UAE

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Pre-contractual negotiations
  • Is there an implied duty of good faith to continue to negotiate?

    Prior to the formation of a binding contract, there is no onus on the parties to continue negotiations in good faith under UAE law.  However, if the essential elements of the contract and all other lawful conditions which both parties regard as essential have been agreed, potentially with further details to be agreed upon at a later stage, and no express stipulation that the contract has not yet been agreed, then a contract may be deemed to have been already made.

    Terms may be implied into the agreement even if it was not necessarily the parties’ intention to include them and may include that which is incidental to its performance by reason of law, custom and the nature of the transaction.  Under the UAE Civil Code, if a contract is deemed to have been entered into, the contract must be performed in accordance with its contents and in a manner consistent with the requirements of good faith.

    It should therefore be made clear during pre-contractual negotiations that the contract will not be binding until all details have been finalised and it has been executed. It would be prudent to record both parties’ agreement to this principle in writing in a Memorandum of Understanding and mark all pre-contractual documents as being non binding and “subject to contract” and where possible avoid using UAE law governed MOU documents.

    What are the consequences of termination of negotiations by one party unilaterally?

    If the essential elements of a contract are sufficiently well defined such that it is deemed to have been entered into, then remedies for breach are available. No remedies are available if this is not the case.

    What is the potential impact on third party rights?

    Under UAE law a contract may not impose an obligation upon a third party but it may create a right. 

    Further, it is permissible for a person to impose a condition that rights are to be for the benefit of a third party.  Such condition shall confer upon the third party a direct right against the undertaker for the performance thereof.

Confidentiality agreements
  • Are there implied confidentiality obligations where there are no formal confidentiality agreements entered into by the parties?

    In the UAE, there are no general confidentiality provisions implied into contracts. However, the UAE Civil Code requires an employee to keep his employer’s industrial and trade secrets confidential during and after termination of a contract if this is customary practice, in addition to any express contractual provisions.

    Furthermore, the UAE Penal Code creates three criminal offences with respect to breaches of confidentiality which parties should be aware of. These are as follows:

    1. It is an offence to publish news, pictures, or comments pertaining to the secrets of people’s private or family lives, if these are real and true. 

    2. It is an offence for any person, who by reason of his profession, craft, situation or art is entrusted with a secret, to disclose it other than as permitted by law, or to use it for his own, or another person’s advantage.

    3. It is an offence for any individual to open a letter or telegram without the consent of the addressee, or to eavesdrop on a telephone conversation.

    What are the consequences of breach?

    In relation to the breach of a contract of confidentiality, the UAE Civil Code provides that if the parties cannot be restored to the pre-contractual position, then compensation may be ordered by the court.  While it is permissible to provide for liquidated damages in the contract, the court retains the power to override them and award compensation for breach of contract equal to the loss. If amounts of compensation are not fixed by the contract, the court will assess them with reference to the actual loss or damage suffered.

    In relation to the offences under the Penal Code mentioned above, the penalties include terms of imprisonment and fines.

    Are specific terms/formalities required for a binding confidentiality agreement?

    No. The formalities required for a binding confidentiality agreement are usually no different to those required for any other type of contract.

    The requirements for a binding contract in the UAE are similar to those in common law jurisdictions such as England. Article 129 of the Civil Code provides for three key components of a legal contract under UAE law including: agreement upon the essential elements of the contract (offer, acceptance, intention to create legal relations and consideration); certainty of the subject matter of the contract and the contract having a lawful purpose.

    It is also important to note that whilst not a requirement under Article 129 of the Civil Code, a contract must be performed in a manner consistent with the requirements of good faith (Article 246, Civil Code).

Exclusivity arrangements
  • Can an obligation to negotiate exclusively be implied where no formal agreements are entered into by the parties?

    It is unlikely that this will happen.& However, it is worth noting that in some cases there may be a legal requirement for exclusivity. For example, when appointing an agent in the UAE, the agent is given by law exclusive rights to represent the principal in the territory covered by the agreement and can prevent the products covered by the agency agreement from being imported into the territory through another agent.

    Are any specific terms/formalities required to make exclusivity arrangements enforceable?

    No, the formalities required for a binding exclusivity agreement are usually no different from those required for any other type of contract, as is the case with Confidentiality Agreements.

Heads of agreement
  • Are they legally binding?

    Under the UAE Civil Code, if parties to a contract agree on the essential elements of the obligation and the remainder of the other lawful conditions which the parties regard as essential and leave matters of detail to be agreed upon afterwards, but they do not stipulate that the contract shall not be regarded as made in the event of absence of agreement, upon such matters, the contract is deemed to have been made. If a dispute arises as to the matters which have not been agreed upon, this is decided in accordance with the nature of the transaction and the provisions of the law.

    However, each party has the right to revoke any agreement while the “parties are still in session1” (ie have not parted or finalised the agreement). Therefore, whether a heads of agreement is inferred to be binding depends on the status of the “pre-contractual negotiations”.

    If the parties intend for the heads of agreement to be binding, they should ensure that:

    it is clearly stated as being binding or that the relevant clauses are clearly stated as being binding, and
    the essential terms are clearly stated so they can be interpreted with sufficient certainty.

    Can heads of agreement have any tax implications/adverse consequences?

    Heads of agreement are unlikely to have tax implications in the UAE but the tax consequences for a party to a contract will vary depending on the specific circumstances of that party.


    1 Literally while the parties are still at the majilis (or meeting place) discussing the agreement.

Break fees
  • Are break fees usually payable?

    We do not regularly see break fee arrangements in this jurisdiction.  However, in relation to negotiations connected with a share purchase agreement, it may be reasonable for the buyer to receive a break fee in the event that the seller breaches exclusivity (or other obligations) to cover the costs incurred by the buyer in undertaking its due diligence of the company. From a seller’s perspective, it may possible to ask for a break fee if a buyer has been granted exclusivity, possibly following an auction process, and then fails to proceed to completion for reasons not linked to any adverse findings from its due diligence of the target company.

    What are the main legal issues to be considered eg enforceability?

    Enforceability issues relating to break fees in UAE contracts may be complex.  As a form of liquidated damages, break fees may be specified in contractual agreements. However, the law allows either party to a contract to make an application to a court for the specified damages to be varied so that the amount of compensation is equal to the actual loss. Any agreement which is contrary to this is void.

    UAE law provides that in the absence of any particular agreement or law, the rules of commercial custom shall apply.
    So, it is difficult to forecast with any degree of certainty how a contract may be interpreted and applied by the courts;  much would depend upon the facts of a particular case, the ambiguity (or absence thereof) of the terms of the contract in question, and the then current legislation.

    It is generally advisable for parties to include an arbitration clause so that a jurisdiction can be specified which is more familiar to the parties, and in which a more predictable judgment may be expected. The UAE is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and so arbitration judgments obtained in other jurisdictions may be enforced in the UAE. Judgments obtained from foreign courts, however, are less likely to be enforced in the UAE and so an attempt to specify a foreign governing law and jurisdiction for a contract with a significant UAE element may not be effective.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.