This article is written by Vandana Shrivastava, a student of B.A.L.L.B.(Hons.) at the Institute of Law, Nirma University, Ahmedabad. The article discusses general Acts that are associated with contract law in the UAE, along with a brief comparison between India’s and UAE’s contract law provisions.
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Contracts are universal. They form a part of our daily lives. Given their widespread usage, the probability of disruptions and breaches in a contract are exponentially high. To combat the same, civilized nations establish laws to govern contracts. It provides remedies to aggrieved parties. One might be curious to learn about contract laws of other countries for work or just out of curiosity. This article is for such people. It specifically concerns and elaborates on the legal provisions on contract law in the United Arab Emirates (UAE).
Major provisions relating to contracts
In the UAE, the provisions relating to contract law are laid down in the Civil Code of UAE, that is based on the Islamic law of the country. The same is followed nationwide. In matters concerning commercial contracts, the Commercial Transactions Law of the UAE comes into force. This article primarily focuses on the underlying contractual provisions of the Civil Code of the UAE.
Civil Code of the UAE
Article 125 of the Civil Code defines a contract as the making and acceptance of an offer by the contracting parties along with an agreement. Such an agreement would be effective on the subject matter of the contract and would impose an obligation on the parties to the contract, which they would be bound to do. There could be more than two parties to a legal contract.
The subject matter of a contract
Article 126 of the Civil Code has laid down the subject matters of a contract. They are as under:
- Moveable or immovable property. It also includes corporeal and incorporeal property. The corporeal property includes tangible property like a car, a watch, a machine
- The incorporeal property includes intangible property like copyrights, patents, goodwill
- Benefits derived from a property
- A specific act or service
- Anything that is not prohibited by the law and is in accordance with public order or morals
The term ‘good faith’ has not been defined in the Civil Code of the UAE but it implies a duty of bona fide conduct, meaning that the parties to a contract shall act in accordance with the legal provisions and custom of the contract and shall abide by the terms of the contract whilst carrying out their duties. Good faith is an implied obligation in the UAE, as under Article 246 of the Civil Code. It is regarded as a significant consideration when a contract is being entered into.
Types of contracts
In the UAE, contracts could be entered into two ways as stated under Article 132 of the Code, orally or in writing, by expressing the intent to enter into a contract.
- The intent to enter into a contract could be expressed in the past or present tense. It could be performed imperatively when the contract has to be performed presently or customarily which is understandable even by a person with the inability to speak; or
- The parties to the contract can indulge in an interchange of acts to represent mutual consent from both ends; or
- The parties could adopt any course to leave no ground for doubt on the establishment of mutual consent.
The parties should ensure that they perform a lawful act by legal means whilst fulfilling their contractual obligations. Entering into a contract to do an unlawful thing or to omit from the performance of a legitimate thing would render the contract unlawful under Article 127 of the Code.
A valid contract is intrinsically and descriptively lawful. The parties to the contract are competent with respect to the subject matter of the contract, are legally empowered and entitled to do so. The subject matter has a lawful purpose and is carried out legally, devoid of any vitiating condition. Valid contracts are defined under Article 209 of the Code.
Article 210 of the Code states that a void contract, unlike the valid contract:
- is intrinsically unlawful and lacks the essentials of a contract; or
- has a defective subject matter or purpose or form; or
- is not in accordance with laws of making a contract and shall, therefore, be deemed affectless and incapable of rectification.
Article 211 states that if a contract is partially void, the same will render the entire contract void. However, in cases where the subject of each part of the contract is separately specified, the remainder that is not void shall remain enforceable. Further, it is stated that if a part of a certain contract depends upon the grant of consent, the entire contract would become effective when the consent is granted. But, if the consent is not granted, only the part that required the grant of consent will become void along with its consideration. The remaining provisions shall remain valid.
Defective contracts could be termed as a hybrid of valid and void contracts. These are termed as voidable contracts. Article 212 illustrates that a voidable contract is the one which is intrinsically valid but it is invalid in form and if the voidable part of the contract is removed, it shall become void again. In simple terms, it is the performance of a legal contract by illegal means; removal of the unlawful means to achieve the end shall restore the validity of the contract. Additionally, it shall be noted that the parties and their heirs would have the right to revoke the contract after issuing a notice to the parties to the contract.
The terms verbal and oral are used interchangeably in a contract. Verbal contracts are prima facie enforceable in the UAE. The enforceability of these contracts is dependent on their legal position. The verbal contract shall fulfil the essential elements of a contract as under Article 132 of the Civil Code. All general provisions associated with contracts under the Civil Code would be applicable on verbal contracts.
If a person stays silent where his statement is needed to ascertain his acceptance, the silence will be regarded as acceptance. This could only happen if there exists a prior dealing between the contracting parties and the offer made is in relation with the same prior dealing or if the offer made is beneficial to the person to whom it has been made.
Any dispute, whatsoever, that pertains to contract law, can be decided by the court of law in accordance with the Civil Code. If there is no agreement among the essential elements of the contract, the contract would not be enforceable. Agreement among non-essential elements shall neither suffice to form a contract nor are they necessary for the same. The court has the discretion to consider the extent to which the contract has been performed. Consideration is not required for a contract to exist in the UAE, but the court could still consider it to check the extent of performance of the contract.
Role of custom and practice in verbal contracts
Customs play a significant role in the determination of the existence of a contract. Past dealings and transactions have evidentiary value in the determination of the terms of the contract. When specific agreements are absent, the rules of commercial customs and practices will be applicable on all matters that are not covered under the Commercial Code of the UAE or other laws that govern commercial matters.
In the UAE, the local customs overpower the general customs. When commercial customs are absent, the provisions of civil matters are applied to the extent that they are consistent with general principles of commercial activity.
A subcontractor is a person who is hired by the contractor or the employer to perform certain tasks under a contract. Here, there will be two contracts. The first one will be between the employer and the main contractor and the second one will be between the main contractor and subcontractor. The two contracts are independent of each other. Article 491 of the Civil Code states that a subcontractor cannot claim the amount due to him from the employer when the contractor is supposed to pay him for the same. However, he can claim the amount from the employer if the contractor assigned to him a work concerned with the employer.
The Court of Cassation (457 Judicial Year 24) held in a decision dated 20 April 2005 that Article 891 and 892 of the Civil Code collaboratively provide that the liability of the main contractor against the employer will always be present but there exists no direct relationship between the employer and the subcontractor. Therefore, in a contract, the rights and responsibilities of the employer and the contractor towards each other have been defined and the employer may choose to not rely on them unless the contract has contrary provisions.
Termination of contract
Article 267 to 273 are concerned with the dissolution of contracts. Article 267 of the Civil Code states that a valid contract is binding on the parties and it could be terminated in three ways:
Termination by mutual consent
Article 268 provides for termination of a contract once the purpose of the contract is achieved. Further, the parties can terminate the contracts when there has been a breach by either of the parties or at the will of either of the parties. ‘Mutual consent’ of the parties is essential for the termination of contracts in these cases.
When the termination is on the will or convenience of either of the parties and there is no breach on contract, the party who is willing to terminate the contract can act unilaterally in pursuance of the same. However, Article 218 of the Civil Code requires that the same should expressly be stated in the contract, otherwise, it wouldn’t be admissible. Furthermore, it should also be mentioned in clear words that such termination by will shall be carried out in accordance with provisions of Article 267.
Article 271 of the Civil Code lays down that the parties can terminate the contracts without judicial interference despite non-performance of the obligations arising out of the contract if the terms of the contract expressly state that notice of termination would not be required. If the terms of contracts are silent on the same, they shall be required to issue a notice of such termination.
Article 247 of the Civil Code states that if one of the parties refrains from the performance of its obligations under the contract, the other party could withhold its performance as well.
Termination by litigation
With regard to any disputes arising in a legally enforceable contract, the parties could approach the court to ascertain the validity of the termination of the contract. If the termination of the contract is illegitimate, the court will grant an order against the termination.
Termination under law
The types of a contract would be dependent upon the laws of the sectors that they are undertaken in. For instance, a principal/supplier cannot terminate a contract without providing ‘material justified reason’ under the UAE Commercial Agency Law. The said law is recognized by the UAE Ministry of Economy and the Courts of UAE.
Further, force majeure will be attracted when a contract is rendered impossible to be performed due to an unforeseeable and an unavoidable event. If the performance of a part of the contract becomes impossible, then the concerned part would be removed and the remainder shall persist. Force majeure is not defined under the laws of UAE which makes the demonstration of an unforeseeable event quite arduous.
Cases on ‘public nature’ are exceptional circumstances where some relief is granted to the performance of the contract. However, this provision is rarely relied upon. The pandemic of COVID-19 could qualify as an exception under public nature. The courts of the UAE did not consider the global financial crisis of 2008 under the category because they opined that economic fluctuations are generally foreseeable.
Difference between Indian and U.A.E contract laws
In India, the matters on contracts are governed under the Indian Contract Act,1872 and The Sale of Goods Act,1930. Contract Law in the UAE is a part of the Civil Code of the UAE. It is not governed under a separate Act. The Civil Code is a religious law, based on Islamic Law, whereas the contract law provisions in India have not been derived from any religious law. The Contract Act in India was established during the colonial era and the basic structure of the Act remains the same. The provisions of contract law are applicable on all contracts in the nation but in the UAE, the application of contract law provisions varies among sectors.
This article gives a broad overview of the contract law provisions of the UAE. It has been stated that the Civil Code has a general application on all contracts. The Articles that are associated with the same have been elaborated in the article and are sufficient to introduce a person to the basic knowledge of contracts in the UAE.
- THE CIVIL CODE Translated from Arabic into English by James Whelan MA (Cantab), Cert. Ed. (London) Resident Manager, Clifford Ch
- The Duty of Good Faith in UAE Contracts: All in Good Faith?
- Verbal contracts in the UAE – is lip service enough?
- Broad Overview of the UAE Contract Law
- How to part ways – the three ways to terminate a contract in the UAE
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