“The criterion in the construction of contracts is intentions and meanings and not words and forms.”
Article 258 (Section 1), UAE civil code Pre – Contractual Negotiations Before a binding contract can be formed, there is no responsibility for any party to continue its negotiation in good faith under United Arab Emirates (UAE) law. However, if there are essential elements of a contract present and both parties entering into a contract have agreed to its terms, and it is to be subjected to a later date, then a contract may have already formed. The UAE civil code states that if a contract has been deemed to have been entered into, then that contract is subject to hold the requirements of good faith. It is stated under Article 125 of the UAE Civil Transactions Code Number 5 of 1985 (amended – UAE Civil Code) that a contract is defined as the coming together of an offer that is made by one contracting party to another accepting that offer. The agreement of both contracting parties will determine the effect of the contract on the subject matter which will result in an obligation that arises in regard to the terms of the contract that they are bound to. There should, therefore, be a clear verbal understanding during the pre-contractual period that the written provision during negotiations will not be binding until all the terms and agreements have been finalized and it has been implemented. This written provision can be called the ‘Head of Terms’.
Head of terms can be defined as a non-binding document that outlines the basic key terms of a partnership or agreement that is proposed between parties during negotiations. Head of terms can also be called ‘letter of intent’ or ‘head of agreement’. It is most frequently used as a process when negotiating commercial or corporate transactions such as the purchase of a business, share acquisitions or private equity investments, for example. Head of terms-document routinely marks the first step of a fully legal binding contract or agreement and can be held as a guideline to define the roles and responsibilities of the parties entering into the contract before any binding documents are drafted. Head of terms can predominantly be effect to provide:
UAE’s position on Head of terms UAE courts consider the head of terms non-binding as they possess no legal effects on either of the parties involved.
The Dubai Court of Appeal has previously stated that pre-contractual negotiations are considered a formality holding no legal effect due to the fact that they are considered a set of provisions for a final contract that is yet to be put into effect. The UAE civil code has not covered what the essential elements of a contract are, there is a risk that could arise in cases when parties agree on a set of elements that may constitute as essential, therefore being legally bound to the terms of a letter of intent unintentionally, hence why it is important to state intention in the beginning about the head of terms being non-binding.
Although it is implied that the head of terms is not binding, there are legally binding provisions set in place that are a necessity for the protection of the parties involved. There are several clauses that still have the ability to bind the parties such as the governing law, confidentiality clauses or jurisdiction clauses. The laws in UAE state that confidentiality provisions are considered valid and will be enforceable if it is drafted and defined clearly. Breaching a confidentiality clause will result in a party being liable for damages.
The predominant rule of the UAE civil code is that contracts should be interpreted based on how the parties defined the terms therefore their intention before entering into the contract is important, as stated by Article 258 of the UAE civil code. It is noted that these intentions should be made apparent in the formation of sentences and words in the contract or written provision. As a result of this, a judge should not provide condition or clauses that are deemed to be different from the terms and conditions that was expressed in the contract.
Consequently, the courts will be allowed to interfere if the judge recognizes vagueness in the wording of the contract and if the message does not coincide with the intentions of the parties involved, thus allowing scrutiny of the provisions of the contract. Good Faith Article 246 of the UAE civil code states that contracts must be performed in accordance with their contents in a matter that is consistent with the requirements of good faith.
Additionally, the parties involved in the contract should be in performance with the fairness, virtue and custom of the law. Due to the existence of the head of terms agreement, the parties have a contractual obligation depending on the provision elements. It may include cooperation when entering into a final contract or it may involve the obligation to keep the parties informed on the key elements. It may also involve the courtesy of not walking away from negotiations without good cause.
The main purpose of the UAE law upholding good faith is so contractual parties to avoid escaping their responsibilities stated in the contract. Liabilities Article 124 of the UAE civil code states that personal obligations shall arise out of dispositions, legal events and the law. The sources from where the obligations will arise include contracts, independent acts, actions that cause tortious harm, and the law.
Any breach of contract committed by the contracting party will result in liabilities, however, proof of breach must be exhibited. Damages that are incurred under a contractual liability will include loss of opportunity, loss of profits, and direct damages. The civil code has stated that the court shall investigate the number of damages sustained if the terms of compensation were not pre-contractually for direct damages. The provisions of loss of profits are included in Article 292 in the Civil Code and it states that for the damages to be compensated by the contractual party, the loss of profits must be certain and should not be based on probable or hypothetical damages. Consequently, the court will not consider speculative damages.
It is important to highlight that any party entering into pre-contract negotiations should set their intentions and have a clear understanding of what either contracting parties wish to achieve in these negotiations. UAE’s civil code recognizes a contract’s enforceability and offers remedies should any breach of contract will occur to ensure fairness among the contracting parties which include financial costs for damages for contractual and tortious liability.