Top 10 Questions Answered About Contracts In The UAE

Venturing into the United Arab Emirates' (UAE) business realm requires an understanding of its unique legal framework. This article offers a straightforward guide to the UAE's contract law, providing the foundational knowledge needed to navigate agreements and negotiations with confidence.

Specifically, this guide covers (a) a background to the UAE legal system, (b) an overview of UAE contract law, and (c) answers to the top 10 questions regarding entering into contracts.

Background to the UAE Legal System

The UAE's legal system is a unique blend of civil and common law. Civil law governs matters in mainland UAE, while the financial free zones of the DIFC (Dubai International Financial Centre) and the ADGM (Abu Dhabi Global Market) have their own independent courts and legal frameworks derived from English law.

Parties in the UAE, regardless of their location, can choose to subject their contracts to the jurisdiction of the DIFC and ADGM courts, with the exception of certain contracts that must be governed by UAE laws and local mainland courts.

We generally recommend that commercial contracts be subject to the jurisdiction of the DIFC or ADGM courts for reasons detailed later in this guide.

Overview of UAE Contract Law

Under UAE laws, contractual matters are primarily governed by Federal Law No. 5 of 1985 on the Civil Transactions Law of the United Arab Emirates (the "UAE Civil Code").

In the DIFC, contracts are governed by the DIFC Contract Law, No. 6 of 2004, which is influenced by international standards and practices. This law covers various aspects of contracts, including formation, performance, breach, and remedies.

In the ADGM, the Application of English Law Regulations 2015 establishes that English common law, including principles and rules of equity, applies, except where it is overridden by ADGM's own enacted legislation. Consequently, English common law principles largely govern contracts in the ADGM.

Top 10 Questions Answered

Here, we address the top 10 questions about entering into contracts in the UAE.

1. Can contracts in the UAE be drafted in English?

Although Arabic is the official language in the UAE, contracts are validly and commonly drafted in English, especially for international business dealings. However, if a dispute falls under the jurisdiction of the local courts, it will be adjudicated in Arabic, necessitating the translation of the contract and supporting documents into Arabic.

Conversely, English is the official language in the DIFC (Dubai International Financial Centre) and ADGM (Abu Dhabi Global Market) free zones, and disputes before the DIFC and ADGM Courts are conducted in English.

Therefore, the dispute resolution clause is crucial in UAE contracts, as it will determine whether the contract needs to be translated into Arabic or not.

2. Is notarization required for contracts in the UAE?

Most commercial contracts do not need to be notarized. However, certain agreements and documents, such as memorandum of associations, power of attorneys, local agency agreements, wills, and marriage contracts are mandatorily required to be notarized as these documents are typically submitted to UAE government authorities.

Contracts with DIFC and ADGM as their governing law also are not required to be notarized, subject to any documents that are required to be submitted to any mainland government authority.

3. Are electronic signatures, such as those from DocuSign or Adobe, legally recognized for contracts in the UAE?

Yes, electronic signatures are legally recognized under the Federal Decree by Law No. 46 of 2021 on Electronic Transactions and Trust Services, subject to certain terms and conditions stipulated under the law. To enhance the security of a signed document, certification service providers licensed by the UAE Telecommunications and Digital Government Regulatory Authority may be used. Currently, recognized providers include DocuSign eSignature, Adobe Sign, Circularo, emSigner, and Click & Sign.

Electronic signatures are also legally recognized in the DIFC through DIFC Law No. 2 of 2017 and in the ADGM through ADGM Electronic Transactions Regulations 2021, subject to certain conditions prescribed under these laws. It is advisable to use a reputable e-signature service provider to enhance the credibility of the signatures.

4. Do contracts in the UAE require witness signatures?

Under UAE laws, commercial contracts do not generally require any witnesses for signatures. However, certain documents and agreements, such as memoranda of association, powers of attorney, local agency agreements, wills, and marriage contracts, do require notarized signatures as these documents are typically submitted to government authorities.

Under ADGM laws, a document is validly executed by a company if it is signed on behalf of the company by two authorized signatories or by a director in the presence of a witness who attests the signature. Thus, witnessing is required when a document is signed by a director alone. In addition, certain documents, such as wills, probate, and any property transfer documents, also require witnessing.

Under DIFC laws, there is no general requirement for signatures to be witnessed, except for certain documents such as wills or property transfer documents.

To enhance the credibility of a document, we recommend using a reputable e-signature service provider such as DocuSign or Adobe Sign. These services are accepted in the UAE, including the DIFC and ADGM, and do not require witnessing by another individual.

5. What are the legal requirements for a valid contract in the UAE?

Under UAE laws, both parties must be in consensus to enter into the agreement. There must be a clear offer and acceptance, and the terms of the contract must be definite and certain. Both parties must also have the legal capacity to enter into the agreement; for instance, a contract entered into by a minor is void ab initio. Additionally, the obligations of the parties under the agreement must be legally justified. According to the Doctrine of Privity, an agreement cannot confer rights or impose obligations on anyone who is not a party to the deal.

Article 257 of the UAE Civil Code protects the principle of freedom to contract, but this freedom is limited by law, good faith, mandatory provisions, and public policy. In addition, under Article 246 of the UAE Civil Code, all UAE contracts are subject to the duty of good faith without exception, although the Civil Code does not expressly define "good faith."

Under DIFC and ADGM laws, the basic requirements for a valid contract are similar to English law. These include a clear offer, an unconditional acceptance, consideration (something of value exchanged, unless the contract is a deed), and an intention to create legal relations.

6. Is there a statutory interest on late payments?

Under UAE laws, Federal Decree-Law No. 50/2022 on the Promulgation of the Commercial Transactions Law stipulates that in the case of commercial contracts, a creditor is entitled to interest for delayed payments if this is contractually agreed upon. The interest rate can either be the rate agreed by the parties or, in the absence of such an agreement, the prevailing market rate, subject to a maximum of 9%.

In the DIFC, the interest rate is based on the average bank short-term lending rate to prime borrowers for the currency of payment at the place of payment. The default interest rate for judgment debts is set at 9%.

In the ADGM, there is no statutory interest on late payments. Interest will be as per the contract or as deemed reasonable by the ADGM Courts. The default interest rate for judgment debts, in the absence of any agreed rate, is set at 5%.

7. How does UAE law handle breach of contract and what remedies are available?

Under the UAE Civil Code, several remedies are available for breach of contract, including specific performance, damages, and termination.

In the DIFC, the Law of Damages and Remedies (DIFC Law No. 7 of 2005) governs breach of contract and available remedies. These remedies include damages, either exclusively or in conjunction with other remedies such as declarations, injunctions, specific performance, damages as an additional or substitute remedy, rescission, rectification, and action for the agreed sum.

The ADGM adopts English common law principles through the Application of English Law Regulations 2015. Consequently, remedies for breach of contract include damages, specific performance, injunctions, termination and restitution, penalties and liquidated damages, and equitable remedies such as rescission.

8. How are contracts in the UAE terminated?

In the absence of any termination clause in a contract, the provisions of law will apply.

Under UAE law, Article 267 of the UAE Civil Code provides that contracts may be terminated by mutual consent, by a court order, or by a provision of law. Additionally, Article 271 states that in the case of non-performance of contractual obligations, the contract will be deemed terminated automatically ("ipso facto") without needing a court order. However, this does not release the parties from the obligation of serving a formal notification unless they agree to dispense with such notification.

The DIFC Contract Law No. 6 of 2004 outlines several grounds for terminating contracts. Under Article 86, a party can terminate a contract if the other party commits a fundamental breach causing substantial detriment, provided the aggrieved party gives notice to remedy the breach within a reasonable period. Article 88 allows for termination if it becomes clear that a fundamental breach will occur before performance is due. Under Article 82, a contract may be terminated if a force majeure event makes performance impossible. Additionally, contracts can be terminated by mutual agreement of the parties involved.

The ADGM adopts English common law principles through the Application of English Law Regulations 2015. As such, a contract can be terminated due to a material or repudiatory breach by one party, mutual agreement between the parties, frustration caused by unforeseen events making performance impossible, the invocation of a force majeure clause, subsequent illegality of the contract's subject matter, impossibility of performance, the bankruptcy or insolvency of a party, or as specified in a termination clause within the contract.

9. What contracts need to be mandatorily subject to UAE laws and local Courts?

Certain contracts entered into in UAE mainland need to be mandatorily subject to UAE laws including the below:

1. Real Estate Agreements: agreements pertaining to UAE-based properties, including transactions such as purchases, leases, and development projects, are required to conform to UAE legislation and are predominantly under the purview of local judicial authorities.
2. Employment Agreements: governed by the UAE labor legislation, employment agreements' disputes are resolved via the Ministry of Human Resources and Emiratization and subsequently, if unresolved, with the local courts.
3. Agency Agreements: contracts with UAE commercial agents are required to be governed by local laws and Courts, if such agreements are sought to be registered with the UAE Ministry of Economy.
4. Governmental Contracts: engagements with governmental bodies or public institutions are mandatorily compliant with UAE statutory regulations and fall under the jurisdiction of UAE judicial courts.
5. Personal and Family Law Agreement: issues concerning marriage, divorce, custody, and inheritance for Muslims are strictly regulated by the UAE personal status laws, necessitating resolution within UAE judicial courts.
6. Maritime Agreements: Agreements concerning maritime engagements adhere to UAE maritime statutes and are subject to resolution in local courts, except where differently agreed upon.

Similarly, in the DIFC and ADGM, contracts related to real estate, employment, or those with the ADGM are subject to their respective free zone laws. Other commercial contracts may be governed by alternate laws, such as those of England and Wales.

10. How are contractual disputes resolved in the UAE?

Contracts can be resolved through the following dispute resolution forums:

(a) Local Courts

(b) DIFC Courts

(c) ADGM Courts

(d) Arbitration

Local Courts are recommended for clients who prefer disputes to be adjudicated in Arabic or are more comfortable with a civil law legal system.

The DIFC and ADGM Courts offer a common law framework where disputes are adjudicated in English. Dubai-based entities may choose DIFC Courts, while Abu Dhabi-based entities might opt for ADGM Courts.

Arbitration is preferred for cross-border disputes as enforcement is often easier, given that many countries are parties to the New York Convention. Alternatively, parties should check whether the jurisdiction where any judgment may be sought to be enforced has a reciprocal arrangement with the UAE for the recognition of foreign judgments.