Good Faith
The laws of the United Arab Emirates (“UAE”) impose obligations upon contracting parties that are in most cases additional to those obligations set out in the express terms of a contract.
Article 246 of the Federal Law No.5 of 1985 issuing the civil transaction law for UAE (“Civil Code”) stipulates that a contract shall not be restricted to the obligations of the contracting parties to do that which is (expressly) contained in it but shall also include other obligations appurtenant to it by virtue of the law, custom and the nature of the transaction.
Obligation to act in good faith
An example of such other obligation imposed upon contracting parties by virtue of the law is the obligation of Good Faith. This obligation – as set out in the article 246(1) of the Civil Code – provides that a contract must be performed accordance with its contents and in a manner consistent with the requirements of good faith.
There is no definition of good faith carved in stone. However, it is considered that the obligation of good faith positively requires a contracting party to have regard to the legitimate interests of the other in his decisions and actions taken under the contract.
Obligation not to exercise any rights unlawfully
Furthermore, before exercising an express right under the contract to act self-interestedly, a party should consider if such exercise of a right would be considered as unlawful under the Civil Code. According to article 106(2) of the Civil Code, the exercise of a right would be unlawful in the following circumstances:
If there is an intentional infringement (of another’s rights);
If the interests to be gained by such use are contrary to Shari’a law, civil law, public order or morals;
If the interests desired are disproportionate to the harm that will be suffered by others; or
If it exceeds the limits acceptable under the bounds of usage and custom
Summary
The following should be taken into account by parties in their commercial dealings in the UAE:
Parties to a contract are obliged to adhere to obligations set out in the express terms of the contract and those obligations imposed upon them by virtue of the law (i.e. Civil Code), custom and the nature of the transaction.
Such ‘other’ obligations may include the obligation to act in good faith and not to exercise any right (under the contract or law) unlawfully .
In the event that a party breaches such ‘other’ obligations then such party will be held liable to make good the harm caused to the innocent party by virtue of the breach.
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