New UAE Civil Code: good faith requirements may begin before signature

Good faith obligations before the execution of a contract

Under the 1985 version of the UAE Civil Code ("the old UAE Civil Code"), good faith was most clearly addressed in the context of contractual performance. Article 246 of the old UAE Civil Code provided that a contract must be performed in accordance with its contents and in a manner consistent with the requirements of good faith. Although good faith is not specifically defined in the old UAE Civil Code, it is considered a fundamental principle of UAE civil law and contract law. In practical terms and in broad terms, good faith requires parties to act honestly and fairly, and not to seek an unfair advantage or exploit the other party.

That wording was important, but it was directed principally at performance of existing contracts, rather than the way in which parties conduct themselves during negotiations. Article 121 of the new UAE Civil Code moves the good faith process earlier, providing that the proposal, conduct and termination of pre-contractual negotiations must be in accordance with the requirements of good faith.

That does not mean that parties who start negotiations are required to complete them. Article 121 makes clear that negotiations do not, by themselves, impose an obligation on the parties to proceed with a contract. However, the way in which negotiations are conducted, and the way in which they are terminated, may now be subject to closer scrutiny.

A party who negotiates, or ends negotiations, in bad faith may be liable to compensate the other party for actual damage suffered. Importantly, that compensation does not include the benefits expected from the contract that was not concluded, or lost opportunity to realise those benefits, unless otherwise agreed. Parties should therefore be careful about agreeing pre-contractual terms, letters of intent or heads of terms that alter the default position on recoverable loss.

Disclosure during negotiations

Article 121 also provides that it is an act of bad faith to wilfully omit material information affecting the validity of the contract. Article 122 then goes further and introduces a more developed disclosure regime. It provides that a party to negotiations or a contract who is aware of information of decisive importance to the other party’s consent must disclose that information where the other party’s ignorance is presumed, or where the other party has placed trust in the contracting party.

This may be significant for construction and engineering projects. Parties frequently exchange information during tenders and negotiations, including information relating to site conditions, design responsibility, specifications, programme, pricing, procurement risk, permits, consents, access constraints and technical assumptions. In some cases, information held by one party may be important to the other party’s decision whether to enter into the contract, or on what terms.

Of course, not every piece of information exchanged during commercial negotiations will necessarily be “decisive” to the other party’s consent and the precise scope of the disclosure obligation has not yet been established. Equally, parties will still be expected to protect their own commercial interests. However, the new UAE Civil Code appears to create a statutory risk where a party deliberately withholds information that is material to the validity of the contract or decisive to the other party’s consent.

A party alleging that information has been withheld must prove that non-disclosure and the other party must then prove that it disclosed the relevant information. This may make contemporaneous records of disclosure increasingly important.

Can the disclosure obligations be excluded?

Article 122 appears to be mandatory. It provides that parties may not agree to limit, exclude or be exempted from the obligation to disclose material and decisive information. Any clause to the contrary is void, and the aggrieved party may seek annulment of the contract as a result of the breach. Entire agreement clauses, non-reliance wording, disclaimers and other boilerplate protections may still have a role to play. However, parties should be careful not to assume that those provisions will override mandatory disclosure obligations.

Article 121 is framed differently. It imposes a statutory good faith standard in relation to the proposal, conduct and termination of negotiations, but it does not contain the same express exclusionary wording as Article 122. It is therefore less clear whether, and to what extent, parties may modify the consequences of Article 121 by agreement.

Confidentiality during negotiations

Article 123 introduces a further protection for information exchanged during negotiations. It provides that a person who, without authorisation, uses or discloses confidential information obtained in the course of negotiations or the contract will be liable in accordance with the general rules.

This may be relevant in construction and engineering projects, where parties may exchange confidential technical proposals, pricing information, design materials, methodologies and programme assumptions before the final contract is entered into. Parties should therefore consider whether their tender protocols, non-disclosure agreements and internal document controls are sufficient.

Practical considerations

There are a number of practical points for parties to consider.

• Parties should treat the negotiation phase as potentially carrying legal consequences. The absence of a signed contract may not, by itself, eliminate legal risk.
• Parties should document the basis on which information is provided during negotiations, including any qualifications, assumptions, exclusions or limitations.
• Parties should consider carefully what project information should be disclosed during tenders or negotiations, particularly where that information may affect the contractor’s decision whether to contract or how to price the works. For example, owners will need to give thought to whether they provide a contractor with FEED design; a clearer understanding of the status of the design; and a more transparent account of site conditions.
• Parties should be careful not to create a misleading impression about pricing assumptions, programme assumptions, resources, capabilities or exclusions.
• Parties should review entire agreement clauses, non-reliance wording, disclaimers, confidentiality provisions and tender protocols in light of the new disclosure and confidentiality regime.

As we have noted in our previous articles, the practical impact of many of the changes introduced by the new UAE Civil Code will depend on how they are applied by courts and tribunals. That is also true of Articles 121, 122 and 123. What is clear, however, is that the new UAE Civil Code appears to bring pre-contractual conduct into sharper focus. For construction and engineering parties, good faith may now need to be considered not only when the contract is performed, but also before it is signed.

Authored by Emerson Holmes and Jamie Phillips.