Global Development

On 9 January 2020,¹ the Egyptian Court of Cassation has partially rejected the enforcement of an LCIA award in Egypt for violating the Egyptian public policy pertaining to delay interest rates. The arbitral award has ordered an interest rate of 8% per annum to run from the date of the non-payment of the invoices and an additional post-award interest rate of 4% per annum until the date of payment of the invoices, thereby exceeding the maximum threshold of interest rates under the Egyptian Civil Code.

Background

In March 2011,² a similar precedent was issued by the Egyptian Court of Cassation whereby it also partially annulled an Egyptian arbitral award on the same ground. However, since this partial annulment in 2011, several judgments at the Cassation and the Cairo Appeal levels did not annul nor reject the enforcement of arbitral awards exceeding the maximum threshold for interest rate under the Egyptian Civil Code.

This line of cases made it appear as if interest rates were no longer of public policy concern. The recent decision of the Court of Cassation hence constitutes an important turn of events by restoring the issue of interest rate into the realm of Egyptian public policy.

The law on interest rates

The law on interest rates finds its anchors under both the Egyptian Civil Code³ and the Egyptian Commercial Code.⁴ Based on these instruments, there are two types of interest rates that could be distinguished as follows:

• Delay interest rate, which applies when the debtor is late in paying its monetary debts on the due date.⁵ In this case, the rate of interest would differ on the basis of the type of the debt itself. If it is a civil debt, then the interest rate would be 4%, whilst, if the debt is commercial, the interest rate would be 5%. In any case, the delay interest rate should not exceed the threshold of 7%.
• Compensatory interest rate, which applies in the case of loans whereby one party lends another a sum of money for a period of time.⁶ Under this type of interest rate, a distinction must also be made between the type of loan. If the loan is commercial, the creditor can charge an interest rate up to, and not exceeding, the loan interest rate as defined by the Central Bank of Egypt.⁷ As for civil loans, the picture is not as clear as there are no express provisions in that regard. In our opinion, this leaves such civil loans to be governed by the provisions of the Civil Code whereby the maximum threshold for interest rate is only 7%.

In the case of a commercial loan, both types of interest rates could apply subsequently. For instance, (i) if the commercial loan is against an interest rate of 18% (compensatory interest rate),⁸ the debtor will be liable to pay an interest at such rate for the tenor of the commercial loan; and (ii) if the debtor is delayed in paying its debt on the due date, it should only be liable to pay a delay interest rate capped at 7% per annum for the period of delay.

It is to be noted that the above thresholds do not apply to commercial loans entered into with Egyptian banks as the latter have been granted an exemption from such thresholds by virtue of the Banking Law.⁹ This carve-out for the Egyptian banks puts a damper on the issue of whether interest rates still pertain to the Egyptian public policy. It is difficult to consider that an issue with such a wide exception can still qualify as public policy in the eyes of the courts.

The courts’ approach

In 2012, the Court of Cassation seems to have deviated from its previous stance,¹⁰ as it did not annul an arbitral award despite the fact that it ordered an interest rate over the maximum threshold for delay interest rate of 7% under the Egyptian Civil Code. It was clear from the facts of the case that no loans were in place and therefore this interest rate resulted from delay, considered as an issue of public policy under the 2011 case.¹¹ It must be noted that the Court in this case has refrained from discussing this issue at length and in particular whether delay interest rates pertain to Egyptian public policy.

Several judgments issued by the Cairo Court of Appeal have followed the same approach.¹² In one decision, the Cairo Court of Appeal extensively discussed the issue of whether interest rates should still be considered as an issue pertaining to the Egyptian public policy.¹³ The Court answered this question explicitly in the negative. The reasoning behind this answer was how the current society is different from the one in 1948 when such rule was enacted. Also, the Court anchored its decision in the legislature’s action and how the latter has step-by-step carved out exceptions to this rule, especially in the realm of banking transactions, as mentioned above. The Court has found that interest rates do not evoke such vital societal principles anymore that warrant the Courts’ intervention. In the words of the Court:

In light of the changing circumstances and the development of the market place … the Civil Code provisions on public policy which prohibit interest rate through mandatory rules are no longer part of the society public policy … as in the modern era, it cannot be said that the maximum threshold for interest rates constitute a violation of public policy or the fundamental principles of the Egyptian society. The concept of public policy is not a rigid one but rather elastic and a changing one in accordance with the societal conscious and its developing parameters. Accordingly, an erroneous application of these rules is simply a mistake of law that does not fall within the scope of review of the annulment court. (Emphasis added)

In 2020, the Egyptian Court of Cassation revisited this issue and explicitly brought back the issue of interest rates into the dominion of Egyptian public policy.¹⁴ The Court adopted a very succinct line of reasoning without any further extrapolation. The Court found that any interest rate above the maximum threshold is a violation of Egyptian public policy. For instance, the Court did not delve into discussing whether such rule still pertains to the realm of Egyptian public policy. The Court held that there the addition of the two interest rates applied by the LCIA award (8% on the original monetary debt as well as a 4% post-award interest) are in excess of the threshold for interest rates on commercial debts (which is 5% as mentioned above). The Court revised and decreased the 8% delay interest rate to 5% and revoked the post-award interest rate in its entirety.

Should interest rates still be considered a public policy issue?

The question then becomes whether interest rates and especially delay interest rates should be still considered a public policy issue. The Egyptian Cassation Court has reiterated that the notion of public policy changes over time.¹⁵ In the words of the Egyptian Courts, public policy comprises ‘rules aiming to achieve a public interest, whether political, social, economic, pertaining to the society’s high order and which prevails over the individual’s interest’.¹⁶

The Egyptian Civil Code was promulgated in 1948; it is time to reflect on the interest rate issue and re-consider the ambient economic circumstances and how they have changed over the course of this lengthy period.

Firstly, the maximum threshold of 7% for delay interest rate set out in the Egyptian Civil Code was largely a reflection of the economic conditions of such an era. The purpose of the legislature at such time was to combat excessive riba¹⁷ as indicated under the Explanatory Note of the Civil Code.¹⁸ Such threshold is however manifestly not compatible with every era.

If we look at the economic circumstances in Egypt in the past decade alone, we could see how unfair it would be for creditors to charge only 7% on Egyptian Pound denominated debts after floating the Egyptian currency in late 2016. On the other hand, and during the same period of time, this 7% would be considered quite above the universal threshold for interest rates (i.e. LIBOR) if the debt was denominated in US Dollars.¹⁹ In addition, it should be noted that another issue that is not reflected in the Egyptian Civil Code is that interest rates differ for every currency. Given the volatility of interest rates and their variation per currency, it is unfathomable to consider that a flat percentage could connote what would be excessive riba.

Secondly, we need to clarify the intention of the Egyptian Legislature to deem this issue as a public policy issue: Was it to set out a 7% flat maximum threshold for delay interest rates regardless of the era, or to generally deter excessive riba. This issue is of a particular importance in the field of arbitration as the substantive review of an arbitral award is restricted to considering whether it violates public policy or not.

Exploring the economic and religious concepts behind interest rates and riba, the author notes that interest rates are a mechanism devised primarily to mirror the concept of time value of money. Interest rates are enacted under civil laws to enable creditors to claim damages for their losses without bearing the burden of proving such losses (i.e. the fact that that there is a delay/loan itself automatically means that the creditor would be entitled to reimburse the costs associated with such delay/loan. Determining whether an interest rate is excessive riba might sound problematic. However, such assessment could include the following steps:

• Calculate the interest rate in a manner that reflects the actual loss incurred by the creditor;
• Consider whether, and to what extent, the ordered interest rate is in excess of the prevailing interest rate at the place of the debt and for the corresponding currency of the award.

Accordingly, the review of arbitral awards by Egyptian Courts should not be hinged on whether an arbitral award has ordered an interest rate above 7% – a flat rate established 70 years ago – but whether an arbitral award is ordering an interest rate that evokes excessive riba. More importantly, the metrics used to determine the threshold for excessive riba should be malleable enough to reflect the Islamic rationale underlying the riba principle in light of the contemporary economic facts pertaining to the case at hand.

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