Where UAE contract law differs from abroad
Often when companies are doing business in the UAE; and, in particular, wishing to draft a contract, there is a temptation to go online and find a document to copy and paste. Many documents online originate from either the United States or the England, or countries following a similar legal system- the common law system.
However, there are several major differences between UAE law and the abovementioned countries and, therefore, businesses should be wary of using online resources.
Some of the main differences are as below:
1. Memorandums of Understandings (MoU’s)
Under English law and other common law countries’ legal systems, MoU’s are regarded as unenforceable. This is because a MoU is often a short, concise document, signed by parties as a pre-cursor to enter into a more comprehensive document. Courts in common law countries regard MoU’s as vague because they do not contain all the terms- only general ones.
Under the Article 141 of the Federal Law No.5 of 1985 issuing the civil transaction law for UAE (the “UAE Civil Code”), parties can agree the most essential terms in a MoU and then agree to finalise the details at a later date. The Dubai Court has the ability to enter the missing details and terms and therefore complete the contract.
In addition, UAE law can assume that if a party does not finalise the details of a contract, or is talking to third parties at the same time, then it may determine that a party is acting in ‘bad faith’ and is in breach of contract.
Therefore, under UAE contract law, parties are advised to have comprehensive agreements in place before they start any business relationship.
2. “Good Faith”
This is another concept which is missing from English, American and other common law countries. By law, in the UAE, there is a duty to act in good faith in all UAE contracts.
"Good faith" is, a requirement not to use the terms of a contract to abuse the rights of the other contracting party, not to cause unjustified damage to that other party and to act reasonably and moderately.
Article 246 of the UAE Civil Code states
"a contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith".
Unfortunately, the law does not expressly state what the definition of “good faith” is; and it is left for the Dubai Courts to decide in each case. However, the general notion is that the law positively requires a party to consider the legitimate interests of the other party(ies) when entering into a contract.
This provision in the law has wide-reaching consequences and can have an impact on both parties if there is a dispute.
3. Only fraudulent behaviour constitutes misrepresentation
In English, and other common law countries, there is a concept in contract law referred to as misrepresentation. This is when one party induces the other party(ies) to enter into a contract based on a false assertion; and when the false assertion is incorporated into the contract. If this does happen, one party can sue the other party for breach of contract. The misrepresentation can either be innocent or negligent in English law.
Under the Civil Code, Article 185, UAE law states that misrepresentation is when one of the parties "deceives the other by means of fraud, by word or deed, which leads the other to consent to what he would not otherwise have consented to.”
Therefore, UAE law requires a representation to be fraudulent before it will be classified as a misrepresentation. Therefore, the standard to which the parties are held is much higher than under English law. Also, UAE law provides that if one party knows of the misrepresentation and does not say anything, he has consented to it and this will not allow him to terminate the contract.
4. Termination provisions
Typically contracts, under English/common law, allow one party to terminate a contract for “without cause”. This basically allows one party to terminate if it no longer wishes to deal with the other for any reason.
UAE law specifically sets out the circumstances under which a contract may be terminated. These circumstances are limited. “Without cause” terminations are not allowed because they are contrary to Sharia law.
These are just some of the differences between the two types of legal system. Careful consideration should be made before entering into a contract. We, at TWS Legal Consultants, would be happy to assist you whenever you enter into a contract.
Please contact one of our experienced lawyers today for more details. Email us at email@example.com or call +971 4 448 4284.