assignment of obligations under uae law

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UAE clarifies factoring and assignments of receivables

The recently enacted Federal Decree-Law No. 16 of 2021 on Factoring and Transfer of Civil Accounts Receivable (the New Law) which enters into force on 8 December 2021, being the first federal regulation in the United Arab Emirates (the UAE) dealing specifically with factoring and the assignment of receivables, has ushered in some much-needed clarity as to how these arrangements should work in the UAE. Specifically, the New Law provides a new regulatory framework which sets out the basic legal requirements for assignments and transfers of receivables, validity and perfection requirements, as well as the rules for determining priority amongst competing claims over assigned receivables.

Historically, this had been viewed as something of a 'grey' area of the law – governed in a piecemeal way, with Federal Law No. 5 of 1985 (as amended, the Civil Code) governing the assignment of debt and Federal Law No. 4 of 2020 (the Moveable Assets Mortgage Law) governing assignments over receivables which are taken by way of security. This had created some uncertainty as to which regulation should apply in particular circumstances, as well as uncertainty regarding the relationship between the different laws. The fact that the New Law seeks to provide a unified framework in relation to this area is a very welcome development. There are, however, certain key aspects of the New Law which may require further clarification as market participants seek to rely upon this new framework.

Scope of the New Law

The New Law applies broadly to any assignment of receivables made as part of commercial or civil transactions. Notable exclusions from this new law are assignments in the context of:

personal / family transactions;
financial contracts regulated by clearing agreements;
foreign exchange transactions;
interbank payment systems, net-based clearing systems and settlement related to securities, assets or other financial instruments;
repurchase of securities, assets or financial instruments deposited with a broker;
the right to financial payments fixed in endorsable bonds;
the right to payments deposited in credit accounts with banks; and
the right to payments under securities, documentary credits and letters of guarantee.

What is an Assignment?

The New Law governs " Assignments ", which is defined to cover an arrangement where " contractual rights to settle a cash sum owed by the Debtor are transferred to the Assignee, and the Assignment constitutes the agreement to create a security right on the Debtor's debt, transfer it as a security, and sell it in a final sale ". One possible interpretation of this particular definition would be that the New Law only governs arrangements which not only assign a debt but which also create a security interest over that debt. However, many factoring arrangements and debt assignments simply involve a debt being assigned absolutely and do not necessarily involve a security right being created over that debt. The New Law also does not elaborate on the different types of factoring arrangements that can exist, such as the purchase or sale of receivables, discounting and reverse factoring.

Given that the New Law appears (on the face of it) to be intended to cover all factoring arrangements and assignments of debts, the prudent course of action for market participants would be to ensure that all of their factoring arrangements and assignments of debt comply with the New Law, regardless of whether those arrangements involve security being created.

Form of Assignment

When it comes to the form that an assignment of receivables should take, the New Law is not prescriptive, and simply provides that an assignment shall be considered effective provided that the receivables that are subject to the assignment are described in a general or specific manner in order to allow for their identification.

Importantly, the New Law goes on to clarify some of the key points around how to describe the receivables being assigned (in relation to which there previously was some uncertainty). Specifically, we highlight the following:

It is acceptable for the purposes of the New Law to describe the assigned receivables generally, for example by simply saying that the assignment is of all receivables that are currently owed by a debtor, all receivables that will be owed by a debtor in the future, or a specific class or specific or general type of such receivables.
The New Law therefore appears to confirm that, in an assignment agreement, it is not necessary to individually list out each particular contract under which a debt is assigned.
The New Law confirms that if the subject of the relevant assignment is receivables which are owed by a debtor in the future, then that assignment may be effective without the need to enter into any new transaction to assign each future debt in due course.

Effectiveness and Priority

One key point which the New Law clarifies is in relation to the effectiveness of debt assignment agreements against third parties: with specific provisions of the Moveable Assets Mortgage Law being incorporated by reference in order to establish that such assignments, in order to be effective towards third parties, must be declared on the electronic register created under the Moveable Assets Mortgage Law (which is currently operated by the Emirates Integrated Registries Company (EIRC)). While, prior to the introduction of the New Law, it was common for market participants to register assignments of receivables with the EIRC, it was not previously clear whether this was strictly necessary with respect to absolute assignments of receivables under the Civil Code which did not create security interests.

Regarding any specific requirements which need to be met in order for an assignment of receivables to be effective against a debtor (which have traditionally been governed by the Civil Code and relevant cases), the New Law does not specifically repeal or replace the Civil Code in this respect, and so the prudent course would be for market participants to continue to satisfy the applicable conditions derived from the Civil Code. This essentially means that, in order for an assignment of receivables to be enforceable against a debtor, notice of the assignment is required to be provided to the relevant debtor and (depending on the exact circumstances) with it also being advisable for the assignment of receivables to be acknowledged by the relevant debtor. The New Law does however give an assignee the clear right to send a notification and payment instructions to the relevant debtor in relation to receivables that have been assigned to that assignee (even if that notification gives rise to a breach of the underlying contract as between the assignor and the debtor), and does also seem to indicate that the debtor must agree to the assignment particularly in the context where the underlying contract is being amended.

Similar to what we see with registration, when it comes to determining priority among competing claims over receivables, the New Law relies on the Moveable Assets Mortgage Law to allocate the priority (determined by the date and time of registration) of the rights of assignees over the accounts receivable, to determine the priority of the assignor's obligation and to determine the priority of the assignment towards non-contractual rights.

To conclude, the New Law has clarified certain key issues regarding the assignment of receivables, and in doing so has created a more unified framework. It is now clear that any receivables which are subject to an assignment (which may include future receivables) need only be described in the assignment in general terms, and it is also now clear that certain elements of the Moveable Assets Mortgage Law apply to assignments of receivables (such as the registration requirements and rules regarding priority). Question marks do, however, remain over how the New Law treats certain types of debt assignments and factoring arrangements (particularly ones that involve absolute assignments and not security rights), as well as the question of how a court would interpret the relevant provisions of the Civil Code in light of the New Law.

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United Arab Emirates: Assignment Of Rights In The United Arab Emirates

Following the previous article entitled "Assignments in the United Arab Emirates" (published in the November issue of the Law Update) explaining the general conditions and requirements of a valid assignment in the UAE, this article oulines the prevailing jurisprudence with respect to assignment of rights in the UAE. Given the absence of a separate legal regime for an assignment of rights under UAE law, UAE Courts have decided cases on assignment of rights based on existing commercial common practices and comparative law. In the following Dubai Court of Cassation case, the Courts are guided by the provisions of the UAE Civil Code relating to 'assignment of debts / obligations' in determining the validity of an 'assignment of right'.

Dubai Court of Cassation Case No. 188/2006

Issued on 13th march 2007.

A civil action was filed before the Dubai Court of First Instance by a commercial bank (the "Bank") against a corporate borrower (the "Borrower") for non-payment of the latter's obligations under a term loan facility.

Facts of the Case

The Bank granted a term loan facility for the amount of AED7,469,602.09 to the Borrower under the terms of a facility agreement ("Facility Agreement"). Subsequently, the Borrower defaulted on its installment payments. This prompted the Bank to declare an acceleration event pursuant to the terms of the Facility Agreement and making the full amount of the loan immediately due and payable. The Borrower was served a notice of acceleration but failed to settle the outstanding amount of the loan. Hence, an action was filed in the Court of First Instance for collection.

Court of First Instance

The Court of First Instance ruled in favour of the Bank and ordered the Borrower to settle the full outstanding amount plus interests from due date until actual receipt of payment, together with costs and minimal advocate's fees. The Borrower consequently appealed the decision to the Court of Appeal.

Court of Appeal

On appeal, the Borrower argued, inter alia, that the Court of First Instance failed to determine the correct amount outstanding under the Facility Agreement. The Borrower alleged that the Court of First Instance failed to appreciate that the right of the Borrower to receive payments under a contract in relation to a certain project ("Receivables") was assigned in favour of the Bank. It was claimed by the Borrower that since the Bank had been assigned the right over the Receivables, the amounts pertaining to the said Receivables should have been deducted from the outstanding amount of the loan. Further, it was asserted that the amount of Receivables assigned to the Bank was reflected on the Borrower's book of accounts and, therefore, should have been considered by the Court of First Instance when it rendered its decision as to the judgment amount. The Court of Appeal did not find merit in the allegations and upheld the decision of the lower court in toto, hence, the Borrower brought the action to the Court of Cassation.

Court of Cassation

The Court of Cassation ruled that no assignment of right had been perfected between the parties. The Court held that an assignment of right takes place by agreement between the obligee (assignor) and another party to whom the obligee transfers its right (assignee) as against the obligor. An assignment in that respect is a contract between the assignor and the assignee, which must satisfy all of the necessary elements including consent, subject matter and cause. It is settled law that in order for a contract to be concluded, there must be a corresponding offer and acceptance, and the link between them. What is meant by an offer is an offer whereby the person who makes it conclusively expresses his intention to enter into a specific contract, in such a way that if it is accompanied by acceptance, the contract will be concluded. The exchange of offer and acceptance should indicate mutual consent of the parties. The Court referred to Article 1109 (1) of the Civil Code which requires consent of the parties for an assignment to be valid.

Article 1109 (1) states that:

"In order for an assignment to be valid, there must be consent of the transferor and the transferee, and the creditor." In this case the Court held that whilst there was an intention on the part of the Borrower to assign its rights over the Receivables, the consent of the Bank (as assignee) to the assignment was not present. The Court held further that in order for an assignment to be valid the requirement of Article 1113 of the Civil Code should be met.

Article 1113 provides that:

"In addition to the general conditions, the following conditions must also be satisfied in order for an assignment to be valid: a. It must be completed and dependent on no condition other than an appropriate or customary condition, nor must any future contract be dependent on it; b. The performance thereof must not be deferred to an unknown future date; c. It must be limited in time to a specific time limit; d. The property transferred must be a known debt which is capable of being satisfied; e. The property transferred to the transferee in a restricted transfer must be a debt or specific property which cannot be compounded, and both types of property must be equal in type, amount and description; and f. It must not involve any conditional or substantial additional consideration in favour of any of the parties, and the assignment shall be unaffected by such additional consideration agreed upon after the assignment was made, and it shall not be payable."

The Court held that in order for an assignment of right to be valid, the subject matter of the right should be specified as to type and amount. In addition to the general conditions, the property assigned must be a debt of known amount, and capable of being substituted. This means that the subject matter of the assignment, which is the property assigned, must be particularised as to type and amount. Where the property consists of money, it must be of a specified amount, failing which the assignment is void. Assuming that there had been a valid assignment of right, the Court ruled that there was no proof that payments were indeed made by the third party contractor (being the counterparty to the original contract) to the Bank. In light of the above, the Court of Cassation upheld the findings of the lower courts in dismissing the claim of the Borrower that an assignment of right had been granted in favour of the Bank as security for the obligations under the Facility Agreement.

The Court of Cassation in the foregoing case made a significant point in relation to Article 1113(d) of the UAE Civil Code as applied to assignment of rights. For an assignment of right to be valid and enforceable, the type and quantity of the assigned right (arising from a contract; payment obligations or receivables) should be certain and identifiable, and where the assigned right relates to a sum of money, the amount should be fixed at the time of execution of the assignment agreement. The same is equally applicable where the right being assigned relates to receivables at some future date. With the foregoing decision, it should be noted that where the right consists of a sum of money, certainty in the subject matter of the assignment lies not only upon the relevant contract (under which such right is being assigned) being identifiable, but also for that sum of money to be fixed at the time of perfecting the assignment. In taking an assignment of right as a form of security, parties should bear in mind the important components constituting a valid assignment in the UAE including the present position on the matter as clarified by this case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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United Arab Emirates: Attention all banks and financial institutions - Security enforcement alert

United Arab Emirates: Attention all banks and financial institutions - Security enforcement alert

Federal decree law no. 16 of 2021 on factoring and transfer of accounts receivables, share by email.

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One of the prominent forms of collateral for creditors nowadays is obtaining a transfer of a client's accounts receivables. This form of collateral is often referred to as an 'assignment of receivables' (“ Assignment ”), under which the creditor (" Assignee ") becomes permitted to collect from any pre-existing or future debtors that the client (" Assignor ") has receivables.

The Assignment, although never codified in law (unlike the Novation codified under Articles 1106 et seq. of the Civil Code) has always been consecrated by the UAE courts and required a mere notification of the debtor to be considered valid and allowed the debtor tree itself of its obligations by paying the Assignee.

The issuance of Federal Decree Law No. 16 of 2021 on Factoring and Transfer of Accounts Receivables (“ Law ”) has clarified a number of points for all parties involved including:

Serving the debtor the Notice of Assignment is required for the Assignment to be valid against them, while seeking the debtor’s consent to the Assignment is not.
The Assignee is entitled to claim any ‘Additional Rights’ associated with the Assignment “including security rights established on goods, guarantees and credit insurance”.
The debtor is entitled to invoke any defenses available to them under the 'Original Contract' governing the relationship between the Assignor and the debtor unless expressly waived by the debtor.
Enforcement against accounts receivables without the consent of the Assignor can only be sought if the Assignor commits a default on their borrowing obligations. If the accounts receivables are sold (instead of being collateralized), enforcement can be initiated at any time and without the Assignor’s consent.
The Assignee has senior status in collecting the assigned receivables after registration in the Emirates Movable Collateral Registry (EMCR).
The Law only applies to commercial assignments and therefore consumer and retail assignments are excluded.
It is still unclear however whether the Assignment under the Law constitutes a true sale and this will be a matter of merit that will be decided on a case-by-case basis by the UAE courts.

In Depth - Key Takeaways from the Law

1. notice of assignment and debtor’s consent - are they required.

As mentioned above, prior to the Law, the assignment of receivables was governed by jurisprudence, under which, the debtor must have been notified of the Assignment for it to be valid against them. This jurisprudential finding is asserted (albeit indirectly) in Article 15(1) of the Law, which states that the debtor will not be considered to have breached the Assignment in the event payment is made to the Assignor instead of the Assignee if no notice of the Assignment was received.

2. What is the scope of Assignments?

The definition of Assignment only refers to monies. However, Article 1 of the Law also contains a definition for 'Additional Rights' as "any personal or in-kind rights that guarantee the payment of the amount of the assigned Account Receivable, including security rights established on goods, guarantees and credit insurance". Moreover, Article 6 of the Law assures that the Assignee is entitled to claim the Additional Rights.

As such, creditors should perform a due diligence exercise before entering into factoring arrangements and/or obtaining Assignments from their clients for the purpose of identifying any Additional Rights that may be associated with the assigned receivables - especially since Article 20(3) provides the Assignee with the option to enforce those Additional Rights as well.

3. Does the debtor have the right to invoke defenses of the Assignor? And can this right be waived?

Further to the Law providing that the Assignor can take legal action against the debtor to claim the Assignee's transferred receivables, Article 16 states that the debtor is entitled to invoke any defenses available to them under the 'Original Contract' governing the relationship between the Assignor and the debtor.

However, this right can expressly be waived by the debtor (under Article 17 of the Law), but such a waiver cannot exclude defenses arising out of fraudulent acts committed by the Assignee as well as defenses pertaining to the debtor's absence of capacity when having entered into the Original Contract with the Assignee.

4. When can the Assignee enforce against the receivables?

Under Article 20 of the Law, if the Assignee takes the Assignment as a form of security, then legal action without the consent of the Assignor can be initiated only if the Assignor (or the client) commits a default on their borrowing obligations. If however, the accounts receivables are actually sold to the Assignee (instead of being collateralized), then enforcement steps against the debtor can be taken at any point of time.

5. Does the Law provide an easier and faster way to enforce?

Under Article 21 of the Law, the means of enforcement against the receivables is made as agreed upon in the Assignment Agreement or as per the Federal Law No. 4 of 2020 governing Pledged Rights in Moveable Assets ("Moveable Pledge Law"). This allows creditors to enforce against receivables immediately by bypassing normal litigation proceedings.

6. Does the Assignee have senior status vis-à-vis the receivables?

Yes. According to the Article 7 of the Law, the Assignment will have effect towards third parties after registration in the Emirates Movable Collateral Registry (EMCR) and in accordance with Chapter 5 of the Moveable Pledge Law, which in turn asserts the Assignee's (or the creditor's) senior status in collecting the assigned receivables.

7. Does the Assignment envisaged by the Law constitute a true sale?

As it is well known, a true sale could exist in a securitization issuance whereby the assets of an originator are transferred to a Special Purpose Vehicle for the purpose of the issuance of securitization notes and such transfer of assets may not be nullified by any insolvency of the originator, particularly as a result of a claw-back during a suspect period. So does the Assignment under the Law constitute a true sale that could override the provisions of Article 168 of the Bankruptcy Law? There are unfortunately still no clear answers to this question and the legislator seems to believe that this will be a matter of merit that should be decided on a case-by-case basis by the UAE courts.

This is still unsatisfactory, especially since UAE judges, and similar to any other civil law judges, have to abide by the statutory provisions that were promulgated. We therefore anticipate an amendment to the Law to clarify this point as a recognition of true sale could potentially allow securitization operations to flourish in the UAE (especially since it is known as a tax efficient jurisdiction).

8. Does the Law apply to any kind of assignments?

It seems that the Law only applies to commercial assignments and therefore consumer and retail assignments are excluded. The Law is in line with the UAE Central Consumer Protection Regulations and Standards, which prohibit any assignment of consumer receivables without the consent of the consumer.

Expected Impact

Conventional and Islamic banks are more likely to mandate that their clients (the Assignor) include a waiver of defenses clause in the Original Contracts on behalf of the debtors (the Assignee's contract counterparty).
Creditors (or the Assignee), and particularly conventional and Islamic banks, have obtained more clarity on the mechanisms and avenues available for fast and robust enforcement against assignments. We therefore expect more frequent enforcement actions upon this specific form of security in the future.
We expect (and advise) creditors to register their assignments in the EMCR registry as soon as possible to be able to enforce against the assigned receivables when the need arises.

To speak to us in relation to the new Law, any financial services related matters, or issues generally, please feel free to contact one of the team members above or your usual Baker McKenzie contact.

For future updates, you can visit and subscribe to our Middle East Insights blog .

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Assignment of rights under UAE Law

This article delves into the assignment of rights as per the laws of the United Arab Emirates (UAE), specifically focusing on the legal landscape within the UAE jurisdiction. It is important to note that the discussion herein does not encompass the assignment of rights in alignment with the regulations established by the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). We will be issuing a separate article focusing on the assignment of rights under the DIFC and ADGM regulations.

In the UAE, the regulation of assignment was traditionally governed by the Civil Transactions Law (Federal Law No. 5 of 1985). The intricacies of the assignment were addressed in detail from Article 1106 to Article 1132 of the Civil Code. It is noteworthy that the Civil Code specifically focused on the assignment of 'debt and claim,' underscoring obligations rather than rights. An essential requirement for the validity of an assignment was the service of notice to the counterparty, coupled with the necessity of obtaining acknowledgement. Article 1109 of the Civil Code stressed the significance of acceptance from the assignor, the assignee, and the counterparty for an assignment to be deemed valid. Nonetheless, the UAE Courts have consistently held that obtaining 'consent' or 'acknowledgement' in an assignment of rights from the underlying obligor is unnecessary, and serving notice to the underlying obligor is sufficient to complete the assignment.

The UAE Factoring Law was issued on 29 August 2021 1, published on 9 September 2021 and came into effect on 7 December 2021 (the “Assignment and Factoring Law”) which was a significant development in the UAE banking and finance legal landscape and a further enhancement to the UAE federal law No.20 of 2016 in relation to the charging or pledging of movables as security for indebtedness which, although was a significant development in its own right, was perhaps unclear in respect of certain aspects like the possibility of selling future receivables before these coming into existence.

The significance of the Assignment and Factoring Law is that is the first law in the UAE that deals with the assignment of rights and receivables in detail. According to the Assignment and Factoring Law, future receivables could be also assigned. The clear possibility to assign future receivables marks a noteworthy advancement with a substantial positive impact. By allowing for the assignment and capture of future receivables within the relevant agreement, this development presents a forward-thinking approach to financial transactions. Traditionally, securing future receivables was relatively unclear in certain aspects, limiting the scope of collateral. However, the ability to extend such interests to future receivables introduces a new level of flexibility and foresight in financial arrangements.

The UAE Assignment and Factoring Law extends its scope to receivables arising from any transaction within the realms of commercial or civil dealings, regardless of whether conducted through a regulated financial market. This includes transactions with or without the right to recourse against the assignor. Nevertheless, the law excludes its application to the following transactions:

Transactions undertaken by individuals for personal, family, or household purposes.

Financial contracts governed by netting agreements.

Foreign exchange transactions.

Systems and agreements related to interbank payment, netting systems, and adjustments concerning securities, assets, or other financial instruments.

Buyback of securities, assets, or financial instruments deposited with a broker.

The right to payments established through endorsable instruments.

The right to payments deposited into credit accounts with banks.

The right to payments arising from securities, documentary credits, and letters of guarantee.

Crucial aspects of the Assignment and Factoring Law encompass the necessity for a precise delineation of receivables, their relevance to prospective receivables, certain representations and warranties by the assignor, the enforceability of assignments notwithstanding contractual restrictions and the requirement to register the security interest in the Movables Collateral Register (the “Register”). Additionally, the legislation delineates the rights of the counterparty and emphasizes the irrevocable status of the assignment upon payment to the assignee.

An assignment becomes legally binding between the assignor and the assignee upon execution, even if notice is not served on the underlying obligor. This means that although the assignment retains its validity in the absence of notice to the underlying obligor, it only takes effect against the underlying obligor when appropriate notice is delivered. Otherwise, the underlying obligor shall continue to remit payments to the assignor. This aligns with the UAE Courts’ precedents to only requiring notification of the underlying obligor for the effectiveness of the assignment without requiring its consent.

An intriguing interpretation of the foregoing suggests that in the context of finance transactions, the assignment may function as a security interest in the receivables, not solely as a method of repayment.

The assignee of a receivable holds the authority to assert rights over the receivable either in accordance with the terms set forth in the receivables assignment agreement or aligning with the Federal Draft Law No 4 of 2020 on Securing Interest with Movable Property (and its Executive Regulations) (“Movables Security Interest Law”). This provision explicitly emphasizes the parties' ability to mutually agree on enforcement methods within a receivables assignment agreement, supplementing those outlined in the aforementioned law.

To ensure priority over other secured creditors, the assignee must register the security interest in the Register in accordance with the Movables Security Interest Law. It should be noted that in some non-financial free zones in the UAE, the relevant regulations governing the entities established in such non-financial free zones require registering the security interest in the security register maintained by the relevant registrar or the company.

Elhassan Abdelrazek

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LAW 229 Rules of Obligation: Reading list

Law 229 rules of obligation.

Department: Bachelor of Law

Module Description: This module covers the execution of legal rights whether discretionary or obligatory. It deals with conditional obligations and time of performance. It also covers descriptions and modalities, obligation transmission, right & debt assignment; substitutionary performance, such as set-off agreements; specific performance & damages; legal mechanisms for protecting legal performance; right to retain; joint liability; assignment of rights/debts; termination, repudiation, force majeure. It is intended to consider these topics under both English law and UAE law.

Module texts

The module coordinator will provide students with mandatory texts on UAE Law, prepared purposefully for this particular module.

E McKendrick, Contract Law (15th edn Palgrave MacMillan, 2023) Purchase eBook / Access 12th edition

United Arab Emirates

An outline of pre contractual obligations in relation to the United Arab Emirates.

Key contacts

Pre contractual negotiations, is there an implied duty of good faith to continue to negotiate.

Prior to the formation of a binding contract, there is no onus on the parties to continue negotiations in good faith under United Arab Emirates (UAE) law.

However, if the essential elements of the contract and all other lawful conditions which both parties regard as essential have been agreed, potentially with further details to be agreed upon at a later stage, and no express stipulation that the contract has not yet been agreed, then a contract may be deemed to have been already made.

Terms may be implied into the agreement even if it was not necessarily the parties’ intention to include them and may include that which is incidental to its performance by reason of law, custom and the nature of the transaction.

Under the UAE Civil Code, if a contract is deemed to have been entered into, the contract must be performed in accordance with its contents and in a manner consistent with the requirements of good faith.

It should therefore be made clear during pre contractual negotiations that the contract will not be binding until all details have been finalised and it has been executed. It would be prudent to record both parties’ agreement to this principle in writing in a Memorandum of Understanding and mark all pre contractual documents as being non binding and “subject to contract” and where possible avoid using UAE law governed MOU documents.

What are the consequences of termination of negotiations by one party unilaterally?

If the essential elements of a contract are sufficiently well defined such that it is deemed to have been entered into, then remedies for breach are available. No remedies are available if this is not the case.

What is the potential impact on third party rights?

Under UAE law a contract may not impose an obligation upon a third party but it may create a right.

Further, it is permissible for a person to impose a condition that rights are to be for the benefit of a third party. Such condition shall confer upon the third party a direct right against the undertaker for the performance thereof.

Confidentiality agreements

Are there implied confidentiality obligations where there are no formal confidentiality agreements entered into by the parties.

In the UAE, there are no general confidentiality provisions implied into contracts. However, the UAE Civil Code requires an employee to keep his employer’s industrial and trade secrets confidential during and after termination of a contract if this is customary practice, in addition to any express contractual provisions.

Furthermore, the UAE Penal Code creates three criminal offences with respect to breaches of confidentiality which parties should be aware of. These are as follows:

it is an offence to publish news, pictures, or comments pertaining to the secrets of people’s private or family lives, if these are real and true
it is an offence for any person, who by reason of his profession, craft, situation or art is entrusted with a secret, to disclose it other than as permitted by law, or to use it for his own, or another person’s advantage.
it is an offence for any individual to open a letter or telegram without the consent of the addressee, or to eavesdrop on a telephone conversation

What are the consequences of breach?

In relation to the breach of a contract of confidentiality, the UAE Civil Code provides that if the parties cannot be restored to the pre contractual position, then compensation may be ordered by the court.

While it is permissible to provide for liquidated damages in the contract, the court retains the power to override them and award compensation for breach of contract equal to the loss. If amounts of compensation are not fixed by the contract, the court will assess them with reference to the actual loss or damage suffered.

In relation to the offences under the Penal Code mentioned above, the penalties include terms of imprisonment and fines.

Are specific terms/formalities required for a binding confidentiality agreement?

No. The formalities required for a binding confidentiality agreement are usually no different to those required for any other type of contract.

The requirements for a binding contract in the UAE are similar to those in common law jurisdictions such as England. Article 129 of the Civil Code provides for three key components of a legal contract under UAE law including: agreement upon the essential elements of the contract (offer, acceptance, intention to create legal relations and consideration); certainty of the subject matter of the contract and the contract having a lawful purpose.

It is also important to note that whilst not a requirement under Article 129 of the Civil Code, a contract must be performed in a manner consistent with the requirements of good faith (Article 246, Civil Code).

Exclusivity arrangements

Can an obligation to negotiate exclusively be implied where no formal agreements are entered into by the parties.

It is unlikely that this will happen. However, it is worth noting that in some cases there may be a legal requirement for exclusivity. For example, when appointing an agent in the UAE, the agent is given by law exclusive rights to represent the principal in the territory covered by the agreement and can prevent the products covered by the agency agreement from being imported into the territory through another agent.

Are any specific terms/formalities required to make exclusivity arrangements enforceable?

No, the formalities required for a binding exclusivity agreement are usually no different from those required for any other type of contract, as is the case with Confidentiality Agreements.

Heads of agreement

Are they legally binding.

Under the UAE Civil Code, if parties to a contract agree on the essential elements of the obligation and the remainder of the other lawful conditions which the parties regard as essential and leave matters of detail to be agreed upon afterwards, but they do not stipulate that the contract shall not be regarded as made in the event of absence of agreement, upon such matters, the contract is deemed to have been made.

If a dispute arises as to the matters which have not been agreed upon, this is decided in accordance with the nature of the transaction and the provisions of the law.

However, each party has the right to revoke any agreement while the “parties are still in session (1) ” (i.e. have not parted or finalised the agreement). Therefore, whether a heads of agreement is inferred to be binding depends on the status of the 'pre contractual negotiations'.

If the parties intend for the heads of agreement to be binding, they should ensure that:

it is clearly stated as being binding or that the relevant clauses are clearly stated as being binding, and
the essential terms are clearly stated so they can be interpreted with sufficient certainty.

Can heads of agreement have any tax implications/adverse consequences?

Heads of agreement are unlikely to have tax implications in the UAE but the tax consequences for a party to a contract will vary depending on the specific circumstances of that party.

(1) Literally while the parties are still at the majilis (or meeting place) discussing the agreement.

Are break fees usually payable?

We do not regularly see break fee arrangements in this jurisdiction. However, in relation to negotiations connected with a share purchase agreement, it may be reasonable for the buyer to receive a break fee in the event that the seller breaches exclusivity (or other obligations) to cover the costs incurred by the buyer in undertaking its due diligence of the company.

From a seller’s perspective, it may possible to ask for a break fee if a buyer has been granted exclusivity, possibly following an auction process, and then fails to proceed to completion for reasons not linked to any adverse findings from its due diligence of the target company.

What are the main legal issues to be considered e. .enforceability?

Enforceability issues relating to break fees in UAE contracts may be complex. As a form of liquidated damages, break fees may be specified in contractual agreements.

However, the law allows either party to a contract to make an application to a court for the specified damages to be varied so that the amount of compensation is equal to the actual loss. Any agreement which is contrary to this is void.

UAE law provides that in the absence of any particular agreement or law, the rules of commercial custom shall apply. So, it is difficult to forecast with any degree of certainty how a contract may be interpreted and applied by the courts; much would depend upon the facts of a particular case, the ambiguity (or absence thereof) of the terms of the contract in question, and the then current legislation.

It is generally advisable for parties to include an arbitration clause so that a jurisdiction can be specified which is more familiar to the parties, and in which a more predictable judgment may be expected.

The UAE is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and so arbitration judgments obtained in other jurisdictions may be enforced in the UAE.

Judgments obtained from foreign courts, however, are less likely to be enforced in the UAE and so an attempt to specify a foreign governing law and jurisdiction for a contract with a significant UAE element may not be effective.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.

James Coleman

Partner Dubai, United Arab Emirates

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Apps & Integrations
Mondaq United Arab Emirates

Assignment Of Rights In The United Arab Emirates

Dubai Court of Cassation Case No. 188/2006

Issued on 13th March 2007

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Good Faith: English Law v the UAE Civil Code

Introduction.

The reluctance of English common law to imply a term of good faith into agreements negotiated between two commercial parties at arm’s length is well known and is based on the long-established doctrine of freedom of contract. In stark contrast in civil law countries such as the United Arab Emirates, performing obligations in a manner consistent with good faith is a fundamental part of the contract.

A series of English cases on good faith in early 2013 had raised the prospect that the English courts may be on their way to recognising an overarching duty of good faith but this prospect now seems to have receded. This article provides an update on the latest position under English law whilst highlighting the contrasting position under the UAE Civil Code. Those working with construction standard forms internationally need to keep these very real differences in mind as they can have a significant impact on how some provisions operate in practice.

English case law on good faith: the latest position

The early 2013 case of Yam Seng Pte Ltd v International Trade Corporation Limited (“ITC”) 1 involved a long-term distribution agreement for fragrances produced by ITC bearing the name “ Manchester United ”. The court adopted a fairly broad and purposive approach regarding the circumstances in which good faith obligations might be implied, raising expectations that the courts were open to an overarching duty of good faith being implied more widely.

In that case Yam Seng (the distributor) argued there was an implied term that the parties would deal with each other in good faith and, specifically, that ITC had: (i) failed to act with an implied obligation of good faith and prejudiced Yam Seng’s sales by offering the same products for domestic sale below the duty free prices that Yam Seng was permitted to offer; (ii) instructed or encouraged Yam Seng to incur marketing expenses for products that ITC was unable or unwilling to supply; and (iii) offered false information upon which Yam Seng relied to its detriment. There were no express terms of the contract covering any of these points.

Leggatt J noted: “ The content of the duty of good faith is established by a process of construction which in English law is based upon an objective principle . The Court is concerned not with the subjective intentions of the parties ...”

On the facts, only two obligations were implied. First, the court found there was an obligation not to undercut duty free prices, and secondly, there was an obligation not to knowingly provide false information; a duty of good faith was implied in both these respects. The first obligation was contrary to usual standards of commercial dealing and the second was implied into the agreement between the parties as a matter of fact.

The fact that the contract was a long-term distributorship agreement which, the court noted, required the parties to communicate effectively and cooperate with each other in its performance, appears to have influenced the result. The state of the contract, which had not been drafted by lawyers also appears to have swayed the Court.

In stark contrast, the Court of Appeal took a much narrower and restrictive approach in Compass Group UK and Ireland Ltd v Mid Essex Hospital Services NHS Trust . 2 This also involved a long-term contract for catering services.

The issue was whether the Trust was entitled to terminate the contract on the basis that Compass had exceeded the number of Service Failure Points allowed in any given six-month rolling period.

This contract contained an express duty to cooperate in good faith “ as is necessary for the efficient transmission of information and instructions and to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract ”. 3

The question before the court was whether this clause provided an overarching obligation on the parties to operate with each other in good faith. The Court of Appeal held that whilst there was an obligation to act in good faith it was specifically focused on the obligation to take all reasonable action as was necessary for the efficient communication of information and instructions. There was nothing that required the parties to act in good faith in relation to anything else.

Overturning the first instance decision, 4 the court held that commercial common sense did not favour the addition of an overarching duty to cooperate in good faith in circumstances where good faith had been provided for in the contract in such a precise manner already.

Applying this reasoning to the facts of the case, the Court of Appeal considered that the Trust was not prevented from awarding service failure points for failures in performance. The contract expressly contained precise rules for these matters and the ability of the Trust to impose service failure points for poor performance was an absolute contractual right: “ if the parties want to impose such a duty they must do so expressly ”.

The issue of good faith was further considered in TSG Building Services plc v South Anglia Housing Ltd (“SAH”) 5 in May 2013 in relation to an ACA Standard Form of Contract for Term Partnering.

Clause 1.1 of the contract provided:

“ The Partnering 6 Team members shall work together and individually in the spirit of trust, fairness and mutual cooperation for the benefit of the Term Programme . . . and in all matters governed by the Partnering Contract they shall act reasonably and without delay .”

The contract contained an “ unqualified and unconditional right to terminate ” at any time (i.e. termination for convenience).

SAH terminated the contract and TSG argued that the termination was wrongful and in breach of clause 1.1. The issue the court had to decide was whether the good faith clause was pervasive such that it applied to the whole contract and therefore to the termination provisions.

The court accepted that, in principle, an express obligation to act in good faith could be pervasive and, depending on the nature and drafting of the clause, it may be possible for it to affect all aspects of the contract.

However, the court held that this was not the case here. The contract contained an unqualified right to terminate for convenience, to which the obligation to act in good faith could not possibly extend. The entitlement to terminate the contract was absolute. Each party was entitled to terminate at any time. Further, clause 1.1 primarily related to the assumption, deployment and performance of roles, expertise and responsibilities set out in the Partnering Documents.

In the later 2014 case of Bluewater Energy Services BV v (1) Mercon Steel Structures BV and others , 7 Ramsey J examined again the impact of a good faith provision in the context of termination.

That contract provided for a notice of default to be issued to the subcontractor requiring them to “ immediately commence and thereafter continuously proceed with action satisfactory to Bluewater to remedy such default ”. If they did not do so, a notice of termination could then be issued.

The subcontract also provided that the parties “ shall uphold the highest standards of business ethics in the performance of the contract. Honesty, fairness and integrity shall be paramount principles in the dealings between the parties .”

Ramsey J referred to the Court of Appeal decision in Socimer International Bank Ltd (in liquidation) v Standard Bank London Ltd , 8 which related to the standard to be applied in circumstances where the valuation of assets was left entirely in one party’s hands. In that case it was held that a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honest good faith and genuineness and the need for the absence of arbitrariness, capriciousness, perverseness and irrationality. However, the decision remained with the decision-maker and was therefore subjective.

Ramsey J decided that the same standard applied in these circumstances and was not impacted by the express clause in the contract although that clause was consistent with it. He went on to find that termination had been justified on four of the five main grounds alleged in the contractor’s notice of default. 9

It seems then that the English courts are not ready to imply a general doctrine of good faith. The judgment of the High Court in Yam Seng appears to have been sidelined (if not directly overruled) by the Court of Appeal and subsequent cases.

If the parties want to have an express duty of good faith they need to create one and they should think very carefully about its scope. The English courts will not allow good faith-type wording to overrule an absolute contractual right such as the right to terminate for convenience. The parties will need to expressly provide that a good faith obligation operates in relation to such a provision.

The situation might, however, be different if there was evidence to suggest a breach of an express good faith obligation in circumstances where there was a discretionary right (for example awarding a discretionary bonus to an employee). In those circumstances a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honest good faith and genuineness and the need for the absence of arbitrariness, capriciousness, perverseness and irrationality.

Good faith in UAE contracts

In stark contrast, a duty to act in good faith is implied into all contracts that are subject to UAE law. This is underscored by principles of fairness developed under Sharia law.

Article 246 of the UAE Civil Code provides that:

“ a contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith ”.

This in effect is a requirement not to use the terms of a contract to abuse the rights of the other contracting party, not to cause unjustified damage to the other party and to act reasonably and moderately.

Decisions of the Dubai Court of Cassation have ruled that an act of bad faith by one contracting party may provide a cause of action for the other and the duty of good faith is therefore overarching, unlike at English law. In deciding whether an act constitutes bad faith the court may also look at Article 106 of the UAE Civil Code which provides that a party is prohibited from exercising its rights if:

it is intended to infringe the rights of another party;
the outcome is contrary to the rules of Islamic Sharia, the law, public order, or morals;
the desired gain is disproportionate to the harm that will be suffered by the other party; or
it exceeds the bounds of custom or practice.

There are some potentially wide-ranging ramifications of this including:

Good faith is most likely to be applied to evidence for, or to support, an allegation of breach. Where, for example, building materials are found to be defective a breach will be easier to establish if there has been some attempt to conceal this or cover up the materials once incorporated into the works.

Reliance on a time bar notice (e.g. FIDIC’s clause 20.1) is likely to be restricted where a party seeking to rely on it knew about that breach previously (for example, if notification of the claim was made informally and is recorded in meeting minutes or similar but was never formally made). In other words, denying a claim due to the time bar when it had already been communicated, albeit informally, would be an act of bad faith.

Avoiding liability for a very substantial claim due to a time bar may also be unlawful where the losses were serious and unequal with the employer’s contractual claim to be notified in a required time period (for example 28 days under clause 20.1 of FIDIC). Article 106 (1) of the UAE Civil Code provides that “ a person shall be held liable for an unlawful exercise of his rights ” and this, together with the good faith obligation, may be used to challenge the effectiveness of a time bar in such circumstances.

Whilst the UAE Civil Code does provide that parties may fix a pre-agreed compensation mechanism or amount in their contract, the court may also vary the pre-agreed amount of compensation or damages to equal the actual loss in any event, regardless of whether there was any “act of prevention” on the part of the employer. 10

Good faith is also applicable in relation to termination for convenience clauses although it is worth noting that the duty of good faith is not applicable to the obligation itself but to the performance of the obligation. Accordingly the parties’ agreement that the employer may terminate the contract for convenience is a valid agreement and the UAE courts will normally uphold this. Although this employer’s right might be looked at as contradicting the good faith principle, it would be an enforceable contract term as it was freely entered into. However, if the employer relies on this contract provision to terminate the contract in circumstances that give rise to performing the contract in a manner that is inconsistent with good faith, then the court might have a different view. For example, if the contract provides for termination for convenience and limits the liability of the employer to compensate the contractor for the work done until the date of termination, but excluding mobilisation cost, the employer who terminates the contract for convenience immediately after mobilisation and before the contractor has done any work is performing the contract in bad faith. In this case, the contractor might rely on Articles 246 (good faith), 106 (abuse of right) and 390(2) (claiming actual loss) of the UAE Civil Code to recoup its losses. 11

The stark contrast between the position regarding good faith under English law and that under the UAE Civil Code remains in place. This may make a real difference with regard to how some standard provisions in construction contracts are interpreted. As outlined above, the same time bar and termination for convenience provisions may result in very different outcomes on similar facts, depending on how the governing law approaches the issue of good faith.

By Claire King 12 Senior Associate, Fenwick Elliott LLP

Back to the previous page

1. [2013] EWHC 111 (QB) (February 2013)
2. [2013] EWCA Civ 200 (March 2013)
3. Clause 3.5 of the contract.
4. At first instance the High Court ruled that the Trust had abused its contractual powers in relation to the service credits and breached the express provision of Clause 3.5. It further held that the Trust had acted capriciously and irrationally in the way in which it deducted out the credits (e.g. deducting £84,540 for one day out of date chocolate mousse).
5. [2013] EWHC 1151 (TCC)
6. TPC 2005 as amended in 2008.
7. (2) Mercon Holding BV; (3) Mercon Groep BV [2014] EWHC 2132 (TCC).
8. [2008] EWCA Civ 116
9. In the Compass case, Jackson LJ had rejected such an implied term on the grounds that the term in question was an absolute contractual right and not one which could be exercised with discretion.
10. See Article 390 (2) of the UAE Civil Code.
11. These three UAE Civil Code Articles normally work together and it is common to see arguments referring collectively to the three of them in court pleadings.
12. With thanks to Lisa Kingston of Fenwick Elliott for her great assistance in preparing this paper and Ahmed Ibrahim of Ahmed Ibrahim Advocates and Legal Consultants for his assistance in relation to the position under UAE Law.

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Middle East | Publication | May 2023

On 2 January 2023, a new UAE law “Federal Law 34/2022 regulating the advocacy and legal consultancy profession” came into force. This was followed by the implementation of several administrative decisions in Dubai. We refer to the new federal law and the Dubai decisions as the “New Laws”.

In the New Laws, the legal profession in the UAE continues to be categorized in two ways: (i) advocates (i.e. those lawyers that appear before the UAE courts and have rights of advocacy); and (ii) legal consultants (lawyers practising at law firms that do not have rights of audience before with the UAE courts). The New Laws also contain provisions that deal with in-house lawyers.

We set out below the key features of the New Laws:

In-house lawyers

Legal consultants, visiting legal consultants, supervision and disciplinary provisions.

In-house lawyers are now required to register as non-practising lawyers. The procedures, terms and conditions for registration will be set out in executive regulations that are due to follow. Notably, for in-house lawyers in Dubai, the Dubai Legal Affairs Department (the DLAD ) shall establish a roll of “non-practising advocates” and “non-practising legal consultants” whose registration will be renewable on a yearly basis.

The federal law seeks to regulate the activities of in-house lawyers to restrict them from carrying on an independent practice in addition to their in-house role. In-house lawyers can only work for the company they are employed by and cannot appear in courts, other than in their role as an in-house lawyer representing his/her employer.

There is no clarification as yet on whether in-house lawyers will now be required to complete CPLD accreditation or whether in-house lawyers could be subject to the regulatory grievance processes or could be sanctioned for violations in the way that practising lawyers are.

We expect that the executive regulations that are due to be passed will clarify these matters.

The New Laws set out enhanced obligations for UAE advocates.

These include stringent registration requirements, which include written exams, an interview and a medical test and a copy of a valid professional liability insurance policy. A significant development is that advocates can now agree contingency payments for their fees (where relevant, of up to 25% of the court awarded amount).

We note that non-UAE national advocates can be registered as advocates, which was the position under the previous law.

In 2023, a new Civil Procedure Code was passed which paves the way for certain cases in UAE court circuits to be heard in English. It remains to be seen whether all advocates will still need to be Arabic speakers or whether (now that some court proceedings can be heard in English), there will be a way for English speaking lawyers in the UAE to appear as advocates.

Legal consultants continue to be prohibited from appearing in courts, which is a right reserved only for advocates.

The New Laws place an emphasis on the duties and obligations of lawyers with a specific focus on:

Informing clients of any conflicts;
Keeping clients informed of case stages and progress;
Returning original paperwork and documents after the engagement is over (subject to exceptions where the professional fees have not been paid);
Obligations around confidentiality which are broader in this law than in previous laws; and
Requirements to have retainer agreements in place and the factors to be taken into account when assessing the fee payable.

The law sets out more stringent requirements on foreign law firms setting up branches in onshore UAE who are now required to develop and train UAE nationals.

Legal consultants continue to be required to meet CLPD requirements.

A notable change is that the New Laws issued in Dubai make it a regulatory requirement that any “Visiting Legal Consultants”, (i.e. individuals outside the UAE providing legal services in the UAE) must now obtain a permit to provide those services.

This includes any legal services being provided in the DIFC, before DIAC or at any law firm licensed in the UAE. The visiting legal consultant shall be granted a permit to practice the profession for no more than 30 working days per year (which can be extended) or until the completion of a specific legal service.

The New Laws issued in Dubai provide for the setting up of a DLAD professional conduct committee, as well as a DLAD violations committee.

The procedures and timeframes are now detailed in these laws, which include (in the case of complaints) that a division within the DLAD can:

Gather information and seek responses from the practitioner or managing partner of the firm;
Summon any interested parties to hear their statements; and
Request data and documents relating to complaints.

Once a report has been prepared by a directorate within the DLAD, the report will be referred to the relevant committee.

Both the DLAD professional conduct committee and the violations committee will have wide powers to continue their investigation of potential violations. This includes hearing witnesses and seeking documents.

If a violation has occurred, the lawyer could be at risk of (i) a written warning, (ii) suspension for a period of up to 2 years or (iii) being struck off from the roll.

Once a decision has been issued, appeals can be issued to the DLAD Grievance Committee, within a 30 day period of the decision.

At a federal level, the regulatory authorities across the Emirates (i.e. other than lawyers regulated by the DLAD which has its own Emirate-specific processes) can also impose sanctions and call lawyers before a disciplinary board.

The disciplinary board’s hearings will be held behind closed doors although the lawyer can be legally represented.

In summary, the regulation of foreign law firms and legal consultants, as well as those lawyers that visit the UAE on an ad-hoc basis and give legal advice is tightening.

The processes in place to deal with grievances against lawyers is now more specific and detailed.

Law firms, as well as individual lawyers, should ensure that they are aware of the duties and obligations upon them.

These changes will also be of interest to professional indemnity insurers since the tighter legal and regulatory environment for lawyers in the UAE potentially means a change in the risk landscape of the legal profession.

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Privity of Contracts Under UAE Law

The doctrine of privity of contract is a well-established principle under UAE law. This principle states that the rights and obligations in an agreement arise only between the parties to that contract and are enforceable between them and a third party cannot exercise such rights and obligations. The effect of this doctrine is that, if two parties enter into a contract for the benefit of a third party, the third-party is not allowed to enforce any of the terms agreed in this contract.

Article 125 of Federal Law Number 5 1985 on the Civil Transactions Law of the United Arab Emirates (the Civil Code) defines the contract as a meeting of a valid offer expressed by one of the contracting parties with an acceptance made by the other party in the contract. The making of a contract requires mutual consent of the two parties which creates a legal obligation between the two parties. In UAE the doctrine of privity of contract exists and it clearly states that only the parties to the contract can enforce the rights and obligations and a third person has no rights on such contracts.

According to article 129 of the Civil Code, the essential elements constituting a contract are:

“That the two parties to the contractual agreement should agree upon the essential elements;
The subject matter of the contract must be something which is capable of being possible, permissible, defined, specified, or dealt in; and
The obligation arising out of a contract must be for a lawful purpose.

The above elements of a contract go hand-in-hand with the privity of the contract. Pursuant to article 141 of the UAE Civil Code, a contract is formed only when the agreement between the parties to the contract concerning the essential elements of the obligation. An example of the doctrine of privity of contract is the case of Dunlop Pneumatic Tyre Company Ltd vs. Selfridge & Co Ltd, UKHL 1 (26 April 1915), AC 847. In this case, Dunlop is a tire manufacturing company that does not want to sell its products below the standard resale price. Dunlop agreed with its dealer Dew & Co. not to sell the tire below the recommended retail price. Dunlop also required their dealers to get the same undertaking from their retailer Selfridge also. As per the agreement, if retailers sold the tire below the recommended price, they would have to pay 5 euros per tire as damages to Dunlop. This was agreed between Dew and Selfridge and thus Dunlop was the third party to the agreement between Dew and Selfridge. Later Selfridge failed to comply with the agreement and sold the tire below the recommended price. Hence Dunlop sued Selfridge for damages and also filed an injunction to stop them from continuing the sale. The decision was in favor to Dunlop in the initial trial. And in appeal by Selfridge, the decision was reversed in favor of Selfridge. The Court held that Dunlop could not claim for damages since they are not a party to the agreement between Selfridge and Dew and also, has no contractual relationship with Selfridge.

Liabilities of Subcontractor And Employer

Sub-contracting is permissible under UAE law. According to Article 890 of the Civil Code, a contractor is allowed to sub-contract its work in whole or in part unless otherwise stated in the contract, and it also states that the contractor shall be liable towards the employer. The sub-contractor nominated by the employer is called the nominated sub-contractor, whereas the sub-contractor selected by the main contractor is called the domestic sub-contractor. In both cases, the sub-contract agreement will be made between the main contractor and sub-contractor. Hence there will not arise any contractual relationship between the employer and the sub-contractor. As a result, the employer is not contractually liable towards the sub-contractor for any disagreement under the subcontract agreement as well as the sub-contractor is also not contractually liable towards the employer for any delayed or defective works under the subcontract agreement. According to article 891 of the Civil Code, a sub-contractor is not entitled to claim anything against the employer which is due to them from the main contractor unless they have made an assignment against the employer. The UAE Court of Cassation in a decision dated 20 April 2005 rules that, according to articles 891 and 892 of the UAE Civil Code, the liability of the main contractor against the employer remains the same and there will be no direct contractual relations between the employer and the sub-contractor. Thus, the sub-contract agreement determines the rights and responsibilities of the main contractor and sub-contractor in which the employer cannot rely on such agreement unless the main contract provides to the contrary.

The sub-contractor who is not a party to the agreement with the employer is not under any contractual obligation towards the employer. However, to create a bond between the sub-contractor and employer, both parties can rely upon up a collateral warranty, which is enforceable under the UAE law through which both parties can sue or claim for damages suffered. Warranties are considered as one of the sources of the obligation under articles 124, 276, and 278 of the Civil Code. Under this collateral warranty, the employer can sue the sub-contractor for his defective work or performance. But taking into consideration of article 890(2) of the Civil Code, the main contractor will remain liable for the subcontractor’s defective performance. However, in a nominated contractor, the main contractor might take a defense by proving that he had not played any part in the delay or default of the sub-contractor. A well-known decision of the Dubai Court of Cassation in case number 266 of 2008, held that if the sub-contractor was selected by the employer or its consultants, the employer will be liable for any delay or defective performance from the part of the sub-contractor and the main contractor shall not be held liable for any penalty for delay if he can prove that such delay is caused by the sub-contractor and he didn’t play any part in such delay. But this decision made by the court is contrary to the general rule set out in article 890(2). Hence to succeed in the defense the main contactor must seek help from commercial lawyers to demonstrate to the court that he has properly performed his contractual obligations and supervision duty yet the defective performance or the delay could not be avoided for the reasons solely accountable to the fault of the nominated sub-contractor.

According to article 891 of the Civil Code, a sub-contractor is not entitled to claim anything against the employer which is due to him from the main contractor unless they have made an assignment against the employer. Since there is no direct contract between the employer and sub-contractor, the employer is not under any obligation towards the sub-contractor and also the sub-contractor may not claim damages from the employer as per the law. However, the sub-contractor can seek due payments from the main contractor. But problem arises when there is a clause of ‘pay-when-paid” is imposed in the subcontract agreement, which is enforceable under the UAE law. In such cases, the sub-contractors are not able to claim its due from the main contractors until the main contractor has been paid by the employer. If the sub-contractor sues the main contractor for damages before the main contractor get paid by the employer, then the court has the authority to dismiss the case on the ground of premature filing of the claim. However, by creating a valid assignment between the employer and the subcontractor, both parties can sue or claim damages to each other and such assignment enables the sub-contractor to bring a direct action against the employer for non-payment of the dues.

The doctrine of privity of contract is also applicable to heirs. According to Section 3(2) the Civil Code, the heirs, beneficiaries, and successors of the contracting parties to the contract are included in the scope of that specific contract. Article 252 of the Civil Code provides an exception to the doctrine of privity of contract, that a contract may confer right on a third party. However, such an agreement cannot impose an obligation upon a third party. Bank guarantee, documentary credit, discharging the debt of another, and third-party insurance policies are the exceptions to the doctrine of privity of contract. Article 253 defines that “a person who binds himself to procure the performance of an obligation by a third party does not in so doing bind the third party. If the third party refuses to perform the obligation, the person who engaged himself to obtain such performance shall be liable to pay damages to the other contracting parties. He may avoid paying damages by performing himself the obligation he undertook to procure. Where the third-party consents to perform the obligation, his consent is effective only from the time that it is given, unless it is indicated that he intended expressly or impliedly that the consent is retrospective as from the time of issuing the undertaking.

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Given the absence of a separate legal regime for an assignment of rights under UAE law, UAE Courts have decided cases on assignment of rights based on existing commercial common practices and comparative law. ... against a corporate borrower (the "Borrower") for non-payment of the latter's obligations under a term loan facility. Facts of ...
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The recently enacted Federal Decree-Law No. 16 of 2021 on Factoring and Transfer of Civil Accounts Receivable (the New Law) which enters into force on 8 December 2021, being the first federal regulation in the United Arab Emirates (the UAE) dealing specifically with factoring and the assignment of receivables, has ushered in some much-needed clarity as to how these arrangements should work in ...
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The objective of the course is to examine UAE law in relation to assignment and liens. The course is divided into two sections, in which we will examine: Assignment: An assignment is the transfer of a right, debt or obligation from one party to another. An assignment is a contract between the assignor and the assignee (and often a third party ...
Assignment Of Rights In The United Arab Emirates
Given the absence of a separate legal regime for an assignment of rights under UAE law, UAE Courts have decided cases on assignment of rights based on existing commercial common practices and comparative law. ... against a corporate borrower (the "Borrower") for non-payment of the latter's obligations under a term loan facility. Facts of the Case.
United Arab Emirates: Attention all banks and financial institutions
The Assignment, although never codified in law (unlike the Novation codified under Articles 1106 et seq. of the Civil Code) has always been consecrated by the UAE courts and required a mere notification of the debtor to be considered valid and allowed the debtor tree itself of its obligations by paying the Assignee.
Assignment of rights in the United Arab Emirates
Following the previous article qualifying "Assignments in the Associated Arab Emirates" (published in the Next issuance of the Law Update) explaining the general conditions plus requirements of a valid assigning in the UAE, the related oulines the prevailing jurisprudence with respect to assignment out rights in aforementioned UAE.
Assignment of rights under UAE Law
This article delves into the assignment of rights as per the laws of the United Arab Emirates (UAE), specifically focusing on the legal landscape within the UAE jurisdiction. It is important to note that the discussion herein does not encompass the assignment of rights in alignment with the regulations established by the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global ...
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The recently enacted Federal Decree-Law No. 16 of 2021 on Factoring and Transfer of Civil Accounts Receivable (the New Law), being the first federal regulation in the United Arab Emirates (the UAE ...
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The Assignment Agreement is a generic template for assigning legal rights, titles, and obligations under an agreement to an assignee governed by UAE law. The Intellectual Property Right Assignment Agreement transfers all rights and titles of a financial nature to the assignee for an unlimited period from the start date of the work delivered.
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Under UAE law, verbal contracts are prima facie, enforceable. The extent of such enforceability will depend on the actions of the parties, e.g. whether they have demonstrated intention to contract ...
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law. In the following Dubai Court of Cassation case, the Courts are guided by the provisions of the UAE Civil Code relating to 'assignment of debts / obligations' in determining the validity of an 'assignment of right'. Dubai Court of Cassation Case No. 188/2006 Issued on 13th March 2007 Claim A civil action was filed before the Dubai ...
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An assignment under UAE law is the transfer of certain obligations or rights from one party to another. In the UAE, assignments are often used as a security arrangement under which a party (the assignor) who is entitled to receive certain benefits (arising from a contract, payment arrangement or receivables), assigns those benefits to a financial institution as security for a financing ...
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Given the absence of a separate legal regime for an assignment of rights under UAE law, UAE Courts have decided cases on assignment of rights based on existing commercial common practices and comparative law. ... against a corporate borrower (the "Borrower") for non-payment of the latter's obligations under a term loan facility. Facts of the Case.
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UAE clarifies factoring and assignments of receivables

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United Arab Emirates: Assignment Of Rights In The United Arab Emirates

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In Depth - Key Takeaways from the Law

2. What is the scope of Assignments?

3. Does the debtor have the right to invoke defenses of the Assignor? And can this right be waived?

4. When can the Assignee enforce against the receivables?

5. Does the Law provide an easier and faster way to enforce?

6. Does the Assignee have senior status vis-à-vis the receivables?

7. Does the Assignment envisaged by the Law constitute a true sale?

8. Does the Law apply to any kind of assignments?

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