judgment from the Abu Dhabi Court of Cassation regarding the applicability of a Bank’s General Terms & Conditions and the principles of set-off

Assignment of rights under UAE Law

This article delves into the assignment of rights as per the laws of the United Arab Emirates (UAE), specifically focusing on the legal landscape within the UAE jurisdiction. It is important to note that the discussion herein does not encompass the assignment of rights in alignment with the regulations established by the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). We will be issuing a separate article focusing on the assignment of rights under the DIFC and ADGM regulations.

In the UAE, the regulation of assignment was traditionally governed by the Civil Transactions Law (Federal Law No. 5 of 1985). The intricacies of the assignment were addressed in detail from Article 1106 to Article 1132 of the Civil Code. It is noteworthy that the Civil Code specifically focused on the assignment of 'debt and claim,' underscoring obligations rather than rights. An essential requirement for the validity of an assignment was the service of notice to the counterparty, coupled with the necessity of obtaining acknowledgement. Article 1109 of the Civil Code stressed the significance of acceptance from the assignor, the assignee, and the counterparty for an assignment to be deemed valid. Nonetheless, the UAE Courts have consistently held that obtaining 'consent' or 'acknowledgement' in an assignment of rights from the underlying obligor is unnecessary, and serving notice to the underlying obligor is sufficient to complete the assignment.

The UAE Factoring Law was issued on 29 August 2021 1, published on 9 September 2021 and came into effect on 7 December 2021 (the “Assignment and Factoring Law”) which was a significant development in the UAE banking and finance legal landscape and a further enhancement to the UAE federal law No.20 of 2016 in relation to the charging or pledging of movables as security for indebtedness which, although was a significant development in its own right, was perhaps unclear in respect of certain aspects like the possibility of selling future receivables before these coming into existence.

The significance of the Assignment and Factoring Law is that is the first law in the UAE that deals with the assignment of rights and receivables in detail. According to the Assignment and Factoring Law, future receivables could be also assigned. The clear possibility to assign future receivables marks a noteworthy advancement with a substantial positive impact. By allowing for the assignment and capture of future receivables within the relevant agreement, this development presents a forward-thinking approach to financial transactions. Traditionally, securing future receivables was relatively unclear in certain aspects, limiting the scope of collateral. However, the ability to extend such interests to future receivables introduces a new level of flexibility and foresight in financial arrangements.

The UAE Assignment and Factoring Law extends its scope to receivables arising from any transaction within the realms of commercial or civil dealings, regardless of whether conducted through a regulated financial market. This includes transactions with or without the right to recourse against the assignor. Nevertheless, the law excludes its application to the following transactions:

Transactions undertaken by individuals for personal, family, or household purposes.

Financial contracts governed by netting agreements.

Foreign exchange transactions.

Systems and agreements related to interbank payment, netting systems, and adjustments concerning securities, assets, or other financial instruments.

Buyback of securities, assets, or financial instruments deposited with a broker.

The right to payments established through endorsable instruments.

The right to payments deposited into credit accounts with banks.

The right to payments arising from securities, documentary credits, and letters of guarantee.

Crucial aspects of the Assignment and Factoring Law encompass the necessity for a precise delineation of receivables, their relevance to prospective receivables, certain representations and warranties by the assignor, the enforceability of assignments notwithstanding contractual restrictions and the requirement to register the security interest in the Movables Collateral Register (the “Register”). Additionally, the legislation delineates the rights of the counterparty and emphasizes the irrevocable status of the assignment upon payment to the assignee.

An assignment becomes legally binding between the assignor and the assignee upon execution, even if notice is not served on the underlying obligor. This means that although the assignment retains its validity in the absence of notice to the underlying obligor, it only takes effect against the underlying obligor when appropriate notice is delivered. Otherwise, the underlying obligor shall continue to remit payments to the assignor. This aligns with the UAE Courts’ precedents to only requiring notification of the underlying obligor for the effectiveness of the assignment without requiring its consent.

An intriguing interpretation of the foregoing suggests that in the context of finance transactions, the assignment may function as a security interest in the receivables, not solely as a method of repayment.

The assignee of a receivable holds the authority to assert rights over the receivable either in accordance with the terms set forth in the receivables assignment agreement or aligning with the Federal Draft Law No 4 of 2020 on Securing Interest with Movable Property (and its Executive Regulations) (“Movables Security Interest Law”). This provision explicitly emphasizes the parties' ability to mutually agree on enforcement methods within a receivables assignment agreement, supplementing those outlined in the aforementioned law.

To ensure priority over other secured creditors, the assignee must register the security interest in the Register in accordance with the Movables Security Interest Law. It should be noted that in some non-financial free zones in the UAE, the relevant regulations governing the entities established in such non-financial free zones require registering the security interest in the security register maintained by the relevant registrar or the company.

Elhassan Abdelrazek

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A step into the future for receivables financings

The UAE Factoring Law was issued on 29 August 2021, published on 9 September 2021 and comes into effect on 7 December 2021. It builds on the UAE Movables Security Law and clarifies that future receivables can be sold prior to their coming into existence. This clarification will greatly assist those participating in the UAE trade finance market, bringing ever-greater certainty to CFOs, corporate treasurers and trade financiers alike.

This memorandum sets out the key features of the UAE Factoring Law.

UAE federal law No.20 of 2016 in relation to the charging or pledging of movables as security for indebtedness (the Old UAE Movables Security Law ) was a significant development in the UAE banking and finance legal landscape. It gave rise to a significant change in the practice of taking security over movable property in UAE banking and finance transactions (including trade receivables) and it expressly permitted the ability to take a security right over future specified movable property, as well as present specified movable property. However, it also went further and allowed true sales of receivables to be registered on the UAE movables security register (the UAE Movables Security Register ) and Article 11 of the Old UAE Movables Security Law stated that such registrations produced the same effects in their effectiveness against third parties, the procedures for their enforcement and prioritisation in their recovery of rights from the returns on them from the proceeds of their enforcement as if the sale of receivables was a security interest registered on the UAE Movables Security Register.

That being said, it implied that future receivables could be subject to a true sale without expressly clarifying this. UAE federal law No.16 of 2021 in relation to factoring and the assignment of receivables (the UAE Factoring Law ) makes this clear and sets out the requirements in order to do so under UAE law. Key features of the UAE Factoring Law and considerations arising include:

• Helpful confirmation that future receivables can be assigned or sold prior to them coming into existence and without further action upon them coming into existence if adequately defined in the receivables assignment agreement (as well as associated notice of assignment, acknowledgments and registration in the UAE Movables Security Register).
• Parties to a receivables assignment agreement will want to consider whether to register their receivables assignment agreement in the UAE Movables Security Register in order to obtain priority over any subsequently registered receivables assignment agreement in respect of the same receivable. In particular, historic receivables assignment agreements can maintain their priority based on their date of execution if registered prior to 7 June 2022. It is recommended that such agreements be registered where possible and practical.
• If parties send a notice of assignment to a receivable's debtor, that receivable's debtor may only effect a good discharge of the receivable if it pays in accordance with the notice of assignment. This enhances the protection to assignees even if the receivable's debtor does not acknowledge the notice of assignment (although that is, of course, useful evidence that the receivable's debtor has received the notice of assignment) or refuses to countersign it.
• Confirmation that the assignee may want to continue to insist on the receivable's debtor signing an acknowledgment of the notice of assignment to ensure that the receivable is free from set-off and other competing rights.
• Helpful confirmation that an assignment of receivables includes an assignment of any ancillary rights, although there may continue to be sound reasons for taking a catch-all assignment of contractual rights, where financiers are concerned with more than just the receipt of the receivable (and rights ancillary to that receivable) generated by the original contract.

Download the full article

Should you wish to discuss any of the issues raised in this memorandum or in relation to the UAE Factoring Law generally, please feel free to contact the authors including partners Stephen Knight  and  Nathaniel Armstrong .

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11 March 2022

UAE factoring law: a framework to support a growing industry

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Federal Decree Law No (16) of 2021 ( Factoring Law ) was issued on 29 August 2021 and came into effect on 7 December 2021. The Factoring Law, whilst laying a legislative framework for a rapidly expanding trade finance industry in the United Arab Emirates ( UAE ), also provided much needed clarity from, and an update to, Federal Law No (4) of 2020 ( Moveables Law ) and Federal Law No (1) 1987 ( Civil Code ).

New entrants to the trade finance market 

There is a burgeoning trade and invoice finance market in the UAE and trade financiers are entering the market at pace. Backed by strong sponsors these financiers are able to unlock cash flow problems suffered by businesses as a result of notoriously stretched payment terms and supply chain delays which have only been exacerbated by the COVID-19 pandemic. Businesses who may otherwise be facing cash flow insolvency appear to be attracted by these trade finance or factoring arrangements. On the face of it, they are able to secure credit terms without lengthy credit processes and unlock cash immediately. This should, as a result, improve delays in the entire supply chain and sustain business confidence in the UAE. 

The problem with receivables 

The trade finance industry, whilst growing, has traditionally encountered difficulties when seeking to properly secure receivables (especially future receivables). Whilst the Moveables Law represented an advance from the Civil Code, providing the ability to more easily capture receivables (including specified future receivables) and saw the creation of the EMCR (now the Emirates Integrated Registries Company ( EIRC )), there remained key areas, such as in relation to unspecified future receivables, where greater clarity was required. The Factoring Law has hopefully helped to provide that clarity. 

Legal position 

The Factoring Law specifically provides that future receivables, being those which " come into existence after the transfer is concluded " [1] , are capable of being fully secured with no requirement to engage any new transfer " on a case by case basis. " [2]   The nature of such assignment also appears to have evolved, with an assignment created under the Factoring Law either representing an assignment in security or a full transfer of the receivables. [3] The definition of " assignment " in the Factoring Law supports this two-pronged assessment, characterising the assignment as both the agreement under which the transferor's contractual rights are transferred to the transferee and the agreement by which a security right is created over the debt, transferred as security and then sold in a final sale. This is also reflected in Article 20 of the Factoring Law which provides that the transferee can collect the receivables at any time after such receivables fall due [4] (as would be the case if the transferee had title to the receivables in question) while also being able to collect the receivables at any time after there has been a default by the transferor [5] (as would be expected in a scenario where the transferor had a right in security over the receivables). 

Potential for wide application

The changes introduced by the Factoring Law have made a significant impact on the market. Not only have trade financiers taken steps to formalise their operations by obtaining a license [6] but traditional licence-holding financial institutions and UAE clearing banks are now starting to assess whether the Factoring Law can support a wider set of consumer transactions. The definitions of " Factoring ", " Assignment " and " Accounts Receivable " appear, for example, to be sufficiently wide to support an array of transactions where the objective is to access or secure the underlying receivables generated by counterparties or their customers. There are also additional features of the Factoring Law which support this assessment. For example:

• The ability of financial institutions to, on the face of it, take a complete transfer of the ownership of the receivables would seem to be an attractive incentive to funders who have historically found it difficult to properly access these in an enforcement scenario.  
• The ability for  " Additional/Ancillary Rights " to be transferred is helpful, meaning that secondary rights of the transferor which support the primary right to the receivables are transferred without further action on the part of the transferor or transferee. [7] This potentially opens up a broad spectrum of ancillary rights on different transactions that could be transferred. 

One anomaly in relation to the Factoring Law is the position regarding recourse to the underlying transferor. Article 2 of the Factoring Law provides that such arrangements can be effected " whether it is with a right of recourse to the Transferor or without a right of recourse. " This is helpful and allows market participants to assess, as part of their credit process, whether recourse to the transferor is required in addition to recourse to the receivables themselves. However, Article 10(2) provides that " The Transferor shall not guarantee the ability of the Debtor to pay. " This is potentially problematic and throws into question whether recourse to the underlying transferor is actually permitted. One interpretation is that the restriction on the transferor guaranteeing the debtor's ability to pay only triggers where the trade financier has taken a complete transfer of the receivables in its favour (i.e. such a guarantee may still be available when if the receivables are being transferred in security only). However, this remains untested in the market and trade financiers will have to assess this anomaly and its impact on any applicable transactions on a case by case basis.  

Other practical points 

There are a number of additional practical points that market participants should be aware of: 

• Any restriction regarding assignment in the underlying contract does not affect the validity or enforceability of the assignment which is, again, helpful from a trade financier's perspective. [8] However, it should be noted that any defences codified under the original contract shall be valid and retained by the debtor notwithstanding this provision. Therefore, it may be prudent for interested trade financiers to request that these rights be waived in accordance with the provisions contained in Article 17 of the Factoring Law.
• The Factoring Law contains a general restriction on changing aspects of the underlying contract once notification of the assignment has been served [9] . This is helpful for trade financiers as certainty in respect of the underlying contract generating the receivables is retained. An amendment will also be effective if it is entered into prior to notice being served. [10] Market participants should therefore ensure that notices are validly served and done so timeously. It would also be prudent to consider a restriction on amendments to the underlying contract (where the assignment relates to future receivables) to ensure the transferee's consent is required for any such amendment. 
• Depending on when the debtor receives the notification of assignment will have an impact on whether they have validly discharged their payment obligations under the original contract.  If the debtor pays in line with the underlying contract (i.e. to the transferor), before receiving notice, then it will have validly discharged its obligations. [11] However, if the debtor was to pay the transferor after receiving the notice, then it would not have validly discharged its obligations as it is required to comply with the payment instructions in the notice. [12] In this scenario, the transferee has the right to collect the amounts paid or any returned receivables from the transferor. [13] Should the debtor incorrectly pay an amounts or return any receivables to a separate third party then the transferee has the right to collect the amounts paid or receivables retuned from this third party. [14] If no payment is made then the self-help remedies available to the transferee under Chapters 7 and 8 of the Moveables Law can be used under the Factoring Law. [15]
• The Factoring Law dispenses with the requirement for financial institutions to obtain an acknowledgement of the notice of assignment from the debtor which is, again, helpful from a trade financier's perspective. [16] However, most institutions in the UAE will recognise the evidential and practical reasons for procuring an acknowledgement, including instances where it needs to be proved in a court that the debtor had prior knowledge of the assignment or to ensure a smooth transition in payment from the transferor to the transferee. It may therefore remain good practice to be engaged with the debtor.  
• Whilst not specifically listed by UAE Federal Decree Law 14/2018 as a " Licenced Financial Activity " which would require a licence from the UAE Central Bank, in order to forfeit or factor receivables, it would be reasonable to assume that financing in this way would require market participants such as trade financing firms to require a licence form the UAE central bank. 

Conclusion 

Overall the introduction of the Factoring Law is a significant step forward for the burgeoning trade finance industry in the UAE and should help to support and grow business activity. Factoring historically helps new companies and start-ups gain access to funding that would otherwise be unavailable to them while also assisting larger companies improve any issues with cash flow which can be brought on by slow paying clients. However, given the infancy of the law, a note of caution must be present in any analysis in this respect. The boundaries of the Factoring Law have not been tested judicially and, until such time as they are, there will be an element of risk that trade financiers will have to assess.

[1] Article 1 of the Factoring Law.

[2] Article 4(5) of the Factoring Law.

[3] In the latter scenario the trade financier would, in our view, legally own the receivables post transfer – an obvious advantage for creditors and proposed step up from the position under the Moveables Law.

[4] Article 20(2) of the Factoring Law.

[5] Article 20(1) of the Factoring Law.

[6] Article 25 of the Factoring Law requires any provider to obtain a license in advance.

[7] Article 6(1) of the Factoring Law, unless such additional rights require new procedures to transfer. 

[8] Article 5(2) of the Factoring Law.

[9] Article 18(2) of the Factoring Law, save for situation where the transferee consents to the amendment or if it relates to future receivables.

[10] Article 18(1) of the Factoring Law.

[11] Article 15(1) of the Factoring Law.

[12] Article 15(2) of the Factoring Law.

[13] Article 12(1)(b) of the Factoring Law.

[14] Article 12(1)(c) of the Factoring Law.

[15] Article 21 of the Factoring Law.

[16] Article 11(2) of the Factoring Law.

Key Contacts

Philip Chalmers

Managing Associate, Finance UAE

• +971 4 3506 449
• Email Philip

Associate, Finance Dubai

• +971 4 350 6464
• +971 58 207 6038

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Assignments in the United Arab Emirates

Contributor.

An assignment under UAE law is the transfer of certain obligations or rights from one party to another. In the UAE, assignments are often used as a security arrangement under which a party (the assignor) who is entitled to receive certain benefits (arising from a contract, payment arrangement or receivables), assigns those benefits to a financial institution as security for a financing arrangement. It is important not to confuse the elements of a UAE assignment with its common law counterpart. Being a civil law jurisdiction, assignments in the UAE are subject to certain peculiarities and have different implications. For example, the UAE does not recognize the concept of a floating charge, and technically does not distinguish between an assignment by way of security and an absolute assignment. Under a UAE assignment, the assignor relinquishes all its rights in respect of the assigned property from the outset (albeit that perfection, in respect of the third party, may be deferred). Hence, even the term assignment by way of security may be a misnomer.

It is also important to note that the UAE does not maintain a public companies register in which records relating to security (including assignments) are kept and made available to the public. While implications of these are too extensive to be discussed in this article, this generally means that the assignee must make a commercial decision on whether it is comfortable that the assignor has not assigned, and will not assign, the subject matter to any other third party other than the assignee.

The laws of the UAE in relation to assignments are not fully developed. The UAE Civil Code only prescribes for an assignment of debts/obligations, but is silent on the procedural aspect of an assignment of rights. From a banking/lending perspective, an assignment of rights has commercial value as security, and this is what will be discussed in this article.

Please note that the following is not an exhaustive list of the issues to be considered when entering into an assignment, hence prior legal advice should be sought.

Assignable Assets

Based on market practice and case law the following are the main conditions to be satisfied when assigning rights to an asset:

• The subject matter of the assignment, or the specific agreement creating the subject matter of the assignment, must be in existence at the time the assignment is entered into and be identifiable. For example, if the assignment is over receivables, where the relevant contract of which has not been signed or where the assignment relates to future unidentifiable receivables, this condition is not fulfilled;
• The assignor owns the subject matter of the assignment as at the date of the assignment. In other words, if the assignor wishes to assign certain rights to a contract, the contract must be signed first before the relevant assignment is executed;
• The subject matter of the assignment is free from encumbrances and other restrictions. For example, if assigning the rights to a contract, the contract must not contain any prohibitions against assignments. If the contract contains specific pre-requisites to an assignment (for example, the consent of certain parties), these conditions must be complied with.

It is not suitable to create an assignment over the following types of assets:

• Land, where specific land laws of the relevant Emirate prescribe that the interest in such land should be registered with the relevant land registration department. In such an instance, the land laws will apply;
• Interest over assets which are capable of being pledged or mortgaged under statute (most relevant being the UAE Civil Code). In such cases, the statutory pledge or mortgage is a more suitable mechanism to create a security interest over the asset;
• Interest over an asset or contract which has not yet materialized and/or cannot be identified or specified;
• An asset which has already been assigned by the assignor, i.e. the assignor is not allowed to create more than one assignment over the same asset.

Common types of assigned assets include assignments over performance bonds and guarantees, insurance policies and agreements which relate to a specified and identifiable income flow (i.e. receivables).

Procedure and Notice Requirements

Once the suitable subject matter of the assignment has been ascertained, the parties can enter into either of the following agreements:

• Assignment agreement between the assignor and the assignee. The assignment may be subject to notification and consent requirements (as discussed below); or
• A tripartite assignment agreement between the assignor, the assignee and the third party (being the counterparty to the original contract). While this is a cleaner option, it may not be preferable for the third party to actively participate or be aware of all the terms and conditions of the assignment, as some of these terms may be confidential.

The participation and consent of the third party is required under the following circumstances:

• Where the underlying contract specifically provides for the consent of the third party;
• Where the participation of the third party will assist in notifying the public that the assignment has occurred. For example, pending registration of ownership of property under construction at the relevant land registration department, it is best the assignment be noted in the internal registry of the property developer, and hence the participation and consent of the property developer is required ; or
• Where the participation of the third party is essential for enforcement proceedings, for example, the cooperation of the property developer in the case of an eviction.

Apart from the above examples, since an assignment of rights is not expressly covered under the UAE Civil Code, one would therefore have to be guided by UAE case law to ascertain the position of an assignment of rights. While the Civil Code provides that an assignment of debts/obligations require the consent of third parties, the courts in Abu Dhabi and Dubai have had differing views on whether third party consent is required in relation to assignment of rights, or whether third party notification will suffice. Although it is best to err on the side of caution and obtain third party consent for all assignments, this may sometimes prove to be administratively difficult. The courts have also applied different criteria in establishing whether consent may be implied from the action of the third party.

It is also essential that the assignee take possession of or control over the assigned rights, especially in relation to the assignment of receivables. This is a common step that is often overlooked.

Conclusion Although a commonly used method of transferring rights and creating security in the UAE, one should be careful of the potential legal risks and requirements in respect of assignments. It is therefore best to seek legal advice as assignments in the UAE can be minefield, each matter having to be dealt with on a case to case basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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• United Arab Emirates: Attention all banks and financial institutions - Security enforcement alert

United Arab Emirates: Attention all banks and financial institutions - Security enforcement alert

Federal decree law no. 16 of 2021 on factoring and transfer of accounts receivables, share by email.

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One of the prominent forms of collateral for creditors nowadays is obtaining a transfer of a client's accounts receivables. This form of collateral is often referred to as an 'assignment of receivables' (“ Assignment ”), under which the creditor (" Assignee ") becomes permitted to collect from any pre-existing or future debtors that the client (" Assignor ") has receivables.

The Assignment, although never codified in law (unlike the Novation codified under Articles 1106 et seq. of the Civil Code) has always been consecrated by the UAE courts and required a mere notification of the debtor to be considered valid and allowed the debtor tree itself of its obligations by paying the Assignee.

The issuance of Federal Decree Law No. 16 of 2021 on Factoring and Transfer of Accounts Receivables (“ Law ”) has clarified a number of points for all parties involved including:

• Serving the debtor the Notice of Assignment is required for the Assignment to be valid against them, while seeking the debtor’s consent to the Assignment is not.
• The Assignee is entitled to claim any ‘Additional Rights’ associated with the Assignment “including security rights established on goods, guarantees and credit insurance”.
• The debtor is entitled to invoke any defenses available to them under the 'Original Contract' governing the relationship between the Assignor and the debtor unless expressly waived by the debtor. 
• Enforcement against accounts receivables without the consent of the Assignor can only be sought if the Assignor commits a default on their borrowing obligations. If the accounts receivables are sold (instead of being collateralized), enforcement can be initiated at any time and without the Assignor’s consent. 
• The Assignee has senior status in collecting the assigned receivables after registration in the Emirates Movable Collateral Registry (EMCR).
• The Law only applies to commercial assignments and therefore consumer and retail assignments are excluded.
• It is still unclear however whether the Assignment under the Law constitutes a true sale and this will be a matter of merit that will be decided on a case-by-case basis by the UAE courts.

In Depth - Key Takeaways from the Law

1. notice of assignment and debtor’s consent - are they required.

As mentioned above, prior to the Law, the assignment of receivables was governed by jurisprudence, under which, the debtor must have been notified of the Assignment for it to be valid against them.  This jurisprudential finding is asserted (albeit indirectly) in Article 15(1) of the Law, which states that the debtor will not be considered to have breached the Assignment in the event payment is made to the Assignor instead of the Assignee if no notice of the Assignment was received.

2. What is the scope of Assignments?

The definition of Assignment only refers to monies. However, Article 1 of the Law also contains a definition for 'Additional Rights' as "any personal or in-kind rights that guarantee the payment of the amount of the assigned Account Receivable, including security rights established on goods, guarantees and credit insurance".  Moreover, Article 6 of the Law assures that the Assignee is entitled to claim the Additional Rights. 

As such, creditors should perform a due diligence exercise before entering into factoring arrangements and/or obtaining Assignments from their clients for the purpose of identifying any Additional Rights that may be associated with the assigned receivables - especially since Article 20(3) provides the Assignee with the option to enforce those Additional Rights as well.

3. Does the debtor have the right to invoke defenses of the Assignor? And can this right be waived?

Further to the Law providing that the Assignor can take legal action against the debtor to claim the Assignee's transferred receivables, Article 16 states that the debtor is entitled to invoke any defenses available to them under the 'Original Contract' governing the relationship between the Assignor and the debtor.

However, this right can expressly be waived by the debtor (under Article 17 of the Law), but such a waiver cannot exclude defenses arising out of fraudulent acts committed by the Assignee as well as defenses pertaining to the debtor's absence of capacity when having entered into the Original Contract with the Assignee.

4. When can the Assignee enforce against the receivables?

Under Article 20 of the Law, if the Assignee takes the Assignment as a form of security, then legal action without the consent of the Assignor can be initiated only if the Assignor (or the client) commits a default on their borrowing obligations. If however, the accounts receivables are actually sold to the Assignee (instead of being collateralized), then enforcement steps against the debtor can be taken at any point of time. 

5. Does the Law provide an easier and faster way to enforce? 

Under Article 21 of the Law, the means of enforcement against the receivables is made as agreed upon in the Assignment Agreement or as per the Federal Law No. 4 of 2020 governing Pledged Rights in Moveable Assets ("Moveable Pledge Law"). This allows creditors to enforce against receivables immediately by bypassing normal litigation proceedings.

6. Does the Assignee have senior status vis-à-vis the receivables? 

Yes. According to the Article 7 of the Law, the Assignment will have effect towards third parties after registration in the Emirates Movable Collateral Registry (EMCR) and in accordance with Chapter 5 of the Moveable Pledge Law, which in turn asserts the Assignee's (or the creditor's) senior status in collecting the assigned receivables.

7. Does the Assignment envisaged by the Law constitute a true sale?

As it is well known, a true sale could exist in a securitization issuance whereby the assets of an originator are transferred to a Special Purpose Vehicle for the purpose of the issuance of securitization notes and such transfer of assets may not be nullified by any insolvency of the originator, particularly as a result of a claw-back during a suspect period. So does the Assignment under the Law constitute a true sale that could override the provisions of Article 168 of the Bankruptcy Law? There are unfortunately still no clear answers to this question and the legislator seems to believe that this will be a matter of merit that should be decided on a case-by-case basis by the UAE courts.

This is still unsatisfactory, especially since UAE judges, and similar to any other civil law judges, have to abide by the statutory provisions that were promulgated. We therefore anticipate an amendment to the Law to clarify this point as a recognition of true sale could potentially allow securitization operations to flourish in the UAE (especially since it is known as a tax efficient jurisdiction).

8. Does the Law apply to any kind of assignments?

It seems that the Law only applies to commercial assignments and therefore consumer and retail assignments are excluded. The Law is in line with the UAE Central Consumer Protection Regulations and Standards, which prohibit any assignment of consumer receivables without the consent of the consumer.

Expected Impact

• Conventional and Islamic banks are more likely to mandate that their clients (the Assignor) include a waiver of defenses clause in the Original Contracts on behalf of the debtors (the Assignee's contract counterparty).
• Creditors (or the Assignee), and particularly conventional and Islamic banks, have obtained more clarity on the mechanisms and avenues available for fast and robust enforcement against assignments. We therefore expect more frequent enforcement actions upon this specific form of security in the future.
• We expect (and advise) creditors to register their assignments in the EMCR registry as soon as possible to be able to enforce against the assigned receivables when the need arises.

To speak to us in relation to the new Law, any financial services related matters, or issues generally, please feel free to contact one of the team members above or your usual Baker McKenzie contact.

For future updates, you can visit and subscribe to our  Middle East Insights blog .

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Assignments and Liens in UAE Law

The objective of the course is to examine UAE law in relation to assignment and liens.  The course is divided into two sections, in which we will examine:

Assignment: An assignment is the transfer of a right, debt or obligation from one party to another.  An assignment is a contract between the assignor and the assignee (and often a third party) and it must satisfy the necessary elements of offer and acceptance, consent, subject matter and cause. The course will examine provisions of the UAE Civil Code, in particular Articles 1106 to 1113, and 891.

Ownership of land must be registered at the Land Registry, and therefore a mere assignment may be insufficient.

Liens. A lien is a right that one party must retain the property of another person as security for money owed to him. The classic example is the “mechanic’s lien”, whereby if you take your car to a garage for repairs, the garage will not allow you to retrieve your car until you have paid the costs of the repairs.

A lien may be particularly relevant in the construction industry, whereby a contractor with possession of the development may refuse to hand possession back to the owner until the contractor has been paid his dues. We will consider the FIDIC contracts and Articles 879 and 1527 of the Civil Code, and other provisions of the Civil Code.

Participants are encouraged to bring a copy of the UAE Civil Code with them.

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The New UAE Debt Law: All You Need to Know

Since January 2020, the new insolvency Law in the United Arab Emirates has been fully implemented. Due to local legislation, debtors in Dubai and the other emirates are shielded from legal action.

Debtors’ financial responsibilities are no longer criminalized under the new federal bankruptcy law, including a three-year repayment schedule. You can learn more about the new Dubai debt legislation and how it will benefit UAE citizens struggling with debt in this guide.

Q1. When does this law come into effect?

UAE debt collection rules are already in force and came into force in January 2020.

Q2. Is insolvency law similar to the bankruptcy law in the UAE?

The UAE’s new bankruptcy legislation was enacted to address and safeguard persons experiencing financial troubles. Bankruptcy law is limited to corporate liquidation and insolvency proceedings.

Q3. What does the new legislation do to assist persons who are in debt?

The regulation is intended to safeguard Emiratis and residents who are either experiencing or foresee experiencing financial problems and cannot repay their obligations. It will then restructure their debt with the possibility of receiving “new concessional loans.” Under the new law, Court-approved repayment options with more lenient conditions, maybe via reduced interest rates, will be offered. Previously Debt defaulters have been compelled to resort to extreme methods due to a lack of insolvency standards.

Q4. How does the court deal with debts?

Following the UAE’s financial bankruptcy rules, the court will designate an expert to handle debt processing. In collaboration with the debtor and their creditors, the expert will design a three-year debt settlement plan. Once the plan is completed, all financial responsibilities will be met under the agreed-upon terms.

Essentially, this new UAE federal debt legislation will provide two channels for resolving individual financial bankruptcy. It will be accomplished by providing a plan for the settlement of financial obligations and the bankruptcy and liquidation of funds.

Q5. Is it still possible for those who cannot pay their debts to go to jail?

Not at all. The new legislation “would safeguard the debtors from legal prosecution, decriminalize the financial responsibilities of bankrupt individuals, and allow them a chance to work, be productive, and provide for their family”. For the first time, debtors will be granted up to three years to repay their debts.

As a result, they will be able to continue earning money, which will allow them to maintain their family and their creditors.

You May Also Like:  How to Clear Your Debts Under the UAE’s New Insolvency Law

Q6. What are the different ways to resolve Financial Insolvency under New UAE Debt Law? 

Essentially, the new UAE federal debt legislation will provide two procedures for resolving individual financial bankruptcy. It will be accomplished by presenting a strategy for resolving financial commitments and bankruptcy and fund liquidation.

This new UAE federal debt legislation will provide people with two options for resolving their financial bankruptcy: a plan for paying financial commitments or insolvency and liquidation of money.

Financial obligations settlement:  

The court will appoint one or more specialists to help the debtors throughout these processes and design a settlement plan for the financial obligations based on their circumstances. Once a strategy has been established, the creditors will vote on and implement it.

The court has the authority to refuse or terminate the procedure of obligation settlement if:

• The debtor abstains from or intentionally damages or conceals some or all of their possessions.
• The debtor makes false assertions concerning their obligations, finances, or rights.
•  Due to financial difficulty, debts are not paid for more than 40 consecutive working days after maturity. In this instance, the debtor may file for bankruptcy.

Insolvency and Financial Liquidation:

The second method of resolving bankruptcy in the UAE is to liquidate assets and money to repay debt. This approach is used when a debtor cannot repay their obligations for a period of more than 50 consecutive working days beyond the due date due to financial difficulties.

When a debtor elects liquidation, the court appoints a trustee to assist and supervise the liquidation of the debtor’s finances and assets. According to Article (8) of the new debt legislation, this appointment is made. Creditors may also seek the liquidation of a debtor’s money in specific situations, provided that the liquidation sum does not exceed AED 200k. Essentially, this new UAE federal debt legislation will provide two channels for resolving individual financial bankruptcy. It will be accomplished by providing a plan for the settlement of financial obligations and the bankruptcy and liquidation of funds.

Q7. Are debtors eligible to seek additional loans during the settlement period?

No, the debtor is not permitted to get further loans unless the court orders in response to a request by the debtor, creditor(s), or authorized expert.

This article aims to provide a general overview of the subject. The information included herein may not be appropriate in all circumstances and should not be relied upon without seeking specialized legal counsel based on specific cases.

For more information on Bankruptcy and Insolvency Law , please don’t hesitate to contact us today.

Privity of Contracts Under UAE Law

11 Apr 2022

The doctrine of privity of contract is a well-established principle under UAE law. This principle states that the rights and obligations in an agreement arise only between the parties to that contract and are enforceable between them and a third party cannot exercise such rights and obligations. The effect of this doctrine is that, if two parties enter into a contract for the benefit of a third party, the third-party is not allowed to enforce any of the terms agreed in this contract.

Article 125 of Federal Law Number 5 1985 on the Civil Transactions Law of the United Arab Emirates (the Civil Code) defines the contract as a meeting of a valid offer expressed by one of the contracting parties with an acceptance made by the other party in the contract. The making of a contract requires mutual consent of the two parties which creates a legal obligation between the two parties. In UAE the doctrine of privity of contract exists and it clearly states that only the parties to the contract can enforce the rights and obligations and a third person has no rights on such contracts.

According to article 129 of the Civil Code, the essential elements constituting a contract are:

• “That the two parties to the contractual agreement should agree upon the essential elements;
• The subject matter of the contract must be something which is capable of being possible, permissible, defined, specified, or dealt in; and
• The obligation arising out of a contract must be for a lawful purpose.

The above elements of a contract go hand-in-hand with the privity of the contract. Pursuant to article 141 of the UAE Civil Code, a contract is formed only when the agreement between the parties to the contract concerning the essential elements of the obligation. An example of the doctrine of privity of contract is the case of Dunlop Pneumatic Tyre Company Ltd vs. Selfridge & Co Ltd, UKHL 1 (26 April 1915), AC 847. In this case, Dunlop is a tire manufacturing company that does not want to sell its products below the standard resale price. Dunlop agreed with its dealer Dew & Co. not to sell the tire below the recommended retail price. Dunlop also required their dealers to get the same undertaking from their retailer Selfridge also. As per the agreement, if retailers sold the tire below the recommended price, they would have to pay 5 euros per tire as damages to Dunlop. This was agreed between Dew and Selfridge and thus Dunlop was the third party to the agreement between Dew and Selfridge. Later Selfridge failed to comply with the agreement and sold the tire below the recommended price. Hence Dunlop sued Selfridge for damages and also filed an injunction to stop them from continuing the sale. The decision was in favor to Dunlop in the initial trial. And in appeal by Selfridge, the decision was reversed in favor of Selfridge. The Court held that Dunlop could not claim for damages since they are not a party to the agreement between Selfridge and Dew and also, has no contractual relationship with Selfridge.

Liabilities of Subcontractor And Employer

Sub-contracting is permissible under UAE law. According to Article 890 of the Civil Code, a contractor is allowed to sub-contract its work in whole or in part unless otherwise stated in the contract, and it also states that the contractor shall be liable towards the employer. The sub-contractor nominated by the employer is called the nominated sub-contractor, whereas the sub-contractor selected by the main contractor is called the domestic sub-contractor. In both cases, the sub-contract agreement will be made between the main contractor and sub-contractor. Hence there will not arise any contractual relationship between the employer and the sub-contractor. As a result, the employer is not contractually liable towards the sub-contractor for any disagreement under the subcontract agreement as well as the sub-contractor is also not contractually liable towards the employer for any delayed or defective works under the subcontract agreement. According to article 891 of the Civil Code, a sub-contractor is not entitled to claim anything against the employer which is due to them from the main contractor unless they have made an assignment against the employer. The UAE Court of Cassation in a decision dated 20 April 2005 rules that, according to articles 891 and 892 of the UAE Civil Code, the liability of the main contractor against the employer remains the same and there will be no direct contractual relations between the employer and the sub-contractor. Thus, the sub-contract agreement determines the rights and responsibilities of the main contractor and sub-contractor in which the employer cannot rely on such agreement unless the main contract provides to the contrary. 

The sub-contractor who is not a party to the agreement with the employer is not under any contractual obligation towards the employer. However, to create a bond between the sub-contractor and employer, both parties can rely upon up a collateral warranty, which is enforceable under the UAE law through which both parties can sue or claim for damages suffered. Warranties are considered as one of the sources of the obligation under articles 124, 276, and 278 of the Civil Code. Under this collateral warranty, the employer can sue the sub-contractor for his defective work or performance. But taking into consideration of article 890(2) of the Civil Code, the main contractor will remain liable for the subcontractor’s defective performance. However, in a nominated contractor, the main contractor might take a defense by proving that he had not played any part in the delay or default of the sub-contractor. A well-known decision of the Dubai Court of Cassation in case number 266 of 2008, held that if the sub-contractor was selected by the employer or its consultants, the employer will be liable for any delay or defective performance from the part of the sub-contractor and the main contractor shall not be held liable for any penalty for delay if he can prove that such delay is caused by the sub-contractor and he didn’t play any part in such delay. But this decision made by the court is contrary to the general rule set out in article 890(2). Hence to succeed in the defense the main contactor must seek help from  commercial lawyers  to demonstrate to the court that he has properly performed his contractual obligations and supervision duty yet the defective performance or the delay could not be avoided for the reasons solely accountable to the fault of the nominated sub-contractor.

According to article 891 of the Civil Code, a sub-contractor is not entitled to claim anything against the employer which is due to him from the main contractor unless they have made an assignment against the employer. Since there is no direct contract between the employer and sub-contractor, the employer is not under any obligation towards the sub-contractor and also the sub-contractor may not claim damages from the employer as per the law. However, the sub-contractor can seek due payments from the main contractor. But problem arises when there is a clause of ‘pay-when-paid” is imposed in the subcontract agreement, which is enforceable under the UAE law. In such cases, the sub-contractors are not able to claim its due from the main contractors until the main contractor has been paid by the employer. If the sub-contractor sues the main contractor for damages before the main contractor get paid by the employer, then the court has the authority to dismiss the case on the ground of premature filing of the claim. However, by creating a valid assignment between the employer and the subcontractor, both parties can sue or claim damages to each other and such assignment enables the sub-contractor to bring a direct action against the employer for non-payment of the dues.

The doctrine of privity of contract is also applicable to heirs. According to Section 3(2) the Civil Code, the heirs, beneficiaries, and successors of the contracting parties to the contract are included in the scope of that specific contract. Article 252 of the Civil Code provides an exception to the doctrine of privity of contract, that a contract may confer right on a third party. However, such an agreement cannot impose an obligation upon a third party. Bank guarantee, documentary credit, discharging the debt of another, and third-party insurance policies are the exceptions to the doctrine of privity of contract. Article 253 defines that “a person who binds himself to procure the performance of an obligation by a third party does not in so doing bind the third party. If the third party refuses to perform the obligation, the person who engaged himself to obtain such performance shall be liable to pay damages to the other contracting parties. He may avoid paying damages by performing himself the obligation he undertook to procure. Where the third-party consents to perform the obligation, his consent is effective only from the time that it is given, unless it is indicated that he intended expressly or impliedly that the consent is retrospective as from the time of issuing the undertaking.

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New Federal Decree Law No. (16) of 2021 on Assignment of Receivables and Factoring

In Brief: This article discusses the recent enactment of Federal Decree Law No. (16) of 2021 on Assignment of Receivables and Factoring ( Assignment and Factoring Law ) and in particular it discusses:

• assignment under the Civil Code;
• assignment and factoring under the Assignment and Factoring Law; and
• priority and enforcement.

Assignment under the Civil Code

Historically, the law relating to assignment in the UAE has been governed by Federal Law No. 5 of 1985 on the Civil Transactions Law (the Civil Code ). The Civil Code deals with assignment in detail through Article 1106 to Article 1132.

Article 1106 of the Civil Code defines assignment to mean “an assignment of debt and claim from the liability of the assignor to the assignee”. An important note to make here is that the assignment provisions under the Civil Code only deal with assignment of ‘debt and claim’; that is, assignment of obligations rather than assignment of rights.

In an assignment of an obligation, A assigns to C its obligation to discharge a contractual claim or its obligation to pay B, whereas in an assignment of rights, A assigns to C its right to receive payment from B. One of the key provisions of assignment is that in order for it to be perfected or valid, notice has to be served to the counterparty and acknowledgment must be obtained. Article 1109 of the Civil Code states that “the validity of an assignment is conditioned upon the acceptance of the assignor, the assignee and the counterparty.” This means an assignment of an obligation (whether debt or claim) is not enforceable against the counterparty unless it agrees to it.

Assignment of rights has been governed by case law. The UAE Courts have been consistent in ruling that ‘consent’ or ‘acknowledgment’ in an assignment of rights from the ‘payor’ is not required and notice to the payor will suffice to perfect the assignment. The rationale for this is that in an assignment of rights no additional burden is imposed on the payor. For example, the Abu Dhabi Court of Cassation in Case No. 597 of 2012 stated that “an assignment of rights shall be established by mutual consent between the assignor and the assignee without the need to obtain the debtor’s consent. If the debtor has not been served with notice of assignment, the debtor can deal with its original creditor as the sole creditor.” The Court further stated that the counterparty will be bound by the assignment once it has become aware of the assignment.

Assignment and Factoring Law

The Assignment and Factoring Law was published on 9 September 2021, the first federal law in relation to assignment of right to payment and it came into force on 7 December 2021. As noted above, previously there was no UAE law on assignment of rights.

Assignment is defined in the Assignment and Factoring Law to mean “an agreement whereby the assignor assigns to the assignee its contractual rights for collecting a monetary amount owed by the Receivable's Debtor. The assignment involves an agreement to create a security interest over the receivable, to assign as a collateral and irrevocably sell the same.”

Article 2(2) of the Assignment and Factoring Law says that it applies to all commercial and civil transactions except for assignment of receivables that arise out of the following situations:

• a transaction carried for personal, family or household purposes;
• financial contracts regulated by netting agreements;
• foreign exchange transactions;
• systems and agreements of interbank payment, netting systems and adjustment relating to securities, assets or other financial instruments; and
• buyback of securities, assets or financial instruments deposited with a broker.

Article 2(3) of the Assignment and Factoring Law further says that it shall not apply to the following cases:

• the right to payments proven under endorsable instruments;
• the right to payments deposited into the credit accounts with banks; and
• the right to payments under securities, documentary credits and letters of guarantee.

Key provisions of the Assignment and Factoring Law

• The receivables must be generally or specifically described so that they can be identified (Article 4(4) of the Assignment and Factoring Law).
• Assignment of receivables can apply to future receivables (Article 4(5) of the Assignment and Factoring Law).
• Assignment will be effective regardless of any contractual agreement obliging the assignor not to assign its right to payment under the original agreement (Article 5(2) of the Assignment and Factoring Law).
• The counterparty will enjoy the same rights it has against the assignor under the original agreement and this includes right of set-off, however this can be contracted out (Articles 16 and 17 of the Assignment and Factoring Law).
• Once payment is made to the assignee the counterparty cannot claim it back from the assignee even if the assignor is in breach of the original contract (Article 19 of the Assignment and Factoring Law).
• Existing assignments can be registered in the Moveable Collateral Register within six months from 7 December 2021.

Enforceability of assignment and notice requirements

Article 4(2) of the Assignment and Factoring Law says that an assignment will be enforceable, once executed, between the assignor and the assignee even if notice has not been served on the counterparty (payor). This implies that if notice is not served on the counterparty, the assignment is still valid but in order for the assignment to be binding on the counterparty notice must be served, otherwise the counterparty will continue to pay the assignor.

As noted above, the Courts in the UAE have historically been consistent in ruling that an assignment of right does not requires consent of the counterparty and notice will suffice to perfect an assignment. The Assignment and Factoring Law maintains this position and does not require the counterparty to provide consent. However, the counterparty will only be bound by the assignment once notified and when payment instructions are received in accordance with Article 14 of the Assignment and Factoring Law.

Article 11(1) of the Assignment and Factoring Law provides that the assignor and the assignee may each serve notices and payment instructions to the counterparty and once notice is served, the counterparty is obliged to take payment instructions only from the assignee.

Priority and third-party rights

Articles 7 and 8 of the Assignment and Factoring Law provide that in relation to priority, the relevant provisions of the Federal Law No. (4) of 2020 on Securing Interest in Movable Property ( Movable Pledge Law ) will apply. Article 7(2) of the Assignment and Factoring Law particularly says that an assignment is not enforceable against third-parties (in other words, against competing creditors) unless it is registered in the Movable Collateral Register which is currently managed by Emirates Integrated Registries Company.

Under Article 10(1) of the Movable Pledge Law, a security right is effective against third-parties if:

• it is registered in the Movable Collateral Register;
• possession has been transferred to the pledgee; and
• the pledgee has taken control of the security assets.

The above priority in relation to assignment means that once an assignment of the right to receive payment is perfected by registration in the Movable Collateral Register, it will be binding against any subsequent assignment of the same right. This means a creditor under an assignment by way of security should immediately register the assignment in the Movable Collateral Register, in order to ensure priority over competing claims.

Factoring is defined in the Assignment and Factoring Law to mean a “transaction whereby the assignor assigns the current and/or future receivables to the assignee, or an agreement between the parties that the assignor shall retain the entries relating to and collect the receivable transferred and to afford protection to the assignee in case the Receivable's Debtor defaults on payment.”

A significant point to make is that the Assignment and Factoring Law provides that factoring can only be exercised by entities licensed by the UAE Central Bank. Although further guidance is anticipated from the UAE Central Bank in accordance with Article 25 of the Assignment and Factoring Law, no such guidance has been issued as at the date of the publication of this article. For any entities wishing to carry out factoring activities, it is important that they monitor any updates on this point and seek the relevant licence from the UAE Central Bank at the appropriate time.

Enforcement

The Assignment and Factoring Law does not provide a specific mechanism for enforcement should the counterparty refuse to pay the assignee upon receipt of payment instructions. However, Article 21 of the Assignment and Factoring Law says that the assignee can enforce its rights in accordance with provisions of the assignment or alternatively can take enforcement action under Chapters 7 and 8 of the Movable Pledge Law.

Chapter 7 of the Movable Pledge Law provides that the assignee can enjoy self-help (out of court enforcement) subject to notice being served on the counterparty and Chapter 8 of the Movable Pledge Law provides for an expedited court enforcement process. Under Chapter 8 of the of the Movable Pledge Law, the enforcement application is made to the Judge of Urgent Matters and the matter is considered by the Judge within a short timeline as set out in detail therein.

Filed under

• United Arab Emirates
• Company & Commercial
• Hadef & Partners

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