09 May 2018

The Duty of Good Faith in UAE Contracts: All in Good Faith?

Authored by: Hadef & Partners, Sector Groups

5 things you need to know about the duty of good faith when entering into a contract in the UAE:

  1. All contracts in the UAE are subject to the duty of Good Faith of the parties, without exception

The duty of a party to act in good faith is an obligation to deal honestly and fairly when contracting. It is an automatically implied obligation, strongly codified in Article 246 of the UAE Civil Code. It is also clearly rooted in all UAE law governed contracts and for the reasons detailed below, it is an essential consideration when entering into a contract in the UAE.

  1. What is ‘good faith’?

The Civil Code does not expressly outline the parameters of the meaning of the duty of good faith, but it implies that contracting parties must act in accordance with the virtues of law, custom and the overall nature of the contract as well as in accordance with the actual terms stipulated within the contract.

  1. Good faith can apply to contracts governed by foreign law

In certain circumstances, the duty of good faith can be applied to contracts that are governed by foreign law. This could be the case where a dispute arises and the UAE Courts accept jurisdiction to a claim brought before them, leaving contracting parties with much more accountability to the duty of good faith than they may have originally anticipated.

  1. Good faith is applicable to pre-contract negotiations

The duty of good faith will apply to pre-contractual negotiations between parties. If a party to a contract makes, for example, a statement found to be fraudulent, provisions of the Civil Code relating to fraudulent statements and inadvertencies will likely render the contract void for lack of mutual consent. The wronged party can, in these circumstances, apply to the court for the contract to be canceled and could also seek damages.

  1. Good faith can impact the outcome of a dispute

It is important to be aware of the significance of the underlying duty of good faith when entering into contracts in the UAE. The obligation to act in good faith is comprehensive in scope, and assessment of the fulfilment or otherwise of the duty can impact the outcome of a contractual dispute considerably.

The fact that the duty of good faith is implied in all UAE law governed contracts means that a party cannot simply look to the terms of a contract when a dispute arises. Rather, the parties’ conduct, even during pre-contract negotiations, will be subject to the obligation to act in good faith. As a result, the duty of good faith is undoubtedly an essential consideration whenever discussing and eventually entering into, a contract in the UAE.

For more information, please contact us on sectors@hadefpartners.com.