backOn 1 June 2026, Federal Decree-Law No. 25/2025 Issuing the Civil Transactions Law (the “2025 Code”) will come into force, replacing Federal Law No. 5/1985 (the “1985 Code”).
While geopolitical events continue to cause uncertainty for those in the Middle East, the 2025 Code embodies the UAE’s efforts to be a stable and welcoming home for people to do business; rather than wholesale change, the 2025 Code clarifies provisions of the 1985 Code and codifies principles, practices and behaviours that will be familiar to many of those in the UAE.
This client alert considers the impact of the new 2025 Code on five of the most relevant aspects to any commercial contract, namely (i) negotiation; (ii) contractual interpretation; (iii) force majeure; (iv) liquidated damages; and (v) compensation and damages.
Negotiation
Whereas previously, Article 246 of the 1985 Code indicated that good faith was only applicable to the performance of contracts (i.e. the post-contractual phase), Article 121 of the 2025 Code confirms that pre-contractual negotiations should also be conducted in good faith. The 2025 Code also entitles a party to compensation where the other party negotiates or terminates contractual negotiations in bad faith – with compensation commensurate to the actual damage sustained by the innocent party.
Article 122 of the 2025 Code establishes a mandatory pre-contractual obligation on parties to disclose “information of decisive importance to the consent of the other party” and to exercise “due diligence to provide the other party with information and data related to the negotiations, the contract to be concluded, and the circumstances and conditions surrounding the contractual process.” Crucially, this Article cannot be waived or excluded by agreement between the parties, and a breach entitles the innocent party to annulment of any contract entered into as a result of a breach of this Article.
It is worth noting that the new disclosure obligation under Article 122 of the 2025 Code is both: (i) positive, in that it requires parties actively to disclose important information, rather than simply requiring a party not to withhold information which is requested of them (which should be contrasted with common law concepts of caveat emptor – buyer beware), and (ii) incapable of being contracted out of, meaning that any provision in a final contract which seeks to exclude liability for insufficient pre-contractual disclosure shall be null and void.
From a practical perspective, the 2025 Code makes it clear that “good faith” behaviour should be the norm at all times and, importantly, this includes pre-contractual discussions. As a result, organisations should ensure that all employees conduct themselves accordingly.
Contractual Interpretation
Article 120 of the 2025 Code consolidates and restates Section 4 (Articles 257-266) of the 1985 Code, which set out the principles and rules of contractual interpretation. Whilst the old Section 4 principles have been retained, Article 120 contains two important changes:
- The first is that there is a new interpretive rule that a contract shall be interpreted in a manner that achieves “justice and good faith between the parties” (Article 120(11)). This mirrors the aforementioned “good faith” obligation introduced by Article 121. This should be seen as a codification of civil law principles that courts should retain flexibility to seek a fair outcome in the instant case rather than adhering to strict rules and precedent.
- Article 120 (13) of the 2025 Code extends the court’s powers of interpretation to favour “the party bearing the burden of the obligation or the weaker party in the contract”. Previously, the 1985 Code only permitted courts to interpret contracts of adhesion in favour of the debtor (retained in Article 120(2) of the 2025 Code). This new provision will be relevant for parties of unequal bargaining power, and, particularly, in consumer contracts or other circumstances where one party is signing up to another’s standard terms with little or no opportunity to negotiate.
While these changes give the courts broad interpretative powers, the starting point for contractual interpretation remains that parties have freedom to agree their own terms and that clear and unambiguous language cannot be departed from unless it is contrary to the law. In other words, the best way of avoiding the deployment of the new interpretive rules is to ensure that the terms of the contract are drafted clearly and unambiguously.
Force Majeure and Hardship
Under Article 273 of the 1985 Code, the remedy for force majeure was rescission of the contract. However, Article 236 of the 2025 Code has introduced a new remedy of contract modification, alongside rescission, in circumstances where the force majeure is temporary. Article 236(3) provides that where the impossibility of contractual performance is “temporary in continuous (successive) contracts”, either party may seek to modify the contract.
In a mirror image of the changes in Article 236, Article 224 of the 2025 Code adds rescission to the possible remedies the court may apply in the event of exceptional circumstances giving rise to financial hardship (previously the courts could only amend the burdensome provision). Similar provisions are included in Article 829(3) in respect of construction contracts.
The expanded regime under the 2025 Code gives both parties and the courts greater flexibility to preserve contractual relationships in circumstances where disruptions to the performance of obligations are temporary and is closer in its style and structure to commonly negotiated contractual force majeure clauses. Recent events in the Middle East have underscored how this flexibility may be beneficial to parties who may not wish to rescind a contract where a disruption, however significant, may only be temporary.
Liquidated Damages
Article 340 of the 1985 Code permitted judges, in all cases, and at the request of one of the contracting parties, to amend any agreed compensation amount (i.e. liquidated damages) “to make the amount assessed equal to the prejudice” – in other words, to order that the compensation be commensurate with the harm actually suffered by the non-defaulting party. It was generally considered that this gave the courts discretion to award damages in excess of or below pre-agreed liquidated amounts where it was just and equitable to do so.
Under Article 340 of the 2025 Code, the courts may:
- reduce any agreed compensation amount if either (a) the debtor can establish that the original assessment was “exaggerated” or the original obligation has been “partially performed”, or (b) the creditor contributed to or aggravated the harm caused; or
- increase the agreed compensation if the debtor committed “fraud or gross fault”.
These changes provide greater certainty for contracting parties to understand the circumstances in which the courts will depart from the agreed compensation provisions set out in a contract, and underscore what was already the case in practice – that the courts will likely only interfere with a well-drafted liquidated damages provision in exceptional circumstances.
Compensation and Damages
Article 294 of the 1985 Code allowed for damages to be paid in instalments or as periodic payments, but the Courts had no further power to review compensation assessments over time. Article 256 of the 2025 Code has introduced several new mechanisms: the Court may review compensation at a later date in light of “changing circumstances and prices”; the injured party may request review if the harm is aggravated; and the Court may reserve the right to reassess further within a specified period.
In granting more flexible powers to the Courts when it comes to assessing compensation over time, the corollary of this expanded framework is that there is less certainty for contracting parties when it comes to determining the quantum of damages. Previously, once a sum had been awarded, that would be the end of the matter; now, the parties can continue to dispute and the Courts can continue to be involved in the question of quantum long after an initial resolution has been reached.
Key Takeaways
Just as the UAE has evolved since 1985 so too the Civil Code and its implementation have evolved and this is reflected in the new 2025 Code. The key tenor is one of quiet continuity and nuanced revisions rather than seismic change, reflective of a nation that prides itself in being a safe and stable place to live and work, providing the freedom for parties, in good faith, to agree their own terms while reserving for the courts the power to intervene in the interests of justice in unforeseen and extreme circumstances. Those powers, in turn, provide guidance to individuals and companies on how to approach their contractual rights and obligations.
Additional Contributors: Jonathan Green