Welcome to the Saudi Arabia focus edition of Law Update.
One of the key markets in the Middle East and North Africa (MENA) that continues to lead from the front is the Kingdom of Saudi Arabia (KSA). As the largest country in the Middle East and the 18th largest economy in the world, the progress KSA continues to make is underpinned by its Vision 2030 that envisions developing the country as an investment powerhouse and hub that ultimately connects Asia, Europe, and Africa. Given Saudi Arabia’s significance to the regional economy, our team of experts have prepared a range of pertinent articles that provide insights into new laws, regulations, and the legal landscape in the Kingdom.
This edition will provide you with an up-to-date guide on matters such as; the framework issued by the Saudi Central Bank on IT governance, the anti-corruption landscape under Vision 2030; we also provide practical tips for dispute avoidance. This is only a snapshot; there are many more articles within the KSA focus section for you to read, which we hope you will find valuable and enjoyable.Read the edition
The Seller had purchased a substantial number of plots in a development through financing from a Bank. All the plots were subject to the Bank’s mortgage.
Subsequently, the Seller sold 20 plots to the Purchaser whilst the mortgage remained on the land.
The Purchaser fell behind on his payments to the Seller after cheques amounting over AED 120 million were dishonoured. The Seller filed a criminal complaint against the Purchaser.
The Purchaser denied the charges on the basis that the Seller had defrauded him by selling property that was mortgaged, a fact the Seller had failed to disclose to him as alleged by him. He sought to be acquitted of the crime of dishonoured cheques. Al Tamimi represented the Seller in this case.
Court of First Instance
The Court sentenced the Purchaser on the basis of the dishonoured cheques.
Court of Appeal
The Purchaser appealed to the Court of Appeal.
The Court of Appeal acquitted the Purchaser on the basis that the Seller had obtained the cheques fraudulently because of the non-disclosure of the mortgages. The Court of Appeal had erroneously applied Law 14 of 2008 because they had relied on Article 10 of Law 14 of 2008 which obliged the Seller to get the consent of the mortgagee to sell the mortgaged property.
Court of Cassation
The Seller appealed the decision before the Court of Cassation and encouraged the Public Prosecutor to appeal. The Public Prosecutor accepted the application and appealed based on the following grounds:
The Court of Cassation’s Findings
Disposing mortgaged property
The Court of Cassation rejected the Purchaser’s argument pertaining to the failure to disclose to the Purchaser that the land sold was actually mortgaged and could not be disposed of by the Seller. The Court of Cassation accepted the counter-argument that the sale and purchase agreement had no bearing on the offence of giving a cheque in bad faith.
The Court of Cassation also accepted the argument that the transaction between the parties and receipt of the cheques occurred before the Dubai Mortgage law (14 of 2008) came into force. The Court held that a law takes effect upon its issuance by the relevant authority which is evidenced by publication in the Official Gazette (which is when it becomes public knowledge).
Law No. 14 of 2008 was issued on 14 August 2008. The law came into force 60 days from the date of publication. Accordingly, the provisions of Law 14 of 2008 should not have been applied to this case, as the transaction took place on 22 April 2008. In relying, amongst other things, upon the provisions of that law, the Court of Appeal erred and its decision should be overturned. Instead, the Civil Code was to be applied, specifically Article 1412 of the Civil Code which states:
“The mortgagor may dispose of his property, which is pledged by way of security without the same affecting the rights of the mortgagee.”
Under this article there is no requirement for the mortgagor to obtain the mortgagee’s consent prior to disposing the property.
The Court of Cassation also confirmed that a person who owns mortgaged property has the right to dispose of the property to which he still holds title. Selling the property or obtaining additional mortgages would not constitute fraud within the meaning of Article 399 of the Penal Code. Exercising a right of ownership does not attract any criminal liability or entail deception.
Finally, the Court of Cassation held that the defence of non-responsibility does not arise if a cheque is issued in connection with a legitimate transaction, regardless of the extent of the defect marring the contract. Article 401 of the Penal Code would only apply if a cheque is issued in connection with any of the property-theft crimes listed in the provision.
The Court of Cassation decided to issue its judgment on the merits from the first appeal without returning the case back to the Court of Appeal. The application of Law 14 of 2008 was disregarded and the Court of Cassation applied UAE Civil Code (Article 1412) which does not require the mortgagee’s consent for the owner to sell his mortgaged property.
This case is important because it confirms that Law No. 14 of 2008 (Dubai Mortgage Law) does not apply retrospectively. If the court had held otherwise then this may have invalidated a number of sales contracts in Dubai. The market can however now take confidence that agreements made before the introduction of law No. 14 of 2008 are still valid and enforceable.
Sellers of property, however, must now ensure they obtain the consent of both the purchaser and the mortgagee when selling mortgaged property. If consent is not obtained, the courts may consider this as a violation of Article 10 of Law 14 of 2008 and the contract deemed void.