A diligently drafted contract that fits the purpose in an integrated manner for the smooth functioning of an individual’s business operations in the UAE. In this article, the author has briefly discussed the important aspects of contracts in the UAE and India separately.
In UAE, the Civil Code of rules applies to every citizen and governs all the civil rights and obligations along with the other important contractual requirements as well. At the time when the contracts are entered for commercial purposes, the Commercial and Civil Code are both applicable to the relationship, alongside several other legal rules and regulations to ensure the effectiveness and validity of every functional specific type of contract.
In the United Arab Emirates, the Civil Code is based on Islamic law principles which points out a differentiation between crucial elements on which the existence of a contract is dependent and if the same is opposed that would make it void. Other than that there are not many fundamental matters affecting the binding force of the contract’s terms but not the existence of the contract.
1. The crucial elements
The crucial and required elements for the existence and formulation of a contract under the Civil Code are as followed:
- Mutual consent of the participative parties has to be present for all the basic essential elements of the contract;
- A permissible subject matter which has the capability to be defined and is possible to perform or work on in reality (or capable of being defined);
- A lawful purpose or the reason for the performance of the obligations aroused out of the entered contract.
When the courts while settling disputes have to review whether the present contract in the case can be considered as a formed contract or not, for which the generally review the surrounding circumstances and also specifically consider the evidence if any:
- offer and the acceptance of it from every parties’ side;
- certainty regarding following and setting the terms and condition of a contract;
- each party must have the capacity to form and enter the contract.
2. Freedom to contract
Under UAE contract law, parties are free to agree with the contract and enter into it freely on the set parameters of their contractual relationships, although contractual freedom is subject to several legal restrictions. For instance, a contract which is made for an unlawful cause, or the subject matter which goes against the public order or morals, becomes a void contract. A contract which is entered into by certain parties who lacks the capacity will not necessarily be said as defective and non-binding unless the capacity has been taken away or has been restricted by operation of law, or the contract entered into results in some kind of exploitation, or conspiracy against, those parties who aren’t capable.
3. Execution requirements
Notarising documents is necessary so that it can be provided as proof of the authenticity of all the relevant documents. There are some types of agreements which must be in writing form and has to be notarised in order to be effective
Under UAE law, verbal contracts based on first impressions are accepted as correct and therefore are enforceable. The limit of such enforceability depends on the actions of the parties entered into it, for example, whether they have shown an intention to form a contract or whether they have agreed upon the crucial terms of the contract.
Although verbal contracts are very much enforceable in UAE, it is always a prudent choice to formalise the agreed terms of an agreement into writing to avoid any type of conflict about the terms of the contract or over its very existence itself.
The importance of good faith
Every contract in the UAE is subject to the presence and performance of good faith of the parties, without exception.
It is a duty of the parties to act in good faith because it is a part of their obligation under the said contract which is to deal honestly and fairly throughout the time period of the contract as decided. This is an automatically instilled and known obligation, which is very boldly and strongly codified under the Civil Code. It is one of the very essential considerations of UAE contracts. The Civil Code does not clearly define the parameters of the meaning of the duty of good faith, because it something already implied that contracting parties are ought to act in accord with the virtues of law, custom and the complete nature of the contract, as well as with the actual terms mention within the contract too.
In gist, the duty of good faith:
- Is applicable to contracts governed by foreign law;
- It can be applied to pre-contract negotiations; and
- It can also impact the result of a dispute.
Terminating a Contract
In the UAE there are just three ways through which one can legally terminate a contract, as provided under the Civil Code which are:
- by mutual consent;
- by litigation;
- in accordance with the law.
When contracts go wrong
The conflict resolution clause in any of the written contract is a significant element, and it consequently requires a keen eye on consideration and drafting, regardless of the process which was agreed upon or choice of law and forum.
Usually, court judgments can get difficult to enforce overseas. Arbitration awards however can be more easily enforced under many jurisdictions globally. This is required to be characterised in one’s choice of law and jurisdiction negotiations.
When preparing an appropriate dispute resolution clause, one must consider:
- The cost bearings of the contract and also costs of claims has to be considered;
- Whether maintaining the confidentiality of the matter is a matter of concern since many a times court resolution renders the details of a conflict or dispute publicly;
- The location of opposite party’s assets for the purpose of enforcement, if other party wins the dispute, then he or she can enforce it against the assets of the opposite party in another country?;
- Whether the contract is of a technical nature or specialist nature since it may perhaps require expert input.
The Law of Contracts in India is defined as a contract which is an agreement enforceable by law that provides personal rights, imposes personal obligations and responsibilities, which the law protects and enforces against the parties to the agreement. The basic law of contract is based on the conception that is which parties have created legal rights and obligation through the formulation of an agreement, which is considered quite personal in nature and is only enforceable by action against the party in default.
Section 2(h) of the Indian Contract Act, 1872 defines the term contract as “An agreement enforceable by law”. Wherein the word ‘agreement’ is defined in Section 2(e) of the Act as ‘a promise or a set of promises, which forms a consideration for all the parties to the agreement’
Validity and formation of contract
According to a reputed legal scholar Sir John William Salmond, a contract is defined as “an agreement which creates and defines the rights and obligations between two or more parties” and to make sure that contract is formed through fulfilling the requirements under law one has to see that whether the proposal or offer by one party and the acceptance thereof by the other party has been made or not. This usually involves the process of negotiation where the parties decide the offer which is to be offered and whether it should be accepted or not to create a contract.
Standard Form Contracts
The law of contract has faced a lot of problems in recent times, which is undertaking and considering the new dimensions. The problems arise from the modern large scale and the huge practicing arena of making contracts in a standardized form. People on whom such formation responsibility of standard form contracts are imposed, they hardly have any option or choice available to them other than adhering. This gives a unique opportunity and a giant loophole through which many huge companies exploit this opportunity or rather the weakness of the person by imposing upon him the terms, which may reach up to the extent of making the company free from all liability under the contract. It is necessary and important to protect the parties’ interests and therefore, there are some rules and legal help available or devised by the courts to protect the person in such cases.
The Indian Contract Act, 1872, gives a basic structure of how the contractual laws function in India, how is it enforced, what are the various provisions regarding non-performance of any action as decided to perform under the entered contract and also in case of the breach of contract.
There are provisions framed that define and explains the imposition of liquidated damages in case of the breach of the contract. For instance, if a party who is wounded by the breach of a contract may hold up this as an action for damages and damages means compensation in monetary terms for the suffered loss or repercussions be it physically, mentally or monetarily suffered losses by the aggrieved party and hence in contract cases like these the damages occurred is what is termed as liquidated damage
Be it the Contract law of India or UAE or any other country all of them undergo the impact of economic slowdown, over the commercial contracts, formed internationally, and also domestically, the outcome is always been enormous to cope up and handle. There have been circumstances, where one of the parties to the contract has failed to perform its obligations under the set contract because of the pure outrageous consequences of this economic slowdown. In many of the cases, it was seen and felt, that even though one of the party continues to form the obligation under the contract even under the differing economic scenarios can come out to be fatal for them.
However, one is supposed to be sympathetic enough to consider the prevailing laws in the respective countries and make sure that the interests of the contracting parties in the event of such hardships are protected. The base for the contractual remains the same it is just a matter of consideration and negotiation on an international and domestic basis to primarily protect the rights and interests of the individuals and maintain a sound contract.