The UAE's new Civil Code: key changes and its practical application 

Article 19 establishes that contractual obligations shall be governed, in form and substance, by the law expressly agreed upon by the parties. Only if the contract is silent will (a) the law of the State where the parties have a common domicile apply, or (b) if the parties have different domiciles, the law of the State where the principal obligation of the contract is performed shall apply, unless it appears from the circumstances that another law was intended to be applied.

Whilst the Old Law does recognise parties' choice of law, in practice the UAE Courts rarely (if ever) apply foreign law. The changes in the New Law may indicate a shift in this approach, such that we may see the onshore courts applying foreign law (and possibly also hearing expert evidence on foreign law).

Article 106 sets out clearer criteria for determining whether a party's exercise of its rights is 'abusive'. Article 106(2) specifies four circumstances in which the exercise of a right is unlawful: (a) where a right is exercised with malicious intent; (b) where the interests pursued are contrary to the law, public order or public morals; (c) where the desired interests are disproportionate to the harm caused to others; or (d) where the exercise exceeds the bounds of custom and usage.

Whilst the abuse of rights doctrine existed under the Old Law, Article 106 now codifies the doctrine with greater precision. The introduction of a proportionality test (limb (c)) is significant. It requires parties to exercise their contractual rights in a manner that is commercially reasonable relative to the harm caused. It remains to be seen how courts will apply the criteria set out in this provision, in particular whether the circumstances listed in the article will be treated as cumulative conditions or rather alternative indicators that courts rely on when determining abuse of rights.

Article 119(1) provides that if the wording of a contract is clear, it may not be departed from by means of interpretation to ascertain the will of the contracting parties. However, where there is scope for interpreting the contract (i.e., because of ambiguity in the drafting), Article 119(2) requires that the common intention of the contracting parties must be sought without being restricted by the literal meaning of the words. Guidance shall be taken from the nature of the transaction and the honesty and trust that should exist between the contracting parties in accordance with current custom in transactions.

The New Law retains, in substantially similar terms, the existing rules on contractual interpretation found in Article 265 of the Old Law. While this does not represent a change in approach, the retention of these principles provides continued certainty that UAE Courts will interpret contracts in accordance with the parties' common intentions and the ordinary meaning of words.

The New Law codifies the obligation to conduct negotiations in good faith and extends this to: (i) negotiations being terminated in good faith (and a party can now be held liable for terminating a negotiation in bad faith); and (ii) an obligation to disclose important and decisive information, relevant to the consent of the other party. Deliberate failure to provide a material statement affecting the validity of the contract is explicitly recognised as an instance of bad faith. Importantly, parties are not permitted to limit, amend or waive this disclosure obligation.

Good faith was a general principle under the Old Law, and so, for example, a duty to disclose material information in negotiations could be inferred. However, the Old Law did not expressly recognise a party's duty to negotiate in good faith in pre-contractual negotiations and did not explicitly impose liability on a party for a failure to do so.

Under the New Law, parties are now expressly liable for negotiating or terminating negotiations in bad faith, giving a party recourse to damages even where no contractual relationship was formed. Although the text does not state this expressly, liability arising from terminating negotiations in bad faith would likely be tort liability. However, Article 121(3) expressly excludes liability for lost profits or opportunities unless otherwise agreed by the parties.

The changes suggest that the UAE Courts may be permitted to consider representations and statements made during the course of pre-contractual negotiations to determine liability for bad faith pre-contractual conduct.

An express statutory regime for framework agreements has been introduced. Article 138 provides that a framework agreement is a contract whereby the contracting parties define the essential terms governing the contracts they conclude between them in accordance with the provisions of this agreement, and this agreement shall be considered part of those contracts, unless otherwise expressly or impliedly agreed.

Framework agreements had no express statutory basis under the Old Law. While such arrangements were commonly used in practice, the absence of a statutory definition meant there was uncertainty as to: (a) the enforceability of framework agreements themselves; and (b) the legal relationship between the overarching framework agreement and individual call-off contracts concluded under it.

In light of the New Law, procurement and supply chain arrangements now have a clearer legal foundation. Parties can structure umbrella agreements with greater confidence that these arrangements would be enforceable.

The New Law, at Article 224, gives the court discretion to reduce an onerous obligation to a reasonable limit or rescind a contract. This discretion arises where exceptional and unforeseen events render performance of a contract onerous on a party, such that it would threaten heavy loss on that party. The New Law provides that when exercising its discretion, the ourt may balance the interests of both parties. Any agreement to the contrary shall be null and void.

The New Law does not materially change the substance of the force majeure rule. Similar to Article 273 of the Old Law, Article 236 of the New Law provides that where a force majeure event renders the performance of an obligation impossible, the corresponding obligations of the parties lapse and the contract is automatically dissolved. Specifically for lump-sum muqawala contracts, Article 829(3) empowers the court to extend time, increase or decrease remuneration, or rescind the contract where "exceptional general circumstances" undermine the "financial basis" of the contract.

The New Law recognises that there may be instances where unforeseen events render performance so onerous that it justifies rescinding the contract in its entirety. In contrast, the hardship provision contained in the Old Law was expressed in narrow terms, and provided only that a judge could reduce the burdensome obligation to reasonable limits, whereas under the New Law the court has wider discretion to rescind an overly burdensome contract.

It remains to be seen how courts will interpret what constitutes an “onerous” obligation for the debtor threatening it with a “heavy loss”. However, based on similar mechanisms adopted in other civil law systems, the threshold is likely to be high, and courts would typically refrain from modifying the contract unless the obligation becomes highly burdensome for the debtor.

The recent regional conflict in the Middle East may prompt parties to seek a rebalancing of their contractual obligations on the basis of hardship. In circumstances where the conflict has made contractual performance more “onerous”, parties may look to Article 224. In such circumstances, a party would need to demonstrate that while performance remains possible, the cost or difficulty of doing so has increased to an extent that renders the obligation excessively “onerous” and imposes a disproportionately heavy burden.

Equally, parties may look to rely on force majeure to terminate their contractual obligations. However, such claims are likely to face a high threshold. Under UAE law and the available case law, the party invoking force majeure will need to demonstrate that the regional conflict rendered contractual performance objectively impossible, rather than merely more difficult or costly, and that it was the direct and sole cause of the resulting non-performance.¹

Article 340 provides that courts retain the power to reduce liquidated damages that are disproportionate to actual loss. Article 340 expressly sets out the grounds on which a court may reduce liquidated damages, including where the assessment was exaggerated or where the original obligation has been partially performed. The New Law also expressly permits a creditor to claim amounts exceeding the agreed compensation where the debtor committed fraud or gross fault, which is a remedy not expressly provided for under the Old Law.

Whilst the Old Law did permit a court to amend a liquidated damages provision, it did not articulate in express terms how or when this power should be exercised. The New Law provides welcome clarity in this regard.

The New Law includes a number of provisions specific to construction contracts. Key changes include:

• Notice obligations (Article 816(3)): Contractors must immediately notify employers of any defects in employer-supplied materials or designs, or other factors impeding performance. Failure to notify renders the contractor liable for all consequences arising from such negligence.
• Remedies for defective work (Article 818): If a contractor performs work defectively, the employer may issue a formal warning requiring correction within a reasonable period. If the contractor fails to comply, the employer may terminate or appoint another contractor at the first contractor's expense - without necessarily requiring prior approval from a dispute resolution forum.
• Decennial liability (Articles 821-824): Engineers and contractors remain jointly and severally liable for ten years for any total or partial collapse, including defects threatening structural safety. Exemption clauses are void. Importantly, the New Law expressly excludes subcontractors from the scope of decennial liability, limiting it to the employer-engineer-main contractor relationship.
• Engineer's liability (Article 822): Engineers are liable for design defects if their role is limited to design, or jointly and severally liable with the contractor for execution defects if their role is limited to supervision.
• Hardship in lump-sum contracts (Article 829(3)): Courts may restore contractual equilibrium where exceptional unforeseeable circumstances collapse the financial basis of a lump-sum contract, including by extending the performance period, adjusting remuneration, or ordering rescission.
• Termination for convenience (Article 836): Employers may withdraw before completion, provided contractors are compensated for all expenses incurred, work completed, and what they could have earned had they completed the work (subject to equitable reduction).

The New Law has introduced specific provisions to address several issues arising under construction contracts that were not expressly dealt with under the Old Law. This includes enhanced self-help remedies for employers and the express exclusion of subcontractors from decennial liability.

The changes introduced by the New Law bring greater legal certainty to the construction industry in the UAE. The developments also underscore the importance of parties negotiating and drafting their contracts carefully to ensure risk allocation has been properly addressed. However, that is not the end of the story. It is vitally important that those involved in actually performing the contract fully understand the rights and obligations of the parties under both the contract and the New Law, including ensuring that appropriate steps are taken to safeguard those rights (such as compliance with notice provisions).