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Introduction
Strategically located, with well-developed infrastructural capabilities and good business-friendly policies, United Arab Emirates has emerged into a global commerce hub. Corporate transactions like M and A, joint ventures and financing agreements are an essential part of the economic activities performed in the UAE. Free from legal impediments in keeping with the intent of parties, smooth transaction flow emanates only when contract drafting has been done properly.
This article delves into the basics, legal factors, and best practices in contract preparation for corporate transactions in the UAE.
The main source of Contracts law in the UAE is found under the Federal Law Number 5 of 1985, also known as Civil Transactions Law, sometimes referred to as the UAE Civil Code, providing generalized principles of contract inception, performance, and wrongful actions. Specific laws related to the corporate bodies have emerged through the Commercial Companies Law (Federal Law number 32 of 2021).
The Civil Code gives the basic principles of contract law, namely mutual consent, consideration, and capacity. The Civil Code also explains different types of contracts, of which sales, lease, agency, and employment are just some examples. More fundamentally, the UAE Civil Code outlines the essential elements of a valid contract that include mutual consent, lawful object, and definite and lawful cause. These elements ensure that contracts are enforceable and fair to the parties involved. Besides this, the Civil Code indicates information regarding different types of contracts, such as sales, leases, and agency agreements, indicating the rights and obligations of contract parties in each case. In the case of contracts involving companies, the role of the Civil Code remains critical in the definition of rights and obligations of contracting parties. It also determines which law is to be administered in setting up companies-the terms involved in incorporation-and formulating shares and appointment of directors.
Another matter the Civil Code covers is contractual liability. It institutes principles about breach of contract and remedies to the non-breaching party, which can consist of damages, specific performance, or rescission of the contract.
More importantly, more so on contract interpretation, the Civil Code guides it. It established the law of the assessment of intent in between parties when such conflicts happen. These are more important in complex cases involving several parties in any company’s contracts.
It has, for example, a section dedicated specifically to particular provisions particular to company contracts. Of course, under the issuance of negotiable instruments there are provisions found in a promissory note or a bill of exchange to go with whatever commercial transactions come along in life.
Free zones, such as DIFC and ADGM in Abu Dhabi, administer their own system of law, on which it is based upon common law. For contracts concluded within the jurisdiction, there will be different rules applicable, and the jurisdiction agreed shall be stated on the face of the contract. Business enterprise in UAE free zones should abide by the local laws of any country which stipulate the formation of a constitution of a contract. They have formulated different provisions for the same. The particular contracts management laws in UAE free zones are of different species and valid only in that context. There to attract foreign investments, encouraging business life cycles and, in consequence of this, free zones received their specific laws from government, which distinguish the state of mainland UAE. While the main law remains being Federal Law No.2 of 2015 Concerning Commercial Companies that involves general principles of rules observed by all the companies being operated within UAE, while consequently, these same applied to free zones as well. The free zones often have their own regulations so that the federal laws may be implemented less strictly.
The governing authority for each free zone makes its specific regulations to facilitate business operations.
For a contract to be valid and effective, there should be certain elements, which include:
Identify the contracting parties with their names, registration number, and place of origin. It will be sensible and proper for one to obtain such details in advance to prevent subsequent litigations on grounds of wrong information. Corporate parties must provide evidence of persons who can sign such an agreement; that person is empowered enough to have such an agreement binding their respective company.
Describe in words the purpose and scope of the transaction so that nothing goes unclarified, for example, while writing an M&A agreement let it be clear whether it is an asset sale or acquisition of equity shares or a merger.
Detail each party’s rights and obligations and be specific and measurable to avoid ambiguity. For example, if it is a joint venture, detail the capital contributions, the extent of management participation, and profit-sharing arrangements pertaining to each party.
Representations and warranties in respect of the parties being both legally and financially sound. For example, in a typical M&A transaction, the seller would represent that the buyer had no undisclosed liabilities or outstanding litigation against him
Identify any conditions that must be satisfied before the contract is accepted or a particular performance obligation can be fulfilled. Examples include regulatory approvals and access to risk-free finance.
The governing law and jurisdiction for dispute resolution shall be specified, cross-border transactions often including an arbitration clause, Dubai International Arbitration Centre (DIAC) and DIFC-LCIA being popular choices.
Foreign investors conducting business in the UAE have to strictly follow the local laws of which one of them pertains to foreign ownership. Companies from mainland restrict shareholding at 49% on foreign ownership except in very few business activities enumerated under the ‘positive list.’ 100% foreign ownership can be availed by a free zone, but in their respective regulatory and compliance which requires careful navigation. In addition, the law requires that contracts in the UAE be written in Arabic or accompanied by an Arabic translation since Arabic is the official language of the country. If discrepancies arise between the English version and the Arabic version, the Arabic text is applicable in court, making a precise and culturally aware translation essential to avoid conflicts over the meaning of the contracts. Cultural norms and etiquette in business are also imperative in contract drafting. Language that is perceived as insulting, too aggressive, or dismissive of the local culture can put the negotiations off track and destroy relationships. The time spent drafting contracts with all the cultural sensitivities really creates trust, builds collaboration, and makes sure that business goes smoother under the UAE’s unique legal and cultural landscape.
The evident use of simple and understandable language ensures that the contracts used are at once effective and accessible, with no jargon or vague terms in the language, making agreements easy to understand for all, regardless of whose mother tongue is not English. As a reminder of critical risks, equally important: well-drafted provisions under proper force majeure may address unforeseen events; political instability, natural or economic disruptions that may imperil the interests of all the parties. Also, to be noted, the dynamic legal landscape in the UAE is constantly subject to various upgrades and changes to laws that may affect the validity of contracts and enforceability over it. Agreements are reviewed and updated periodically to be in line with regulatory requirements and sound legal. Such complexities require the input of lawyers based in the UAE; their knowledge could provide valuable insights into the regulations needed, customary practices, and pitfalls, thus leading to a contract that is robust, practical, and well aligned with the region’s legal and business environment.
Drafting contracts that conform to the UAE law would require close attention to various key issues. This should include knowing the peculiar admixture of civil and Islamic laws in the UAE, the content of the UAE Civil Code, and all sector-specific legislations in the UAE. Cultural aspects are equally vital, since the UAE cultural landscape is diverse. The respect of local customs and traditions can create a very strong relationship and smoother negotiations, so it is advisable to engage local legal and cultural advisors to guide effective communication and contract terms.
It would help reduce the risks and misunderstandings associated with drafting if obligations, rights, and consequences of breach along with standardized templates are provided along with careful review. It is very important to keep oneself updated on changes in UAE legislation and the regulatory framework to ensure continuous compliance. Diligent and informed parties can avoid disputes and smooth transactions.
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