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15 January 2025

Dubai Court Of Cassation Clarifies Limitation Periods For Promissory Notes In UAE Commercial Transactions

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In a recent judgment issued by the Dubai Court of Cassation in Case Number 440-2024-329, key principles regarding the statute of limitations applicable to promissory notes were clarified...
United Arab Emirates Corporate/Commercial Law

In a recent judgment issued by the Dubai Court of Cassation in Case Number 440-2024-329, key principles regarding the statute of limitations applicable to promissory notes were clarified. The court's decision addressed the proper interpretation of the limitation period for claims arising from promissory notes, emphasising the importance of distinguishing between negotiable instruments subject to endorsement and those issued as direct obligations.

This article reviews the case and its implications for parties involved in commercial disputes involving promissory notes in the UAE.

Factual Background

The dispute arose when the Plaintiff sought repayment of a loan amounting to 2,000,000 Saudi Riyals based on a promissory note signed by the Defendant. The Plaintiff also requested interest at 5% annually from the due date until full repayment.

In response, the Defendant challenged the authenticity of the promissory note and filed a counterclaim for damages totalling 11,504,537 AED, alleging financial harm caused by the Plaintiff's actions.

A crucial point of contention was whether the Plaintiff's claim was time-barred. The Defendant argued that the claim should be dismissed under the one-year statute of limitations applicable to negotiable instruments with endorsements, as stipulated in Article 564 (1) of the UAE Commercial Transactions Law (the "CTL") which states that a bill of exchange that falls payable at sight shall be payable once presented and shall be presented for payment within one year of the date of being drawn up.

Lower Court Rulings

Both the Court of First Instance and the Court of Appeal adopted the Defendant's position, ruling that the Plaintiff's claim was time-barred. They based their decisions on the interpretation that the promissory note was akin to an endorsed negotiable instrument, which was in turn subject to a one-year limitation period.

However, the Plaintiff argued that the lower courts had misapplied the law by failing to distinguish between endorsed negotiable instruments and direct obligations under promissory notes.

Key Issues

The case focused on two primary issues:

  1. The correct statute of limitations for claims based on promissory notes
  2. The differentiation between promissory notes issued as direct obligations and those subject to endorsement

The Plaintiff contended that the applicable limitation period was three years, by application of Article 624(1) of the CTL.

This provision equates the obligations of a promissory note issuer to those of an acceptor of a bill of exchange.

Additionally, Article 618 of the CTL outlines varying limitation periods depending on the parties involved: a three-year period for claims against issuers, a one-year period for claims involving endorsers or drawers, and a six-month periodfor claims between endorsers or against the drawer after payment.

Court of Cassation's Analysis and Decision

The Court of Cassation reviewed the arguments and the relevant provisions of the UAE Commercial Transactions Law. It highlighted the following key points:

Application of Article 624(1):

The court confirmed that Article 624(1) of the CTL explicitly equates the obligations of a promissory note issuer to those of an acceptor of a bill of exchange.

Consequently, claims against the issuer are governed by the three-year statute of limitations applicable to bills of exchange.

Improper Application of the One-Year Limitation:

The court clarified that such a limitation only applies to claims involving transferors and endorsees in negotiable instruments, not to direct obligations under promissory notes.

Narrow Interpretation of Limitation Provisions

Crucially, the court emphasised that limitation provisions must be strictly interpreted, and exceptions cannot be extended by analogy to cases not explicitly covered by the law. Since the promissory note in question was not endorsed or transferred, applying the one-year limitation was incorrect.

Continuous Communication and Interruption of Limitation

The court also considered the Plaintiff's evidence of continuous communication with the Defendant including messages via WhatsAppregarding the debt.

It recognised that such communication could interrupt the limitation period, further supporting the Plaintiff's argument, although this was not the focus of the Judgment given the general finding that a longer limitation period applied.

Based on these findings, the Court of Cassation overturned the lower courts' decisions, ruling that the plaintiff's claim was not time-barred.

The case was subsequently remanded to the Dubai Court of Appeal for consideration of the merits in light of the three-year limitation period being applicable.

Discussion

This case serves as an important precedent for entities and persons transacting through commercial instruments in the UAE.

Key takeaways include:

Strict Interpretation of Limitation Rules

The judgment underscores the need for a strict and narrow interpretation of limitation rules because UAE Courts will distinguish between different types of financial instruments and the corresponding limitation periods.

Understanding the Nature of Promissory Notes

Parties must differentiate between promissory notes issued as direct obligations and those subject to endorsement. Claims based on direct obligations are governed by a three-year limitation period, while endorsed instruments may be subject to a shorter limitation.

Continuous Communication and Interruption of Limitation

Evidence of continuous communication regarding a debt can potentially interrupt the limitation period. Parties dealing with commercial instruments should consider maintaining records of such communications as they may support a subsequent claim in court as well as act as a means of suspending any limitation period.

In short, this Dubai Court of Cassation ruling provides clarity on the proper application of limitation periods for promissory notes under UAE law by reinforcing the three-year limitation period for direct obligations, offering guidance for resolving future disputes involving promissory notes.

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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