The negotiation phase of a commercial transaction has long occupied an ambiguous position in UAE law. Parties invested substantial time, money and confidential information while remaining free, in principle, to walk away. That position has changed decisively with the entry into force of Federal Decree-Law No. 25 of 2025 promulgating the Civil Transactions Law (the New Civil Code) on 1 June 2026. For the first time, UAE legislation expressly regulates the initiation, conduct and termination of pre-contractual negotiations through a coherent statutory framework centred on good faith. The result is a clear, modern articulation of pre-contractual liability that aligns the UAE more closely with continental civil-law systems while preserving essential commercial freedom.
From Implied Principle to Express Statutory Duty
Under the previous Civil Transactions Law (Federal Law No. 5 of 1985), the duty of good faith was primarily associated with the performance of concluded contracts. Article 246 required that a contract be performed in accordance with its terms and consistently with the requirements of good faith. Pre-contractual conduct was regulated only indirectly, typically through the general rules on liability for harmful acts (tort) where fault could be established. Courts occasionally recognised duties arising from a relationship of trust once negotiations had advanced, but there was no dedicated statutory regime governing the negotiation stage itself.
The New Civil Code fills this gap. Article 121 establishes three foundational propositions. First, the proposal, conduct and termination of pre-contractual negotiations must comply with the requirements of good faith. Second, the mere fact of negotiating does not create an obligation to conclude a contract. Third, a party that negotiates or terminates negotiations in bad faith is liable to compensate the other party for the actual damage suffered. Importantly, recoverable compensation is limited to actual loss; it does not extend to the expected benefits of the unconcluded contract or to lost opportunities to realise those benefits, unless the parties have agreed otherwise.
This formulation deliberately balances two competing values. Parties retain the freedom not to contract. They lose, however, the freedom to negotiate opportunistically or to break off discussions in a manner that abuses the other party’s justified reliance.
What Constitutes Bad Faith?
Article 121 expressly treats the deliberate failure to disclose material information affecting the validity of the contemplated contract as an act of bad faith. Beyond this statutory example, bad faith is assessed by reference to honesty, fairness and the prevention of abuse of right and these are the concepts long familiar in UAE jurisprudence and rooted in both civil-law tradition and Islamic legal principles. Conduct likely to attract liability includes:
- Entering or continuing negotiations without any genuine intention of concluding a contract, while allowing the other party to incur costs or forgo alternative opportunities;
- Prolonging negotiations solely to keep a competitor off the market or to extract confidential information;
- Abruptly terminating advanced negotiations after having induced the other party to undertake significant reliance expenditures (due diligence, financing commitments, preparatory works or exclusive dealings) without a legitimate commercial justification; and
- Withholding information of decisive importance to the other party’s consent.
Article 122 reinforces these principles by imposing a positive duty of disclosure. Each party must disclose information of decisive importance to the other’s consent where the counterparty’s ignorance is presumed or where a relationship of trust exists. Clauses that purport to limit, waive or exclude this disclosure obligation are null and void. Concealment may also support a claim for annulment of any contract that is ultimately concluded.
Article 123 completes the pre-contractual regime by protecting confidentiality. A party that uses or discloses, without authorisation, confidential information obtained during negotiations is liable under the general rules of civil liability. This protection applies whether or not a contract is eventually signed.
The Measure of Liability
The New Civil Code deliberately confines recovery to actual damage. Typical heads of recoverable loss include legal and advisory fees, due-diligence costs, preparatory expenses and other out-of-pocket reliance losses that can be causally linked to the bad-faith conduct. Compensation is limited to actual losses already suffered. The law does not allow recovery of the expected profits from the unconcluded contract unless the parties have agreed otherwise. This measured approach avoids transforming every failed negotiation into a claim for lost profits while still deterring abusive behaviour.
Liability under Articles 121-123 is independent of the formation of a contract. It arises from the statutory duties themselves. In this respect, the UAE has adopted a functional equivalent of the classic civil-law doctrine of culpa in contrahendo, now given clear statutory expression rather than being left to judicial development or analogy with tort rules.
Practical Implications for Commercial Parties
The new regime has immediate consequences for the drafting and conduct of negotiations in the UAE.
Parties should no longer treat letters of intent, heads of terms or memoranda of understanding as entirely consequence-free. While such documents may still declare that they are non-binding as to the principal transaction, they cannot exclude the mandatory duties of good faith and disclosure. Attempts to contract out of the disclosure obligation under Article 122 will be ineffective.
Clear communication remains essential. Parties who wish to preserve maximum flexibility should state expressly that discussions remain subject to contract, that no reliance should be placed on the prospect of a deal and that each side remains free to terminate for any reason or no reason. Even then, the manner of termination must not be abusive. Where exclusivity is granted, the period should be finite and linked to genuine progress milestones.
Disclosure protocols take on heightened importance. Parties in possession of information that is decisive to the other side’s decision-making particularly in sectors such as real estate development, construction, project finance, joint ventures and M&A should establish internal processes to identify and disclose such information in a timely manner. Conversely, parties receiving information should document the basis on which they rely and the steps they take in reliance.
Confidentiality agreements and non-disclosure agreements retain their utility, but they now operate alongside the statutory protection in Article 123. Misuse of information obtained during negotiations can give rise to liability even in the absence of a formal NDA.
Conclusion
The New Civil Code marks a significant maturation of UAE contract law. By placing good faith at the centre of the pre-contractual phase, the legislature has recognised that commercial negotiations are not a legal vacuum. At the same time, it has carefully preserved the fundamental freedom not to contract and has limited recovery to actual reliance losses. The resulting framework offers greater predictability for businesses operating in the UAE while aligning local law more closely with international commercial expectations.
Parties and their advisers must now treat the negotiation stage with the same seriousness previously reserved for the signed contract. Risk begins well before the ink dries. Those who conduct negotiations honestly, disclose decisive information and terminate discussions for legitimate commercial reasons will find the new rules supportive of efficient deal-making. Those who treat the pre-contractual phase as a zone of consequence-free opportunism will discover that UAE law now provides a clear and effective remedy.
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