by Melanie Grimmitt
If you are a construction contractor accustomed to operating in common law jurisdictions where the doctrine of “freedom of contract” is generally upheld, you should be aware that the position under UAE law is different. We explore how it is different below …
Common Law Approach
In most common law and European jurisdictions, party autonomy and freedom of contract (whilst being gently eroded since the 19th century) are concepts that are recognised and respected. English law, for example, allows commercial parties to contract freely, provided that the agreement does not contravene any laws or public policy, and the courts will generally try to support the agreement between the parties. Although we can’t deny that notions of equality of bargaining power and fairness are increasingly being used to justify an interventionist stance, the courts of common law jurisdictions are – by and large – slow to use the doctrines of misrepresentation, mistake and economic duress to vary the terms of a commercial agreement.
The UAE position
The UAE, on the other hand, is a civil law jurisdiction, with its codified laws based on the Egyptian code, which in turn is derived from the French code. In addition, the laws of the UAE are influenced by Shari’a law. Nevertheless, as a general rule, under UAE law, the parties are entitled to agree on any contractual terms that they deem fit, provided that such terms are not inconsistent with the provisions of law or contrary to public order or public morals (pursuant to Article 2 of the UAE Commercial Code). Thus the common law concept of freedom of contract exists in the UAE but is subject to certain further limitations, based on ‘moral’ considerations.
Whilst in general the position in the UAE appears broadly similar to the English law position, there are some important differences, including the fact that in the UAE the scope of public policy exceptions and a court’s power to strike down or vary a contract are broader. This can cause challenges for parties who have become accustomed to operating in a secular legal and political environment, who may now be faced with having their contract varied or struck down on the basis of principles which may find their genesis in the Shari’a, for example.
In a construction context, the more limited application of freedom of contract in the UAE has important consequences for concepts that international contractors and developers may be familiar with, or take for granted, such as the interpretation of limitation of liability and liquidated damages clauses.
Examples of the differences in approach
Like English law, UAE law includes statutory implied terms that fetter the doctrine of freedom of contract. For instance, pursuant to the Civil Code parties are required to perform their contract in a manner consistent with good faith, (Article 246(1)). These statutory implied terms are different to those one might expect under English law, which are generally more tangible and objective.
A further example is the different approach taken to limitation of liability provisions as explained in my last blog.
Another interesting example is the different approach that the UAE takes to termination provisions, such as a termination for convenience clause. Again under English law, the Courts will generally uphold an agreed termination provision, including the right for one party to terminate its contract for convenience. The validity of such provisions in the UAE, however, is highly questionable. This is because UAE law prescribes the circumstances in which a contract may be terminated (which are limited and do not include a right to terminate a contract without cause) and because such provisions are considered to be contrary to Shari’a law. This is a topic to which we will return!
Therefore, whilst the concept of ‘freedom of contract’ can be said to exist in some form in the UAE, it is not the same as in English law. In the UAE there is a greater risk of the terms of a contract being altered and reinterpreted. In these circumstances it is vitally important to ensure contracts have been reviewed by lawyers familiar with UAE law so at least the areas of potential uncertainty are understood and action can be taken to mitigate consequential risks.
But which approach is better?
Well that, of course, depends.
The flexibility provided by the UAE law in some circumstances may be very helpful. For example a contractor faced with paying liquidated damages in circumstances where the employer has not suffered loss to an equivalent extent is likely to welcome the opportunity to argue that the liquidated damages provisions he agreed to should be varied by operation of the UAE law.
On the other hand greater certainty of contract may be argued to be a pre-requisite to construction risk management, which will surely be the focus of attention of the international contracting industry as it picks itself up from the worldwide economic downturn.
Perhaps the more interesting question is whether as a matter of principle the UAE should reach the same position in relation to freedom of contract as that found under the common law? Should freedom of contract supersede moral or religious considerations when determining the terms of an agreement between two commercial entities, or are the latter considerations more important?
Kluwer Construction Blog
The principle of good faith, as stated in Art. 246 UAE CC, clearly limits the employer’s power to terminate for convenience/without cause; however, a similar limitation may be implied in a convenience clause in common law jurisdictions. In this regard please refer to cases, such as Renard & Kellog in Australia, Abbey v PP Brickwork, Rice v Yarmouth in England or CB Flooring in the US.