UAE legal series: A few peculiarities

Although in the UAE different laws apply to each of the seven emirates, many of the basic contractual principles are governed by federal law, and are thus uniform across all emirates. The most important pieces of federal legislation are contained in the commercial code, which applies to transactions made “in the course of business”, and the civil code, which is of more general application.

The fundamental contractual principles contained in those codes are familiar enough, but there are a few peculiarities …

Freedom of contract

Under both codes, the basic contractual principle is substantially the same: whatever the parties have agreed, applies, so long as it does not conflict with public order or decency, or a mandatory legal provision. One important provision relates to liquidated damages – although parties are free to fix in advance an amount of damages, the court has a power to vary it in line with the actual loss suffered; this power cannot be excluded.

Interpretation

When a contract is silent on a particular matter, or where no written contract exists, UAE federal law requires the local courts to resort, in descending order of priority, to: federal laws of specific application; the commercial code (provided it applies) and other federal commercial laws; laws of the relevant emirate; construction industry custom; general custom and, finally, laws pertaining to civil matters (which would include the civil code).

Although this leaves the civil code lowest on the list, in practice, particularly in relation to construction industry contracts, it is often applied over and above custom, not least because it contains provisions of specific application to contracts to perform work or services (known as “muqawala” contracts), which are often relevant.

Where the parties’ intentions are not clear from the contract itself, courts will seek to divine the intentions by looking at the surrounding circumstances, including correspondence as well as industry custom and practice. Additional information of this kind should not be allowed to override the words of the contract itself where no ambiguity exists, so a well drafted contract will avoid the need for enquiries of this nature.

The good faith requirement means that a party cannot
rely on a strict interpretation of the contract to do exactly what it has contracted to and no more

Good faith and implied obligations

The civil code further provides that contracts must be performed “in a manner consistent with the requirements of good faith”. The doctrine of good faith is difficult to define, but in general, it means parties must not seek to exploit others and, if possible, avoid conflict. The obligation to perform not just what is contained in the contract, but what is connected to it by law, custom or the nature of the transaction is set out in the same article of the civil code as the good faith doctrine, and can be considered to be linked. It means that a party cannot rely on a strict interpretation of the contract to do exactly what it has contracted to and no more.

Unfair contract terms

A mandatory provision of the civil code, which cannot be overridden, provides that where a contract is made by “adhesion” and contains unfair provisions, a judge may vary those provisions or excuse a party from performing them. The requirement that the contract was obtained by adhesion means that there must be significant inequality between the bargaining positions of the parties.

Muqawala provisions

The civil code contains provisions specific to contracts to perform work or services, known as muqawala. Such a contract must as a minimum contain a description of the subject matter of the contract, particulars of the type and amount of the works, the manner of performance, the period of performance and the price to be paid. Most of the standard forms used in the region will fulfil these requirements. In the event that the contract is silent as to payment, the contractor’s rights will be governed by the code.

In general however, UAE law is not nearly as prescriptive as to the contents of the contract as UK contractors might expect. Pay-when-paid clauses, for example, are not prohibited and are, in fact, commonly used.