This article is written by Rajat Chawda, the Institute of Law, Nirma University. In this article, he talks about the main principle governing the contract law in the UAE.
Everyday people enter into a contract either directly or indirectly. From purchasing a simple pen to a multi-billion dollar business company, the law of contract is involved. People into various contracts like license-licensee agreement, employer-employee agreement or service rendering agreement, etc. Every country has its own separate legislation governing the contract formation. This article will address the law governing the contract formation in (United Arab Emirates) UAE, how it is formed, what is its element and how it can be terminated.
Formation of contract
In the UAE, the Civil Code applies and like all the common law principles of contract law the same principles or elements apply for any contract in UAE law.
The formation of a valid and accurate contract is of great importance to a business. In order to form a contract, there should be an offer from one side of the party and acceptance from the other party. The following things should be included in a contract:
- The names of the parties.
- Subject-matter of the contract.
- The obligations of parties.
- Time of performance of the obligations by parties.
- Consideration to be paid.
- Termination of contract.
- Breach of contract.
Signing a contract
Any person is eligible to sign a contract unless he is specifically removed from exercising such capacity or restricted by any other provision of UAE law.
A part may also empower some other person to sign the agreement on their behalf (delegation), through a power of attorney. While signing a contract the delegated authority should:
- Should clarify the other party that they are signing under delegated authority.
- Only work under the scope of their delegated authority.
A company can also sign contracts if it is permitted to do so. Documents of the company should be referred to ascertain whether it is legally permitted to sign or not.
To prove the authenticity of the relevant documents provided for the contract, appropriate notarization is required. There are certain agreements which need to be in writing and authorized by way of notarization to be effective. An agency agreement is one such example which needs to be registered at the UAE Ministry of Economy.
Main principles governing UAE contract law
Contract of adhesion
As a general rule, in UAE, it is practised that the courts are not allowed to interfere with the terms of contract which parties agree in an agreement. This provides protection to parties that the terms they agree upon will be enforceable and provides them to enter into a contract freely. The contract of adhesions is an exception to this practice. Article 248 of the UAE Civil Code empowers a judge to remove terms of an agreement that are considered as unfair to the adhering party. Through this article, the parties cannot prevent the judge from interfering and imposing his authority on the terms of the agreement. If the parties try to do so, the agreement will be considered an unenforceable agreement.
So, How will a standard contract between consumer/purchaser or any other contract be considered as a contract of adhesion? The following condition needs to be satisfied:
- As per Article 145 of the Civil Code, the supplier or the party at the higher end of the bargain shall provide the standard terms and conditions to the consumer and these should be similar to the terms & conditions provided to others.
- The terms and conditions offered should be considered non-negotiable.
If the following conditions are satisfied the contract of adhesion will be enforceable. If the contract is amended even a little bit it won’t be considered as a contract of adhesion but as any other enforceable contract.
Principle of good faith
As per Article 246 of the UAE Civil Code, a contract should be performed in a good faith based on its terms. It is an automatically implied obligation to act in good faith in all UAE contracts, strongly codified in this Article. Under the code, to act in ‘good faith’ means to not use the terms of a contract to abuse the rights of the other contracting party, to act reasonably & moderately, and to cause damage to the other contracting party.
The code does not define what is meant by ‘good faith’ and it is left open on the court’s discretion to determine from case to case what will be constituted as ‘good faith’ in a contract. It is a settled norm that ‘good clause’ in general requires to consider the legitimate interests of the other contracting party. Therefore, while contracting a party should consider this principle extensively to avoid disputes in the future whose consequences will harm the contractual relationship between the parties.
Termination of contracts
The provisions to terminate a contract are provided under Article 267. This article states that “If the contract is valid and binding, it shall not be permissible for either of the contracting parties to resile from it, nor to vary or rescind it, save by mutual consent or an order of the court, or under a provision of the law”. The following are the ways to terminate a contract:
Termination by mutual consent
Most of the written agreements contain a provision for how the parties should part ways in case of breach by either of the party (termination: ‘for cause’) or at the will of the party (termination:’for convenience’). This written agreement constitutes an agreement to terminate a contract on mutual consent of the parties, satisfying requisites of Article 267.
If the agreement expresses a specific situation in which the contract will immediately be terminated, the contract will be immediately terminated when such circumstances occur. If otherwise, a notice of termination has to be delivered to the opposite party to effect the termination as per Article 271 of the Code.
In case of termination for convenience where no breach has occurred and such provision has been included in the agreement, such termination is allowed under Article 218 of the Code. The inclusion of such provisions in the agreement signifies the parties consented mutually for such termination.
It is also worth noting that by the provision of Article 247, a party is empowered to perform his part of the contractual obligation if another party has neglected to perform his part of the obligation.
Termination through litigation
In case parties did not add a ‘mutual consent termination’ clause in their agreement. Any of the parties can reach the court to terminate the contract.
Termination in accordance with law
- Specific Laws
There are specific laws legislated to govern specific legal disputes like labour laws, cyber laws, etc. The specific law must be considered while terminating a contract.
- Force Majeure
An external unforeseeable event outside the control of both the parties which renders the performance of the contract impossible to perform. If the contract is partially performed, the terms which were not performed will be terminated. The procedure to prove this event to make impossible the performance is not defined under the UAE Code.
- Public Nature
In the situations of exceptional ‘public nature’ circumstances because of which the party cannot perform his part of the contract, then the exemption is permissible.
Contractual & tortious liability
It is very important to ascertain the rights and obligations of parties arising out of the failure of one party to honour the terms of the contract. Article 124 of the code states the personal obligations or rights that will emerge out of dispositions, legal circumstances and the law.
To ascertain whether an act or omission is a breach or not, reference needs to be given to the contracts, the independent acts, actions that can cause harm, and the law. This provision deals with only obligations which arise out of the breach of contractual terms and is termed as contractual liability. To claim compensation for contractual liability, the party claiming compensation must prove that there exists a breach by the opposite party and damage has been caused in consequence of that breach.
The damage caused to the party can include a loss of opportunity, consequential damage, interests and moral damages, loss of profits or direct damages. Also, if there is no predetermined amount fixed by the contracting parties to be compensated for the damage caused, the court is empowered to grant the same on a factual basis. Damages like consequential damages can also be claimed under the code.
Article 292 and the explanatory note of Article 389 provides for loss of profits in the code (a tortious liability). The code clarifies that the damages pertaining to loss of profits must be specific and certain in future and should not be based on probable or hypothetical damages. Even speculative damages cannot be claimed under the code. The moral damages can be claimed on the infringement of liberty, dignity, honour, reputation, social standing, and financial condition.
Beware of agreements to agree
Let’s consider an example where a builder contracts with a person to build a house for him. They agreed on the amount to be paid and the time to be taken by the builder to complete the task, while in the agreement the person also consented to agree on the future dealing which may arise while performing the contractual obligation. This is an agreement to agree.
Under English law, such agreements to agree in the future are generally not capable of being enforced.
Contrary to this, Article 141 of the Code provides that the parties to a contract must agree on the essential elements of the obligation, but that they can leave matters of detail to be determined at a later date. Therefore, under UAE contract law, parties may be well advised to expressly state that there is no intention that the parties will be bound by Article 141, unless and until an agreement is entered into in writing between the parties.
There are some agreements whereby the parties to a contract wilfully restrict the liabilities of each other while paying compensation for a breach. Article 390 of the code states that the contracting parties may fix in advance the amount of compensation which needs to be payable under terms of a contract or through a separation agreement. The provision focuses on a liquidated damages clause, not a clause to limit the liability or exclude it completely in certain types of loss. When the predetermined limited compensatory amount is less than the harm caused to the party, the court strikes down this arrangement and awards compensation accordingly.
Ingredients of misrepresentation
Misrepresentation is one of the alternate causes of action for a breach of contract whereby one of the parties is factually deceived by the other which induced him to get into contract. This includes statements made by one party which are subsequently proved to be untrue. In English Law, misrepresentation includes both innocent and fraudulent misrepresentation.
Under Article 185 of the UAE Code, misrepresentation will only be considered when a fraudulent act is involved. Misrepresentation will happen when one of the parties deceives the other party through fraud, word, or by deed, which induces the other party to enter into a contract. Therefore, getting deceived is the crucial element to constitute misrepresentation as to a cause of action. A deliberate omission may also constitute misrepresentation.
Contract law is based on the maxim ‘pacta sunt servanda’, i.e., all agreements should be maintained. The main motive behind any contract law is to make an agreement between individual parties official and enforceable. The legislation acts as a mediator between the parties so as obligations of the contract are honoured. In case the obligations are not upheld by one party, appropriate remedies are available to compensate the other party,
This can be also understood from the UAE Law. It recognizes contract enforceability and even discourages the court from interfering with the term and only acts as a mediator (except for the contract of adhesion).
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