Penalty Interest is Conventional to the Maldives – Supreme Court

May 19, 2014

The Supreme Court, in the case of CPS Maldives Pvt. Ltd. v. Works Corporation Ltd. (27 SCA 2013) had decided on 19 May 2014 that the practice of charging penalty fees on outstanding and late payments especially in cases of Invoices with ‘Terms & Condition’ enumerated therein is a practice that is well accepted and recognized in the Maldivian legal system.

The petition before the Supreme Court referred to a dispute between the Appellant, CPS Maldives Pvt. Ltd. against the Respondent, Works Corporation Ltd., in relation to arrears in payment for services and supplies made outstanding under the Agreement signed between the parties on 10 October 2010. The complaint was in relation to the works the Appellants had carried out for the Respondents at Gulhifalhu in 2010. The suit was lodged by the Appellant asking for the outstanding principle sum of USD 280 thousand dollars, in addition to the late penalty fines incurred upon the several Invoices exchanged which amounted to USD 4.1 million, calculated over several invoices most of which were late by more than two years.

In their Judgment, the Supreme Court established that clause 3(a) of the Agreement specifies that the Respondent has taken upon themselves to pay Invoices so received within five days; while the Invoice stipulated a penalty interest of 2% made payable for each day incurred in excess of fifteen days from the date the Invoice was received. The Supreme Court did take notice of the fact that the Respondents had not objected or disputed the Invoices or the conditions mentioned therein. “Including penalty conditions in all types of invoices made pursuant to commercial transactions, so long as such penalty conditions are not made unlawful by law, has been established practice conventional to the Maldives. Islamic law leaves such prerogative to the parties to the transaction in contracts and invoices signed or exchanged between the parties in commercial matters, making the practice itself permissible. Islamic law only clearly disallows penalty conditions that are made impermissible through the sources of law in Islam. In civil transactions, while the conditions which will impede the quiet performance and satisfaction of the contract are disallowed, conditions that facilitate the contract and rules conventional to a specific community practiced over time are allowed under our local laws as well as the Shariah.

Penalty conditions can be stipulated in order to measure the damages incurred by a party to a transaction in anticipation of non-performance or breach. The penalty conditions on financial transactions amounting to usury (riba) are impermissible, but the imposition of penalty conditions in all other commercial transactions is lawful, based [numerous] hadith.

Therefore and because the subject matter of our dispute refers to a Supply and Consultancy Agreement, it can be established that there are no legal or shariah provisions which make the imposition of such conditions as unlawful, and in addition, and it can also be established that there are also no principles or authorities that disallow the creation of ancillary agreements on penalty conditions subsequent to (and despite) the execution of the contract proper.”

CPS Maldives Pvt. Ltd was represented by Ismail Wisham of Suood & Anwar LLP.