DIFC Court: Late payments trigger LC penalty clause despite WhatsApped extensions - Trade Treasury Payments

On 7 August 2025, the Dubai International Financial Centre (DIFC) Court of First Instance issued a ruling underscoring how strictly contractual payment obligations are enforced under DIFC law.

In SIG Middle East LLC v Perfect Building Materials LLC, the Court upheld a penalty clause of AED 3,000 per day for late settlement payments. Over the course of months, that added up to AED 2.84 million, which is around USD 770,000. Every defence was rejected, and permission to appeal was refused.

At its heart, the case was about a straightforward commercial debt. SIG Middle East supplied building materials to Perfect Building Materials. When invoices went unpaid, the parties sat down to negotiate a way forward. On 20 April 2022, they signed a Final Settlement Agreement. Under that agreement, the buyer would pay a reduced sum, but only if it paid on time.

Six post-dated cheques were issued to cover the instalments. To make the agreement stick, both parties included a clause that any late payment would trigger a daily penalty of AED 3,000.

That clause was the most important part of the deal. The cheques did not clear on time. Sometimes they were replaced by new cheques. Later, payments were made using letters of credit. In this case, the LC was used not for international shipments, but instead to catch up with overdue settlement payments.

The buyer argued that these later payments through cheques and LCs were accepted in place of the original obligations, that they substituted for the original deadlines and discharged the penalties. By the end of 2023, all of the money owed under the settlement had indeed been paid, but it had always been late. The supplier, therefore, went to court to enforce the penalties.

The claim was brought under Part 8 of the DIFC rules. Part 8 is a streamlined route available where there is no genuine factual dispute and the matter can be decided on documents. The supplier asked only for the penalties, not for the principal debt, which had already been paid.

The buyer mounted a broad defence. It said the supplier had agreed to substitute performance by taking cheques and LCs after the original due dates. It said the supplier had waived its rights to claim penalties or should be prevented from doing so because of estoppel. It said the simplified Part 8 route was inappropriate because factual disputes remained. It said the claim was an abuse of process, brought out of spite.

The Court rejected each of these arguments. On substituted performance, the judge found that cheques and LCs were simply a means to pay what was already owed. They did not erase the fact that the payments were late. On waiver and estoppel, the judge pointed to messages sent as early as June 2022 in which the supplier told the buyer that penalties would apply. Those reservations of rights meant the supplier had never given up its claims.

The contract also contained a clause preventing oral modifications. Any change had to be agreed in writing. WhatsApp exchanges and informal agreements to delay payments were not enough. The Court stressed that where commercial parties agree on a no-oral-modification clause, they must live by it.

On the procedure, the Court found that the buyer’s supposed disputes were not supported by evidence. The WhatsApp messages were considered, but showed the supplier consistently asserting its rights. That meant the streamlined Part 8 procedure was appropriate. The Court preferred efficiency and clarity to protracted litigation.

Finally, the Court dismissed the allegation that the claim was an abuse of process. Enforcing a contractual right cannot be abusive. The judge concluded that the supplier was entitled to the full AED 2.84 million and refused permission to appeal. The application for appeal was said to have “no real prospect of success”.

The outcome is a stark reminder of how DIFC courts approach penalty clauses. Penalty clauses are scrutinised in many common law jurisdictions, such as England and Wales. Since the Supreme Court decision in Cavendish Square Holding v Makdessi in 2015, English law allows penalty clauses only if they protect a legitimate business interest and are not extravagant. In that case, a multimillion-dollar clause tied to a share sale was upheld because it protected goodwill. But courts retain the power to strike down clauses they consider punitive.

Singapore and Hong Kong have followed the Cavendish reasoning. Both jurisdictions test whether a clause is out of proportion to the interest it protects. In Singapore’s Denka v Seraya Energy case in 2020, the Court of Appeal enforced a liquidated damages clause in a long-term gas supply contract but applied the same “legitimate interest” test.

The DIFC, by contrast, has shown a willingness to enforce the wording of commercial bargains with less judicial interference. Here, the AED 3,000 daily penalty was enforced in full, even though it far exceeded any demonstrable loss. The Court took the view that commercial parties, especially experienced businesses, are free to agree on their own risk allocations.

This matters for banks and exporters. Penalty clauses tied to late payment are a feature of many settlement agreements. The ruling confirms that DIFC contracts will be enforced as written, which provides predictability. It also warns buyers that they cannot rely on informal flexibility to shield them from liability. If they want to change a due date, the contract must be formally amended.

The decision also touches directly on the use of LCs. For many in the trade finance community, LCs are a safety net. They assure payment in transactions where trust is thin. However, this case illustrates that an LC is only a method of payment. It does not, by itself, amend the underlying contract. If the contract says payment was due on a certain date, presenting an LC later does not erase the lateness.

For many in the trade finance community, LCs are a means by which the documents required by the buyer for an underlying trade transaction are availed in exchange for payment under the LC. However, this is a case where the LC is merely a method of payment. The buyer receives no benefit from the documents presented for the drawing, as the presentation is made solely for the disbursement of funds. (An LC is separate from the contract between the buyer and the supplier, and does not amend the underlying contract even if it makes reference to it.) If the contract says payment was due on a certain date, paying by LC later does not erase the lateness.

One practical takeaway is that banks structuring LC-based settlements should ensure their clients understand the distinction. Advising a client to open an LC may solve a short-term liquidity problem, but penalties can continue to accrue unless the contract is formally varied.

The broader implication is that the DIFC is positioning itself as a creditor-friendly jurisdiction. By dismissing weak defences and enforcing penalties to the letter, the courts signal that they will not allow delay or informality to undermine contracts. That may make the DIFC an attractive forum for suppliers and financiers, but a more challenging one for debtors.

This is not the first time DIFC courts have enforced no-oral-modification clauses or penalty provisions, but the scale of this penalty, nearly USD 800,000, makes it a notable case. It is one of the clearest recent examples of the DIFC’s strict approach compared to English or Singaporean courts.