- Introduction
The United Arab Emirates has enacted Federal Decree-Law No. 25 of 2025 (“New Law”), issuing a new Civil Transactions Law and repealing Federal Law No. 5 of 1985 (“Old Law”) in its entirety. This enactment marks the most significant reform of UAE civil law in over four decades. One of the most consequential innovations of the New Law is the express codification of pre-contractual good faith, including clearly defined disclosure obligations and statutory civil liability for bad-faith negotiation, issues that under the former regime, were addressed only indirectly through general principles and judicial developments.
For the first time in the UAE, the law explicitly governs how parties must behave during contract negotiations, imposing statutory duties of good faith and disclosure and introducing liability for bad-faith negotiation practices. These changes fundamentally alter how contracts are negotiated, assessed, and litigated in the UAE. This article examines how the new Civil Transactions Law reshapes contract negotiations, aligns domestic law with international civil-law standards, and introduces a structured doctrine of pre-contractual liability while preserving freedom of contract.
- The Old Legal Position vs. the New Legal Framework
Under the repealed Civil Code, the doctrine of good faith was confined almost exclusively to the performance stage of contracts. As per the Old Law, “The contract must be performed in accordance with its contents and in a manner consistent with the requirements of good faith.” This provision applied only after a binding contract had been concluded. It did not regulate negotiations, impose disclosure obligations, or recognise liability for failed or abusive negotiations. Consequently, parties were generally free to terminate even advanced negotiations abruptly without statutory liability, unless fraud could be established under general tort principles.
The New Law, however, introduces an express and structured pre-contractual regime through Articles 119–122 and Article 138. Article 121(1) of the New Law provides: “The proposal of pre-contractual negotiations, their conduct, and their termination must be in accordance with the requirements of good faith.”
This marks the UAE’s first explicit statutory recognition that good faith applies before a contract is concluded. Parties must act honestly and responsibly when entering into, continuing, or terminating negotiations, introducing a civil-law-style doctrine of culpa in contrahendo (fault in contracting). Conduct that may now give rise to liability includes:
• Entering negotiations without a genuine intention to contract.
• Prolonging negotiations strategically to exclude competitors.
• Abruptly terminating advanced negotiations after inducing reliance.
- Freedom of Contract Preserved
Article 121(2) of the New Law safeguards commercial autonomy. It lays down that “If a contract is negotiated, the negotiations do not create an obligation on the parties to conclude such contract.” This provision confirms that good faith does not equate to forced contracting. Parties remain free to withdraw for legitimate commercial reasons, provided such withdrawal is not abusive, deceptive, or manipulative.
- Liability for Bad-Faith Negotiations
Article 121(3) of the New Law states: “Whoever negotiates or terminates negotiations in bad faith shall be liable for compensation for the actual damage sustained by the other party.” This is a major doctrinal innovation. For the first time, UAE statutory law recognises that liability may arise even in the absence of a concluded contract, provided bad faith, causation, and actual damage are established.
Recoverable damages are likely to include legal costs, due diligence expenses, and reliance losses. However, the law expressly limits the scope of damages: “Compensation shall not include expected interests from the contract that was not concluded [lost profits], or lost opportunities to realise such interests, unless otherwise agreed.”
- Statutory Duty of Disclosure
Article 122 of the New Law transforms what was previously an implied moral obligation into a mandatory legal requirement. Articles 122(1) and 122(2) mandate that any party aware of information that is “decisive” to the consent of the other party must disclose it. This applies where the other party’s ignorance is presumed or where that party has placed trust in the negotiating party.
Parties must disclose information relating to:
• The contract to be concluded.
• The circumstances and conditions surrounding the contractual process.
• Financial insolvency, regulatory restrictions, or legal incapacity.
Crucially, Article 122(4) provides that parties cannot agree to limit, waive, or exclude the obligation to disclose material information. Any clause attempting to do so is null and void. A breach of this duty entitles the aggrieved party to seek annulment of the contract.
- Introduction of Framework Agreements
Article 138 of the New Law explicitly recognises “framework agreements”, i.e., contracts whereby parties define the essential terms governing future contracts. This codifies common commercial structures such as Master Services Agreements (MSAs), distribution frameworks, and call-off contracts.
Under Article 138, the terms of the framework agreement are legally deemed to form part of the subsequent contracts, ensuring legal consistency and enforceability across long-term commercial relationships.
- Reinforced Good Faith in Contract Interpretation
Article 120(11) of the New Law strengthens the regime by mandating that: “The contract shall be interpreted in a manner that achieves justice and good faith between the parties.” This allows courts to consider negotiation history, draft exchanges, and reliance behaviour when resolving contractual disputes, ensuring that strict literalism does not override the requirements of honesty and trust.
- Summary of Key Differences
| Issue | Old Law (No. 5 of 1985) | New Law (No. 25 of 2025) |
| Pre-contractual Good Faith | Not regulated | Mandatory under Article 121(1) |
| Duty to Disclose | No express rule | Explicit & Mandatory under Article 122 |
| Liability for Negotiations | Not expressly available | Available under Article 121(3) |
| Recovery of Lost Profits | N/A | Expressly excluded (Article 121(3)) |
| Framework Agreements | Not recognized | Formally codified under Article 138 |
- Comparative Perspective: UK Law
Unlike the UAE’s new Article 121, English law does not generally recognise a duty of good faith in negotiations. Parties are free to walk away at any stage unless bound by a lock-out or exclusivity agreement (Walford v Miles [1992]). The UAE’s approach aligns more closely with civil-law systems, representing a more interventionist, fairness-based model than the traditional common-law position.
- Practical Implications and Recommendations
Parties must now document negotiation intent, avoid misleading statements or strategic silence, and be prepared to justify termination decisions to mitigate the risk of bad-faith claims. Businesses operating in the UAE should:
• Introduce internal negotiation protocols.
• Use written disclaimers in term sheets and heads of terms clarifying the non-binding nature of negotiations.
• Record negotiation milestones and minutes.
• Train deal teams on mandatory disclosure obligations under Article 122.
- Conclusion
The introduction of Articles 121, 122, and 138 under Federal Decree-Law No. 25 of 2025 represents one of the most transformative developments in UAE contract law. By codifying pre-contractual good faith, mandatory disclosure obligations, and framework agreements, the UAE has aligned its civil-law system with international best practices while preserving commercial autonomy. These reforms materially enhance legal certainty, fairness, and investor confidence, and will significantly reshape how contracts are negotiated and litigated in the UAE from 1 June 2026 onward.
Should you require any guidance on Federal Decree-Law No. 25 of 2025, the New Civil Transactions Law, or their practical implications for your organisation, please contact Engy Nabeel Advocates and Legal Consultants at mtg@mtglegal.com. Our team would be pleased to assess how these transformative changes affect your operations and to support you in identifying the appropriate next steps to strengthen and future-proof your contractual and corporate structures.
Authors
Binu Karthikeyan, FCIArb
Harshil Maheshwari