20 Nov 2018

Verbal contracts in the UAE - is lip service enough?

Authored by: Victoria Woods

In brief:

  • Under UAE law, verbal agreements are prima facie, enforceable.
  • A well drafted written contract that fits your specific business requirements will help your business operations run smoothly and could help you to avoid litigation down the line.
  • In this article, we summarise how verbal contracts are dealt with under UAE law, including how silence is interpreted, the relevance of custom and practice, and how to effectively terminate a verbal contract.

1. Are verbal contracts enforceable in the UAE?

Under UAE law, verbal agreements are prima facie, enforceable. The extent of enforceability will depend on the actions of the parties to determine whether a contract actually exists in law, e.g. whether they have demonstrated intention to contract and whether they have agreed the terms of the arrangement.

An expression of intention may be made verbally (or in writing), by an interchange of acts which demonstrate mutual consent, or by any other course of action which leaves no doubt that there is mutual consent.

2. How is silence dealt with?

Where a person remains silent in circumstances where a statement is called for, this will be regarded as an acceptance. Further, silence will be deemed to be an acceptance if there has been a prior dealing between the parties and the offer is related to such prior dealing, or if the offer will bring about a benefit to the person to whom it is made.

A valid contract can exist where a promise to make a contract has been made and all of the basic/essential elements have been agreed, as well as the period in which they are to be carried out.

If a dispute arises as to matters which have not been agreed upon, the court will adjudicate in accordance with the nature of the transaction and the provisions of the Civil Code. The law stipulates that there should be an agreement over all essential matters and if there is an agreement over some but not all of them, a contract will not be concluded. Agreement over non-essential elements however are not necessary for a valid contract to exist.

The court may consider to what extent there has been performance of the contract by each of the parties, and this may include whether any consideration for the services has been paid (although, there is technically no requirement for consideration for a valid contract to exist under UAE law).

It is also worth noting that the Commercial Code sets out a number of general provisions relating to commercial obligations of parties in commercial transactions. Where a contract is silent on a specific issue (such as price or delivery terms), the relevant provisions of the Commercial Code should be considered in order to ascertain whether it provides a default position in the absence of express agreement by the parties.

3. Is custom and practice relevant to interpreting a verbal contract?

The past course of dealings and transaction history between the parties will have evidentiary value in determining what the parties have effectively agreed as to the terms of a contract between them.

In the absence of specific agreement, the rules of commercial customs and practices apply to all matters not provided for in the Commercial Code or any other law governing commercial matters. The Commercial Code also provides that local customs have precedence over general customs and, in the absence of a commercial custom, the provisions governing civil matters will apply to the extent they are not inconsistent with the general principles of a commercial activity.

In addition, it is worth noting that the Civil Code implies a duty of good faith into all contracts, which may lead a court to examine the conduct of the parties to a contract after it is concluded. Please see our recent article on good faith here for more details.

4. How can you effectively terminate a verbal contract?

There are only three ways to terminate a contract in the UAE and this applies to both written and verbal contracts.

In short, a verbal contract can be terminated by agreement, by litigation or in accordance with the law. Please see our recent article on terminating a contract here for more details.

Conclusion

Although verbal contracts are potentially enforceable in the UAE, it is always prudent to formalise the agreed terms of any arrangement in writing in order to avoid potential disputes over the exact terms (or existence) of the contract and potentially enable the parties to realise the intended commercial benefits of dealing together in the first place.

A well drafted written contract that fits your specific business requirements will help your business operations run smoothly and could help you to avoid litigation down the line.

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