Kuwait Court of Cassation principle number 314

Summary: - A mortgage may be created to secure a conditional debt, a future debt, or a contingent debt, such as creating it to secure an open credit facility as a future debt or the opening of a current account as a contingent debt. Its condition: precise specification of the amount secured by the mortgage or the maximum amount that this debt may reach. Failure to do so. Its effect: absolute nullity of the mortgage for lack of specification of the debt. The basis thereof: Article 981, Civil Code. - Specification of the debt secured by a mortgage. How effected: by its amount, if it is a definite debt, in terms of principal, interest, and the commencement of its accrual. An unconditional debt, a deferred debt, a conditional debt, a future debt, and a contingent debt are alike. They may be secured by a formal mortgage. By the source of the debt: its source must be specified, whether a contract, an unlawful act, unjust enrichment, a unilateral act of will, or the law. Debts vary according to their sources. - Determining whether the debt secured by a mortgage is precisely specified in accordance with the mortgage terms falls within the authority of the court of merits. Its condition. - A mortgage for the issuance of instruments in the amount of two hundred million dollars without specifying the profits, commissions, and expenses secured by the mortgage, the implementation of their calculation, and the nature of everything arising, or specifying the maximum amount the debt may reach. Its effect: the contract lacks precise specification of the debt secured by the formal mortgage, rendering it void for lack of specificity of the mortgage as regards the secured debt. The challenged judgment’s departure from this view, stating that failure to specify profits, commissions, and expenses does not affect the validity of the mortgage. Defective reasoning leading to an error in applying the law, requiring its cassation. Rule: The provision of Article 981 of the Civil Code that “A mortgage may be created to secure a conditional debt, a future debt, or a contingent debt; it may thus be created to secure an open credit facility or the opening of a current account, provided that the mortgage contract specifies the amount of the secured debt or the maximum amount that this debt may reach” indicates—as disclosed by the explanatory memorandum to the Law—“that ‘a mortgage may be created to secure a conditional debt, a future debt, or a contingent debt.’ It then sets out the most important practical applications in this regard: a mortgage may be created to secure an open credit facility, where a future debt is involved, or the opening of a current account, where a contingent debt is involved. In implementation of the principle of specificity of the mortgage as regards the secured debt, which requires that the debt be specified, the provision makes the validity of a mortgage created to secure an open credit facility or the opening of an account conditional upon the mortgage contract specifying the amount of the debt secured by the mortgage or the maximum amount that this debt may reach.” A formal mortgage may therefore be contracted to secure a debt arising in the future or a contingent debt, provided that the mortgage contract specifies the amount of the debt secured by the mortgage or the maximum amount that this debt may reach. Accordingly, the secured debt must be precisely specified; otherwise, the mortgage contract is void for lack of specificity—as regards the secured debt. A formal mortgage may not be contracted to secure all debts incurred by the debtor, whether during any period or a specified period, so long as the debts themselves have not each been individually specified in terms of amount and source. Nor may a formal mortgage extend to secure any other debt, unspecified as to amount or source, incurred by the debtor after the debt secured by the mortgage. The secured debt is specified by 2 matters: 1- Its amount: this amount is specified, if it is a definite debt, in terms of principal and interest and when the latter begins to accrue. In this respect, an unconditional debt, a deferred debt, and a conditional debt are alike, and all are debts that may be secured by a formal mortgage. If the debt is future or contingent, its amount is specified in the mortgage contract by specifying a maximum amount it may reach. If the maximum amount of the debt and the period during which it is incurred are specified, these must be observed. Whatever debt is incurred during the agreed period is secured by the formal mortgage, provided that it does not exceed the stated maximum. 2- The source of the debt: in addition to specifying the debt’s amount, its source must also be specified: whether it is a contract, and which contract, or an unlawful act, unjust enrichment, a unilateral act of will, or the law ... It may be a conditional debt, a debt subject to a term, or an unconditional debt; it may also be a future or contingent debt. Thus, debts vary according to their sources. The sanction for failing to specify the debt secured by a formal mortgage, or a maximum amount it may reach, is the nullity of the formal mortgage contract itself for lack of specificity of the mortgage as regards the secured debt. The nullity here is absolute, and any interested person may invoke it. Although determining whether the debt secured by a mortgage is precisely specified in the foregoing manner falls within the authority of the court of merits, this is conditional upon its basing its ruling on sound grounds sufficient to support it. That being so, examination of the mortgage contract in dispute establishes that it was concluded between its parties to secure the indebtedness of the second respondent company to the first respondent Bank arising from the issuance of instruments subject to their collection, in the amount of two hundred million dollars. Clause 1 of the contract stipulated that the mortgage secured all dues arising from that amount until full payment, and Clause 6 stipulated that the mortgage secured the principal amount of the indebtedness, profits, commissions, expenses, and all obligations arising from this contract, without specifying the profits, commissions, and expenses secured by the mortgage, how they were to be calculated, the nature of all dues arising from that amount, or the maximum amount that this debt may reach. Consequently, the contract lacked precise specification of the debt secured by the formal mortgage, rendering it void for lack of specificity of the mortgage as regards the secured debt. As the challenged judgment departed from this view and concluded that the contract was valid on the assertion that failure to specify the profits, commissions, and expenses did not affect the validity of the contract, it is tainted by defective reasoning that led it to an error in applying the law, a defect requiring its cassation without any need to examine the other ground of appeal.