21 Nov 2018

Five things you need to know about contracts in the UAE

Authored by: Victoria Woods

In brief:

  • A carefully drafted contract that is fit for purpose is integral to the smooth running of your business operations in the UAE.
  • In this article we briefly discuss the five main things you need to know about contracts in the UAE.
  • The five things you need to know about contracts in the UAE includes contract formation, verbal contracts, the importance of good faith, terminating a contract and what to do when a contract goes wrong.

A carefully drafted contract that is fit for purpose is integral to the smooth running of your business operations in the UAE. In this article we briefly discuss the five main things you need to know about contracts in the UAE.

1. Contract formation

In the UAE, the Civil Code applies to and governs all civil rights and obligations (which also covers contractual arrangements). Where a contract is entered into on a commercial basis, the Commercial Code will also apply to the relationship.  In addition to the Civil and Commercial Codes, a number of other laws and regulations deal with the effectiveness and validity of specific types of contracts, such as those dealing with land transactions and ship sales.

The Civil Code (which is based on Islamic law principals) recognises a distinction between essential elements on which the existence of a contract depends (as opposed to it being void), and less fundamental matters that affect the binding force of its terms (but not the existence) of the contract.

  1. The essential elements

The essential elements for the formulation of a contract under the Civil Code are:

  • mutual consent to the basic essential elements of the contract;
  • a permissible subject matter that is possible and defined (or capable of being defined); and
  • a lawful reason or purpose for the obligations arising out of the contract.

When considering whether a contract has been actually formed, the courts will ordinarily review the surrounding circumstances and will specifically consider whether there is evidence of:

  • offer and acceptance;
  • certainty regarding the terms; and
  • each party’s capacity to contract.
  1. Freedom to contract

Under UAE law, parties are generally free to agree and contract on the parameters of their contractual relationships, although contractual freedom is subject to a number of legal restrictions. For example, a contract that is made for an unlawful cause, or the subject matter of which conflicts with public order or morals, is void. A contract entered into by a party lacking capacity will not necessarily be defective and non-binding, unless capacity has been taken away or restricted by operation of law, or the contract entered into results in exploitation of, or conspiracy against, the incapacitated party.

  1. Execution requirements

Notarisation of documents provides proof of authenticity of the relevant document. There are certain types of agreements which must be in writing and notarised in order to be effective, such as commercial agency agreements which are to be registered at the UAE Ministry of Economy and contracts purporting to the transfer real estate.

2. Verbal Contracts

Under UAE law, verbal contracts are prima facie, enforceable. The extent of such enforceability will depend on the actions of the parties, e.g. whether they have demonstrated intention to contract and/or whether they have agreed the essential terms of the contract.

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 conflict about the exact terms (or even existence) of the contract.

Please see our recent article on verbal contracts in the UAE here for more details.

3. The importance of good faith

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. This is an automatically implied obligation, strongly codified in the 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.

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.

In summary, the duty of good faith:

  • can apply to contracts governed by foreign law;
  • is applicable to pre-contract negotiations; and
  • can impact the outcome of a dispute.

Please see our recent article on good faith here for more details.

4. Terminating a Contract

In the UAE there are just three ways to legally terminate a contract, as provided for in the Civil Code which are:

  • by mutual consent;
  • by litigation; and/or
  • in accordance with the law.

Please see our recent article on terminating a contract in the UAE here for more details.

5. When contracts go wrong

The dispute resolution clause in any written contract is a key element, and it consequently requires careful consideration and drafting, regardless of the agreed upon process, choice of law and forum.

Generally, court judgments can be difficult to enforce overseas. Arbitration awards however can be more easily (although not entirely without issue) enforced in many jurisdictions globally. This needs to be factored in to your choice or law and jurisdiction negotiations.

When preparing an appropriate dispute resolution clause, you should consider:

  • the value of the contract and therefore likely value of claims (some dispute resolution processes can be costly);
  • whether confidentiality of the matter is a key concern since often court resolution renders details of the dispute public;
  • the location of your counterparty’s assets (for enforcement purposes). If you win your dispute, can you enforce it against assets of your counterparty in another country?; and
  • whether the contract is of a particularly technical or specialist nature perhaps requiring expert input.

For more tips on ways to potentially avoid litigation, please see our recent article here.

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