This article is written by Yatin Gaur, a student, pursuing B.A.LL.B. from Hidayatullah National Law University. In this article, the author discusses the key differences between the Indian and UAE contract law, dealing with the topic comprehensively along with making conclusions regarding what all one should know before entering into any contract in UAE.
Table of Contents
Introduction
Indian companies with strong balance sheets, ready access to capital and robust positions in their domestic markets are seeking to expand their businesses to capitalize the international market, especially when the local market has been saturated to an extent. For this very reason, the job of a lawyer nowadays is not only restricted to know the law of the country in which he/she practices but also to have a basic understanding of the laws prevailing in other countries as well in order to cater to such client-specific needs.
One such country that attracts maximum eyeballs of the Indian investors is the United Arab Emirates (UAE). UAE with its investment-friendly policies, exceptional growth rates, high standard of living, world-class infrastructure, and a dynamic open market is one of the best destinations for foreign direct investment. This is coupled with a favorable tax regime (currently value add tax charged is 5%) along with full repatriation of capital.
But before doing business in UAE there are some essential things that must be kept in mind as the Indian and UAE law differs in various aspects. This article will primarily focus on the difference in the contract law of India and UAE, giving a basic understanding of the topic that, what all things a lawyer needs to take into account while drafting a contract in UAE.
But before proceeding to discuss the major differences that exist between the contract law of India and UAE, it is essential to get a basic understanding of the legal system that operates in India and UAE and how it differs.
Common law and Civil law system
India follows the common law system while the UAE follows the civil law system. This essentially means that Indian law apart from relying excessively on statues and codes also gives immense importance to judicial pronouncements as well. For example, since there is no statute or code in order to establish the offense of corporate fraud so reliance has to be placed upon the decided case laws.
While the civil-law system that is followed in UAE, places much more reliance on the codes and statutes and judges have very limited authority. The precedents don’t have an authoritative value but serve only as a guiding principle. Due to which there can be conflicting judgments upon the same issue depending on the interpretation of each judge.
However, this can be managed as the parties can also choose to litigate their dispute in courts of the Dubai International Financial Centre (DIFC), in case of commercial arrangements. The DIFC courts can take up matters even when the businesses are based outside of the DIFC. These courts have independent authority and are based upon the common law judicial system. Unlike other UAE courts which use the Arabic language during proceedings, these courts use the English language for the convenience of the parties.
Source of contract law
In UAE
In the UAE, the contractual agreements are governed by the UAE Civil Code. It deals with all the civil rights, remedies and obligations of the contracting parties. Further, along with the civil code, the commercial code also has applications in case of commercial contracts.
Apart from this, there are other various rules and regulations as well, dealing with other practical forms of the contract having a specific application. for instance contracts with regards to the sale of ships and other land transactions.
The Civil Code of UAE is based on Islamic law principles. The peculiar feature of civil code is that it divides the term of the contract into two parts i.e. an essential element of the contract (which gives it a legal force, or the fundamental basis of the contract) and the second part that stipulates the specific details of the contract which in fact can affect the binding force of its terms but not essentially the existence of the contract.
In India
The Indian Contract Act of 1872 governs the contractual relations in India. It lays down provisions on how to enter, execute, implement a contract, and also provides remedies in case of its breach. It also discusses specific forms of contract such as indemnity, bailment, pledge, agency, etc.
Apart from this, there are some other acts as well such as The Sale of Goods Act, The Specific Relief Act, Transfer of Property Act, etc. Most of the contract law in India is based upon the common law system of the UK. Further, it provides a huge scope for the parties to decide upon the terms of the contract barring only specific conditions in which the contract cannot be made to the contrary.
Now we will proceed towards the major differences existing between the contract law of India and UAE.
Principle of good faith
Article 246 of the UAE Civil code very clearly states “a contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith“.
So, essentially speaking, the most significant and the basic difference between the contract law of India and UAE is that all contracts in the UAE, without any exception, must be in accordance with the principle of good faith’. While in India the law does not impose any obligation as such that every contract must be subject to the principle of good faith except certain specific contracts.
But a more important question is, what does it basically signify to use the expression ‘good faith’ in the context of UAE contract law and what is the purpose that it serves?
Definition and object
Though the UAE Civil Code gives no precise or clear definition of the term ‘good faith’. But it can be defined as “a duty or an obligation imposed by the law on the contracting parties to not to abuse or violate the rights of the other party”.
In other words, it can be said that it is a mandatory requirement imposed by the law to guard the legitimate interest of the party contracting. It imposes the duty on each party to act with enough honesty and reasonability to not cause any wrongful loss or injury to the other contracting party.
It expects the contracting parties to act in accordance with the existing law, customs, overall nature of the contract and to observe the specific terms of the contract.
Scope
The principle of “good faith” is strongly codified in the Civil Code. It is an automatically implied obligation thus need not to be expressly stated in the terms of the contract. It has a very wide ambit and application.
But in order to bring out more clarity regarding the scope of “good faith,” there are two other very important questions of consideration.
- Is the principle of “good faith “applicable in the case of contracts governed by foreign law?
The answer to this question cannot be an absolute yes or no. As in certain circumstances, it may be possible while in others it may not hold true.
The determining factor here will be that if the UAE courts agree upon the question of jurisdiction to adjudge the case brought before them then the answer to the above question will be in affirmative otherwise not. Further, if the court accepts to decide on the issue, then, it will now be judged in accordance with the principle of “good faith” and can considerably affect the outcome of any contractual dispute.
- Does the principle of “good faith” apply in the case of pre-contractual negotiation?
The answer to this question is in affirmative. This can be easily understood with the help of the following example.
For instance, If one party of the contract makes any fraudulent statement to induce another party to enter into the contract. The consequence will be that it will render the contract void due to the absence of mutual consent. The aggrieved party, in this case, can approach the court to seek damages.
Thus, it can be summarised that this principle applies at all stages which can include the pre-contract stage, in negotiations, the period of the performance of the contract, during the termination and even after the end of the contract.
Significance of “good faith” while deciding the case
This takes us to our next question that why is it so essential to discuss the principle of good in detail i.e. what is the underlying significance and consequences of this principle in the civil code of UAE.
The principle is so comprehensive in its scope and due to its implied nature, can significantly influence the decision in a contractual dispute. It basically implies that the terms of the contract will simply not be sufficient enough to decide upon an issue, rather a much greater weightage will be given to the duty of good faith as well. This may also mean that in some cases the principle can even override the terms of the contract entered also.
So we can conclude that the duty of good faith is indisputably a quintessential consideration whenever discussing and eventually entering into a contract in the UAE.
Exception in Indian law
In the Indian Contract Act, 1872 (ICA), neither there is a clear mention of the doctrine of good faith nor it is essential to have a ‘good faith’ clause. However, it’s implied reference can be traced in certain provisions of ICA.
Section 223 of ICA
Section 223 of ICA imposes the duty on the principal to indemnify the agent for any loss or injury that may result from any act done in good faith. Let us understand it by an example: “Y” the principal authorizes “ B” his agent to sell his car. “B”, acting in good faith, finds a suitable buyer for the same and sells off the car. But later on, it is found that “C” was the true owner of the car. After knowing about the transaction “C” sues “B” for recovery of loss. In such a case, “Y” will be compelled to compensate “B” for any damage that has been incurred as a result of obeying “Y’s” direction.
Insurance Contract
Insurance contracts are based on the doctrine of “Uberrima Fidei” which means “ utmost good faith”. In such contracts, the law imposes the duty on the contracting parties to disclose all the material facts before entering into such contracts.
The law assumes that since some of the material facts may be in the sole knowledge of the insured, it is essential for the parties to observe a higher degree of good faith. The consequence of suppressing any such material information is that it renders the contract void.
Misrepresentation includes only fraudulent behavior
Indian and UAE law differs significantly in their definition of misrepresentation. To understand this we will first consider the law that is there in India and then the case of UAE.
What does the law of India say about Misrepresentation?
In India, misrepresentation is defined under Section 18 of the Indian Contract Act which includes any innocent misstatement, false statement or breach of duty without an intent to deceive the other party to enter into the contract. It covers the case of both innocent as well as negligent misrepresentation.
The consequence of such agreements is that these are voidable at the option of the party whose consent has been so obtained, as mentioned under Section 19 of the Indian Contract Act. Though it is also important to note that no such remedy is available with the party if they could have discovered the truth with ordinary diligence.
Misrepresentation under Civil Code of UAE
But the definition of misrepresentation as stated under the Civil Code, Article 185, UAE departs heavily from the definition provided by the ICA. As it states that:
An act of fraud committed by means of words or deeds that aims at deceiving the other party to enter into the contract which they have not contracted will amount to Misrepresentation.
So, essentially speaking as per the law of UAE, the statement must be a fraudulent statement to be classified as misrepresentation i.e. coupled with the intention to deceive. Hence, it does not include innocent or reckless statements within its ambit.
Further, it is also important to know that the UAE law specifies that if one party is aware of the misrepresentation but still does not say anything and has consented to the same then cannot terminate the contract in future.
Difference between the Position in India and UAE
This is something completely different from what the Indian law says, as according to ICA “Fraud” and “Misrepresentation” are two completely concepts explained under Section 17 and Section 18 respectively. The major difference between the fraud and misrepresentation can be understood as follows:
- Though both misrepresentation and fraud share the similarity that the statement made must be false. But the difference lies in the fact that in the case of misrepresentation, the person making it believes in the truth of the statement. While in case of fraud, the person making the statement either knows the statement is false or does not believe in its truth.
- To establish fraud, it is important to prove that there was an intention to deceive the other party while such an intention is absent in the case of mischief.
- According to Section 19 of ICA, though the remedy provided in case of fraud and misrepresentation is the same but apart from that fraud also constitutes a tortious offense. But no other remedy is present in case of innocent misrepresentation.
Liquidated damages
General Definition
Liquidated damage is nothing but essentially refers to a predetermined estimate of monetary compensation payable in case of a specific breach of contract resulting in some loss, detriment or injury to a person’s rights or property. In simpler terms, it can be understood as an arrangement between the parties by which they mutually decide upon the amount of compensation to each other in the event of a breach of contract in the future.
Position in India
The Indian Contract Act, unlike the other common law countries, does not distinguish between the penalty and liquidated damages. So, according to Section 74 of the Indian Contract Act, if any two parties while entering into the contract have expressly mentioned the amount of compensation in the case of breach of contract.
The injured party will be entitled to receive reasonable compensation from the party who has broken the contact provided it should not exceed the amount that was mentioned in the contract.
In other words, it can be put that, in case if the amount of compensation is pre-determined by the parties in the event of the breach of a contract. This will only entitle the injured party to receive a reasonable amount of compensation for the loss not exceeding the amount mentioned in the contract.
But will not conform to the injured party the right to claim the whole of the amount that was named in the contract. Rather the amount mentioned shall be construed as a maximum sum which the injured party can receive. However, the actual amount of compensation is to be determined by the court.
Though the most important point to be noticed here is the court cannot award higher compensation than what was stipulated in the terms of the contract.
Rationale: The reasoning behind not to award higher compensation than stipulated will go against the basic principles of contract law and will amount to the insertion of a term to which the parties never gave their consent. Apart from this, another reason is that the contracting parties are expected to take due diligence before signing on the dotted lines. So when the parties mutually decided some amount as “reasonable”. Then there remains no point to allow compensation more than what is agreed upon initially.
Position in UAE
Article 390(1) Civil Code of UAE confers the contracting parties with the right to define the amount of damages incurred in case of breach of contract. However, this does not apply to each individual case. In simple words, it can be said that it provides the contracting parties with the right to decide a specific amount of compensation for a specific breach of contract.
But interestingly, though Article 390(1) Civil Code recognizes the right of the contracting parties to determine in advance the amount of compensation to be payable in case of breach of contract. But it is followed by Article 390(2)of Civil Code that confers the courts with the power to adjust the compensation pre-determined by the parties after taking into cognizance actual damages suffered by the party claiming compensation. The authority vested in the courts to alter the compensation previously decided as per the terms of the contract appears to be in contradiction with the right granted to the parties to determine the damages in advance.
Principle of Garar
This is because the liquidated damage clause as mentioned under Article 390(1) Civil Code stands in sharp contrast with the Islamic law principle of Garar which means “deceptive uncertainty”. This principle prohibits any agreement, in which the amount of damages is predetermined.
Rationale
Liquidated damage clauses suffer from a substantial risk that the pre-decided compensation may deviate significantly from the loss actually sustained due to the actual breach of contract. So, It basically aims to protect the interest of the contracting parties, because as per the principle it is impractical and logically incorrect to quantify the amount of damages that can result from unforeseen circumstances in the future.
Thus, the party invoking a liquidated damage clause will be entitled to compensation that may either exceed or may fall short of the actual loss sustained. It will therefore clearly violate the Islam doctrine of Garar.
So, Article 390(2) basically caters to the function of aligning the concept of liquidated damages as present in common law countries with the Islamic Law principles that are the principal source of UAE Law. On one hand it allows the party to determine the damages in advance but also at the same time confers the courts with the authority to adjust compensation in accordance with the actual loss suffered to avoid any undue advantage or loss caused to any party due to breach of contract.
Where do Indian and UAE law basically differ?
In both the countries India & UAE, the contracting parties are entitled to insert the liquidated damage clause in order to minimise chances of any future dispute. Further in Section 74 of ICA & Article 390 (2) of the civil code of UAE, provides scope to the judiciary to adjust the claim in accordance with reasonable damage suffered by the party due to breach of the contract. But it would not be wrong to say that the scope of the power vested in the UAE courts is more than what is conferred to the Indian Courts.
As, in India, the courts do not have the authority to exceed the compensation than what was previously decided as per the terms of the contract. But, UAE courts have this power to even order compensation exceeding the original term of the contract. Though there are not many case laws available to support this. But this can be substantiated by referring to the Official Commentary on the civil code, which is issued by the UAE Ministry of Justice, (concerning Article 390) specifies that makes the position of UAE law concerning liquidated damages very clear.
It states that if the loss suffered is equal to the amount of the liquidated damages as mentioned in the agreement then the same shall be upheld. However, if the situation is such that if the liquidated damages are not proportionate to the loss sustained. Then upon the request of either of the parties, the judge is entitled to adjust these damages in accordance with the actual loss suffered. This includes both increasing as well as decreasing the amount. This stands in unity with the Shari’ah principles according to which the compensation awarded must be equal to the actual loss suffered.
Memorandums of Understandings (MoU’s)
Memorandum of understanding essentially is a precursor formal document signed by the parties with an intention to enter into a proper contract in the near future. It sets up a framework under which the parties will collaborate in future to enter into a full-fledged legal relation.
Position in India
In India, MoU’s are generally not enforceable till the time it cannot be ascertained that the contracting parties had an absolute intention to enter into a legally binding contract. So, if in case the element of intention is absent from the MoU then it will render the MoU unenforceable and incapable of specific performance. Therefore intention plays a very significant role in determining the enforceability of MoU’s in India.
The intention of parties is something that has to be gathered from the contents and the material clauses of the MoU. Hence, the legality of the agreement is something that will be decided by the extent and scope of rights, duties, obligations it confers to the parties.
Therefore, due caution needs to be exercised while drafting a Memorandum of Understanding taking full care of the language, titles, and clauses used. As, certain specific clauses with regard to jurisdiction, indemnification, the law applicable do have a binding effect on the agreement.
This importance can be understood by considering the fact that the use of the word ‘shall’ will give a binding effect to the MOU while the use of the word “should” a non-binding effect. These difficulties though can be eliminated by including a clause in the agreement that it is not essential that the agreement will translate into a legally binding contract in future.
Position in UAE
The main difference in the case of UAE is because of Article 141 of the UAE Civil Code which states that a contract basically requires two parties to agree upon the essential element of rights and duties and other lawful considerations which are essential for the parties concerned.
It also stipulates that in case if the party already agreed upon the essential terms of the obligation leaving out other non-essential details to be negotiated in future. Even then the contract is deemed to be made until and unless the parties specifically mention that in the absence of such details the contract shall not be regarded as made.
This means the sense of cautiousness demanded in the case while signing the MoU in UAE is more as compared to India. Because even small ambiguities in terms of the contract can inadvertently be construed as an intention to enter into a legal relation. Therefore will bind the parties to certain terms of the agreement which were left to be negotiated in the future.
In such cases, it generally happens that if the essential terms have already been agreed upon and parties have not expressed mention in MoU that they don’t have the intention to enter into a contract and negotiate further. Then the UAE Courts have the power to enter the missing details and terms & hence complete the contract.
Moreover, the UAE Civil Code does not describe what the “essential” elements of a contract are, which leads to further ambiguity. Apart from this if in a situation that it is found that if a party did not finalize the details of a contract & is also in talks with some other third party. Then the conduct of that party will make it liable for acting in bad faith and will consider it as a breach of contract.
Therefore it is imperative to have a comprehensive and complete idea about all the essential and minute details before entering into any MoU, to start any business relationship or to take legal advice to avoid any chances of dispute in the future.
Execution Requirements
As legal professionals, we often encounter questions regarding whether there exists any scope of verbal contracts ? or whether every agreement needs the validation of a stamp or can also be made on non-stamp paper as well? But essentially all these questions revolve around the concept of execution of the contract.
Execution of contract refers to the signing of the contract and completing the formalities for it to become effective to bind the parties to the contract.
Though in both U.A.E.and India verbal contracts are also enforceable and forms a major part of the transaction. But it is always desirable to have the contract in writing stating all the terms and conditions to avoid any future dispute. Therefore, written contracts are of indispensable significance especially in the case of business transactions.
Position in India
In India, the law dealing with the stamping of documents and agreements is The Indian Stamp Act, 1899. Stamping of the document gets the agreement registered under the Indian Registration Act, 1908 ensuring its admissibility and enforceability in court.
Agreements that are must be made on stamp paper and registered
The Indian Registration Act primarily deals with the registration of documents. Section 17 of the Indian Registration Act, specifically mentions certain agreements that cannot be made without stamp paper and are to be compulsorily registered.
This includes:
- Agreements related to immovable property i.e. sale deed, lease, gift deed, lease, etc.
- Instruments involving movable property of valued INR 100 and above.
- Lease deed exceeding the period of one year.
- Instruments that transfer or assign a decree or order of Court for a value INR 100 and above, and immovable property.
Agreement made on stamp paper but don’t require registration
There are certain agreements described under the Indian Stamp Act which require to be made on stamp paper but need not be essentially registered including lease deed for a period less than a year, power of attorney agreements excluding the power to sell property, memorandum of oral partition etc.
Agreements that are not made on Stamp Paper
The only issue with the unstamped agreement is that Section 35 of the Stamp Act renders it inadmissible in a court of law. However the same can be made admissible in court on paying deficit penalty amount which depends upon the state to state. But these then lead to unwanted delays in litigation and additional professional costs.
Position In UAE
In the UAE, execution of a contract requires Notarisation of documents, which is a process that serves as proof that the relevant document is authentic and can be trusted upon.
In UAE also not every contract needs to be in writing and notarized to be effective. But only certain specific agreements need to comply with this condition. These primarily involve agreements related to the transfer of real estate and commercial agency agreements which are mandatory to be registered under the UAE Ministry of Economy.
Conclusion
From all the discussion held above, it will not be wrong to conclude that due diligence and an extreme amount of care is required before entering into any contract in UAE as the law of both the countries differs significantly on various aspects. To summarise it can be said that one must take special care of the following points.
- It is advisable to have a comprehensive idea of the terms of the contract before signing the MoU so the chances of future negotiation are minimal or either the parties should clearly expressly mention their intention to reconsider the term if any.
- Despite this, it will also be beneficial for the parties to take help from a solicitor before signing any MoU.
- The contract must be drafted considering that in UAE misrepresentation only includes fraudulent behavior.
- Limitation clause does not imply that courts can exceed the amount of compensation.
- Parties must ensure to act in good faith at all stages of the contract whether it is the pre-negotiation stage, during the performance of the contract and even after termination. As the obligation to act in good faith is implied into all UAE contracts.
- The dispute resolution clause must be drafted with due consideration stating the choice of law applicable and jurisdiction as per the mutual consent of the parties. Moreover, it should also be kept in mind that since the court judgments are difficult to enforce overseas thus arbitration awards are more desirable.
- While preparing the dispute resolution clause the following it is essential to take note of the following considerations:
- Value of the contract and compensation in case of breach ( as if not pre-decided judicial processes can be lengthy and costly).
- Confidentiality of the matter as such important details may become known to the public in case of court proceedings.
- Nature of the particular contract and its technicality.
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