When overseas investors in the UAE negotiate their contracts, the choice of governing law for their contract can be a point of contention. Often, foreign parties want to choose a neutral and well-established law, such as English law or New York law.

However, the respective bargaining powers of the parties may result in the foreign investor agreeing to UAE law. In other scenarios, the UAE law itself may dictate that it should be used to govern the contract, such as is required for Dubai government contracts under a Decree from 1988. Certain other types of contracts are also required to be governed by UAE law in practice, including UAE employment contracts and memoranda of association to establish a UAE company.  

This article focuses on a few key legal points to note under UAE contract law as set out in the UAE Civil Code, particularly where they are different to English or other common law jurisdictions.  

  1. Beware of agreements to agree - the courts may enforce the missing details

Article 141 of the UAE Civil Code provides that the parties to a contract must agree on the essential elements of the obligation, but that they can leave matters of detail to be determined at a later date. In this circumstance, if a dispute arises, the judge will make a ruling on the missing terms in accordance with the other provisions of the contract and the law. However, it is clear from the Ministry of Justice official commentary that, for a UAE court to do so, it must be clear that the parties intended to reach an agreement even if they fail themselves to finalise all of the details of the contract.

This departs from the usual position under English law, for example, under which agreements to agree in the future are generally not capable of being enforced. Contracting parties may often tactically choose to phrase a point of detail as an agreement to agree in the full knowledge that if they do not agree in the future, it will not become a term of the contract.

It is also worth noting in this context that the implied obligation of performance in good faith may mean that the courts will find bad faith (and therefore a breach of contract) if the parties fail to agree in certain circumstances, such as one party failing to take reasonable efforts to reach an agreement, or entering into parallel negotiations with a third party.

Therefore, under UAE contract law, parties may be well advised to expressly state that there is no intention that the parties will be bound by Article 141, unless and until an agreement is entered into in writing between the parties.

  1. Only fraudulent behaviour constitutes misrepresentation

Common law lawyers are used to the legal concept of misrepresentation forming an alternative cause of action to breach of contract for parties who have been induced to enter into a contract by statements made by one party which have subsequently be proven to be untrue (and which may also be incorporated in the contract in the form of warranties, for example). Misrepresentation is effective because its scope is wide and includes innocent and negligent statements. It may also be fraudulent or reckless. It has a different basis for the calculation of compensation to a claim for breach of contract and also allows rescission of the contract.

"Entire agreement" clauses in English law contracts have, as one of their aims, the exclusion of liability for misrepresentation in all of its forms, other than fraudulent or reckless misrepresentation.

Under Article 185 of the Civil Code, misrepresentation occurs 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". Omission may also constitute misrepresentation where it is deliberate. It does not include statements made innocently or negligently which are captured in the English law concept.  

Any reference to "misrepresentation" in a UAE law contract should be carefully considered in light of this key difference. This is particularly the case given that it is also not possible under UAE law to exclude liability for fraud due to public policy considerations (see point 3 below).

  1. Limitation clauses are acceptable but do not try to exclude liability for your own misdeeds

Article 390 of the Civil Code states that contracting parties may fix in advance the amount of compensation payable under terms of the contract, or in a subsequent agreement. It is clear from the Article that the judge may overrule such a clause and, instead, award compensation in the amount equal to the "harm" (loss). The parties are not entitled to contract out of this judicial right to set the amount of compensation.

This provision focuses on a liquidated damages clause, not a clause which seeks to exclude or limit heads of liability for certain types of loss. However, it is generally agreed that exclusion and limitation clauses are acceptable under UAE contract law, provided that they do not attempt to restrict liability for "unilateral acts", such as fraud and wilful misconduct. In other words, liability for a deliberate act to breach a contract or inflict loss cannot be restricted under contract.

  1. If your contract provides for payment of a sum of money in the future, you should apply the exchange rate when payment is due

If the consideration for the contract is money, its amount and the type must be specified without any increase or decrease in the value of that money at the time that the payment is made (Article 204 of the Civil Code). This is interpreted to mean that, in relation to currency exchange rates, it is important to be clear which rate applies.

It is also preferable that the applicable rate is the prevailing rate at the future date of payment (not the date of the agreement). This is so that the person due to receive payment gets the actual value of the sum in the foreign currency when paid and avoids the argument that the person received more or less than was due to him on the payment date due to the fixed rate applied as against currency movements.  

  1. A duty to act in good faith is implied into all UAE contracts

The concept of "good faith" is well known to lawyers from civil law countries. It is, in effect, 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.

It is implied into UAE law contracts under Article 246: "a contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith". Decisions of the Dubai Court of Cassation have ruled that a bad faith action of the other contracting party may provide a cause of action in itself for the other. The effect of good faith on the terms of a contract is, therefore, wide reaching and may have a significant impact on the outcome of a dispute.