09 Nov 2020

Hadef in the Courts: The Principle of Good Faith – how material is this principle in governing legal rights and obligations?

Authored by: Hiba Mahmud and Khalid El Sherif

In Brief:

  1. The principle of good faith is implied into contracts under UAE law.
  1. According to the principle of good faith, contracting parties have an obligation to act honestly and fairly, not seek an unfair advantage or exploit each other in their contractual dealings.
  1. The principle of good faith may be applied by the UAE courts to reconcile competing legal interests for an equitable result.

Background and Judgment

Our client, a UAE based property owner, had entered into a sale and purchase agreement (the SPA) for the purchase of a mixed use tower block in Abu Dhabi (the Property). The seller was an Abu Dhabi based limited liability company (the Seller) to whom the Property had been gifted, i.e. ownership of the Property had been transferred by the original owner to the Seller without consideration.

Subsequent to the purchase of the Property by our client, the heirs of the original owner filed a claim before the Abu Dhabi courts for the nullification of a number of gifts of property which the original owner had made prior to his death, including the gifting of the Property by the original owner to the Seller, on the grounds that the original owner was incapacitated when he made those gifts. Judgment was issued in favour of the heirs holding that the gifts made by the original owner were null and void (the Judgment).

Consequently, relying on the Judgment, the heirs filed a claim against our client alleging that because the gifting of the Property by the original owner to the Seller was null and void, the SPA and, in turn, our client’s title to the Property are also null and void. The heirs also alleged that they therefore are the rightful owners of the Property under intestacy rules and as a result title of the Property is to be transferred from our client to the heirs and compensation paid to them for the profit that was earned by our client on the Property.

One of the main arguments we raised on behalf of our client was that it had entered into the SPA with the Seller in good faith, and was not privy to details of how the Seller acquired title to the Property.  Pursuant to Article 246 of the UAE Civil Code, the duty to act in good faith is implied into all contracts. Although the concept of good faith is not specifically defined under UAE law, it generally means that the parties must act honestly and fairly, not seek an unfair advantage or exploit each other.  We further argued that the impact of good faith is to affirm the SPA as legally binding.

The Abu Dhabi Court of First Instance agreed with our arguments and held that our client had acted in good faith when entering into the SPA, and accordingly that the SPA and, in turn, our client’s title to the Property are valid.  It provided that allowing the heirs to rely on the Judgment to nullify the SPA and, in turn, our client’s title to the Property would be an abuse of our client’s rights and contrary to the rules of justice and the principle of good faith. The judgment of the Court of First Instance was recently upheld by the Abu Dhabi Court of Appeal.

Legal Significance

The decision of the Court shows that the application of the principle of good faith can be a fundamental basis for legal rights and obligations. Moreover, the UAE courts may in certain circumstances apply the principle of good faith to achieve an equitable outcome in situations where competing interests are alleged to exist.

If you would like more information, or have any questions please contact Hiba Mahmud, Senior Associate, Dispute Resolution h.mahmoud@hadefpartners.com & Khalid El Sherif, Senior Legal k.elsherif@hadefpartners.com Consultant, Dispute Resolution, Abu Dhabi.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.