Gavin Howe
The United Arab Emirates (UAE) has a unique and complex legal system that differs from other countries in several ways. While all countries have their own laws governing contracts, the UAE's dynamic legal landscape presents distinct features and requirements that businesses and individuals must navigate carefully. From the formation and termination of contracts to the role of good faith and the treatment of misrepresentation, the UAE's contract law exhibits notable variations compared to other legal systems, particularly common law jurisdictions like England and the United States. Understanding these differences is crucial for anyone doing business or entering into contractual agreements in the UAE.
| Characteristics | Values |
|---|---|
| Misrepresentation | Under UAE law, misrepresentation is when one party "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". In other words, it requires fraudulent behaviour. In English law, misrepresentation can be innocent or negligent. |
| Memorandum of Understanding (MoU) | MoUs are regarded as unenforceable in English law and other common law countries. However, they are enforceable under UAE law, according to Article 141 of the Federal Law No.5 of 1985 issuing the civil transaction law for UAE (the "UAE Civil Code"). |
| Termination | Contracts under English/common law allow one party to terminate a contract "without cause". In contrast, UAE law sets out specific and limited circumstances under which a contract may be terminated. "Without cause" terminations are not allowed as they are contrary to Sharia law. |
| Good Faith | UAE law implies a duty to act in good faith in all contracts, which means not using the terms to abuse the rights of the other party, not causing unjustified damage, and acting reasonably and moderately. This is also a concept known to civil law countries. |
| Governing Law and Jurisdiction | Parties to a contract in the UAE should specify the governing law and jurisdiction in the event of a dispute. While UAE law often applies by default, parties can choose another jurisdiction as long as it doesn't conflict with the contractual subject matter and counterparty. |
| Contract Requirements | For a contract to be legally binding in the UAE, it must include offer and acceptance, legal capacity, and lawful purpose. Contracts can be oral or written, but written contracts are recommended as they provide stronger legal protection and evidence in case of a dispute. |
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Termination clauses
Another key difference is that UAE law requires a representation to be fraudulent to be classified as a misrepresentation, whereas under English law, misrepresentation can be either innocent or negligent. Additionally, if a party is aware of a misrepresentation and does not speak up, they are considered to have consented to it and cannot use it as a reason to terminate the contract.
In terms of employment contracts, the UAE Labour Law outlines specific circumstances under which an employer or employee can terminate a contract. For example, an employer may terminate a contract without notice if an employee adopts a false identity or submits forged documents. Employees may terminate a contract without notice if the employer fails to meet contractual or legal obligations, assaults or harasses the employee, or instructs the employee to perform work fundamentally different from what was agreed upon in the contract.
UAE law also recognises two types of employment contracts: limited and unlimited. Limited contracts are fixed-term contracts that usually expire at the end of the term unless terminated earlier by either party. Unlimited contracts, on the other hand, are open-ended and can be terminated for various reasons under the UAE Labour Law.
Finally, it is worth noting that the UAE Civil Code allows parties to mutually agree to revoke their contract at any time, and a court order is not required in such cases. This is another aspect that sets UAE contract law apart from other legal systems.
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Misrepresentation
Articles 185 and 186 of the Civil Code define misrepresentation as follows:
> Article 185: Misrepresentation occurs when one of the two contracting parties deceives the other by fraudulent means by word or act, which leads the other to consent to what he would not otherwise have consented to.
> Article 186: Deliberate silence concerning a fact or set of circumstances shall be deemed a misrepresentation if it is proved that the person misled thereby would not have made the contract had they been aware of that fact or set of circumstances.
In other words, misrepresentation or deception implies the existence of fraudulent means, which has led to the consent of the other party to enter into a transaction. UAE law, therefore, requires a representation to be fraudulent before it will be classified as a misrepresentation. This differs from English common law, where misrepresentation can be either innocent or negligent.
Article 187 of the Civil Code sets out the legal consequences of misrepresentation under UAE Law:
> If one of the contracting parties makes a misrepresentation to the other and it transpires that the contract was concluded with gross unfairness (lésion), the person so misled may cancel the contract.
UAE Law interprets 'misrepresentation' and 'lésion – gross unfairness' conjunctively and cumulatively. This means that both concepts should be used in conjunction and not separately. This is somewhat unique to the UAE as, in many other civil law jurisdictions, such as France, Lebanon and Egypt, the two concepts can be applied separately and both can result in termination or nullification of the agreement.
UAE law has set a high threshold for a finding of misrepresentation. Any actions on the part of the victim of misrepresentation that evidence their continued performance of the contract and their consent, set aside the right of the victim from claiming termination of the contract based on misrepresentation.
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Good faith
The concept of "good faith" is pivotal in legal practice, influencing the way parties engage in contracts and resolve disputes. In the United Arab Emirates (UAE), a blend of civil law and common law practices shapes the interpretation and applicability of good faith obligations.
UAE contract law differs from other countries in its approach to good faith. A duty to act in good faith is implied into all contracts subject to UAE law, as outlined in Article 246 of the UAE Civil Code. This means that parties must perform their contractual obligations as stated in the contract, in accordance with the principles of good faith and in a manner consistent with the contract's purpose and requirements. This includes an implied obligation to cooperate, transparently disclose any matters impacting the contract's performance, and mitigate potential damage or harm. UAE courts interpret good faith as a guiding principle when resolving disputes, considering the intentions and behaviours of the parties involved, rather than solely relying on the contract's terms.
In contrast, English common law is reluctant to imply a term of good faith into commercial agreements, upholding the doctrine of freedom of contract. While English case law in 2013 suggested a potential shift towards recognising a duty of good faith, this prospect has since receded. This difference between UAE and English law is significant, especially in international construction contracts, where provisions and practices may vary based on the governing law's approach to good faith.
The UAE's approach to good faith also differs from other civil law jurisdictions. Unlike countries like Egypt and pre-amendment France, UAE courts have limited the application of good faith to the performance of the contract, unless the applicable law expressly includes the negotiation phase. This highlights the importance of understanding good faith obligations across jurisdictions, especially when drafting contracts involving parties from both civil and common law systems.
To summarise, the UAE's unique blend of civil and common law practices shapes its interpretation of good faith, with a strong emphasis on honesty, fairness, and cooperation during contractual relationships. This differs from other countries, particularly common law jurisdictions, and has important implications for parties doing business in the UAE or entering into contracts subject to UAE law.
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MoUs
A Memorandum of Understanding (MoU) is an agreement between two or more parties that outlines their initial understanding, rights, obligations, mutual expectations, and commitments before a formal contract is signed. MoUs are typically used in commercial transactions involving investments, the sale and purchase of shares, and joint ventures. They are also used to establish the foundation for future negotiations and collaborations.
In the context of UAE law, MoUs are recognised and governed by the Federal Law No. 5 of 1985, also known as the Civil Transaction Law or the UAE Civil Code. Article 125 of this code clarifies that a contract is formed when there is an offer, acceptance, and flow of consideration between the parties. While MoUs reflect the initial understanding, they may not always lead to a contract, as future negotiations and agreements are anticipated.
It is important to note that the UAE's dynamic and complex legal system requires a clear understanding of contract law to ensure legally binding agreements and protect business interests. Contracts in the UAE can be in Arabic or English, but Arabic versions will take precedence in court proceedings. Additionally, certain types of contracts, such as real estate and employment contracts, have specific requirements under UAE law.
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Governing law and jurisdiction
The UAE's legal system recognises the validity of both written and verbal contracts. However, written contracts are strongly recommended as they provide stronger legal protection and serve as crucial evidence in the event of a dispute. Notably, if a dispute reaches a UAE court, only the Arabic version of a contract will be analysed and enforced, even if the contract was drafted in both Arabic and English.
When selecting a governing jurisdiction, it is important to be mindful that the UAE courts will not enforce an agreement that gives jurisdiction to a foreign court if the dispute falls within their purview. This includes disputes involving property ownership within the UAE, transactions formed or supposed to be formed in the UAE, and events occurring in the UAE. Therefore, careful consideration is required when choosing a jurisdiction to avoid potential conflicts with the UAE legal system.
In addition to choosing a jurisdiction, parties can specify arbitration as the dispute resolution method. The UAE offers several arbitration centres, including the Dubai International Arbitration Centre (DIAC), DIFC-LCIA Arbitration Centre, and the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC). Alternatively, parties can opt for international arbitration institutions, such as the ICC in Paris or the SIAC in Singapore.
Ultimately, the choice of governing law and jurisdiction in the UAE requires thoughtful consideration of various factors. Seeking legal advice can help minimise the risk of unfavourable outcomes in potential disputes and ensure compliance with the unique aspects of the UAE's legal system, which is governed by laws such as the UAE Civil Code, Federal Law No. 5 of 1985, and Federal Law No. 18 of 1993.
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Frequently asked questions
Under the Civil Code, Article 185, UAE law states that misrepresentation occurs when one party deceives another through fraud, word, or deed, which leads the other party to consent to something they would not otherwise have consented to. Therefore, UAE law requires a representation to be fraudulent before it will be classified as a misrepresentation. The standard to which the parties are held is much higher than under English law.
Under English law and other common law countries' legal systems, MoUs are regarded as unenforceable. This is because an MoU is often a short, concise document signed by parties as a precursor to entering into a more comprehensive document. Courts in common law countries regard MoUs as vague because they do not contain all the terms, only the general ones. However, under Article 141 of the Federal Law No.5 of 1985 (UAE Civil Code), parties can agree on the most essential terms and leave the other details to be determined later.
Contracts under English/common law allow one party to terminate a contract "without cause", i.e., allowing a party to terminate if it no longer wishes to deal with the other party for any reason. On the other hand, UAE law specifically sets out limited circumstances under which a contract may be terminated, and "without cause" terminations are not allowed as they are contrary to Sharia law.
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