UAE Civil Transactions Law 2025 – Key Contractual Implications for Businesses

Overview

The UAE has issued a new Civil Transactions Law (Federal Decree-Law No. 25 of 2025), which will enter into force on 1 June 2026 and replace the 1985 Civil Code. While the new law preserves the UAE’s civil law and Sharia-based foundations, it introduces clearer and more structured rules that will meaningfully affect how contracts are negotiated, interpreted, and enforced in practice. The changes are evolutionary rather than revolutionary, but they materially enhance certainty while raising expectations around good faith and fairness in commercial dealings.

Good faith and pre-contractual conduct

One of the more notable developments is the express extension of the principle of good faith to the negotiation phase. Parties are now expected to conduct negotiations, and make any decision to withdraw from them, in a manner consistent with transparency and honest dealing. Liability may arise where negotiations are conducted or terminated in bad faith, including where material and decisive information is intentionally withheld. While compensation remains limited to actual loss, this represents a meaningful tightening of the legal framework governing pre-contractual conduct.

Modernized rules on contract formation and commercial practice

The new law updates the mechanics of how contracts are formed to better reflect contemporary commercial realities. It adopts a broader concept of consent, recognizing that agreement may be expressed not only through written or spoken words, but also through electronic communications, conduct, and other forms of implied acceptance. This brings digital transactions and practical business behavior firmly within the core of contract formation rules. In addition, the law formally acknowledges long-term commercial relationships through the introduction of framework agreements. These arrangements allow parties to agree on core contractual terms that will govern a series of future transactions, providing legal structure for ongoing supply, services, and cooperation models commonly used in modern business.

Contract interpretation and drafting discipline

The new law adopts a more disciplined and structured approach to contract interpretation. Clear contractual wording must be respected, and interpretation is only triggered where ambiguity genuinely exists. In such cases, courts will look to the common intention of the parties, informed by the nature of the transaction, good faith, and commercial custom. Ambiguous terms may be construed against the party bearing the obligation or the drafting party, particularly in adhesion contracts, underscoring the increased importance of precise drafting and careful use of standard clauses. 

Hardship, fairness, and rebalancing of contracts

While the binding force of contracts remains a cornerstone of UAE law, the new framework expressly empowers courts to intervene where exceptional and unforeseeable events render contractual performance excessively onerous without making it impossible. In these circumstances, courts may rebalance obligations, or, in extreme cases, terminate the contract, after weighing the interests of both parties. Importantly, contractual attempts to exclude this relief are ineffective, signaling a stronger role for fairness and good faith in assessing contractual risk allocation.

Suspension of performance and reciprocal obligations

The statutory basis for suspending performance in bilateral contracts is also reinforced. A party may withhold its performance where the counterparty fails to perform a corresponding obligation, reinforcing contractual balance and proportionality. This clarification provides greater legal certainty and strengthens leverage in payment and performance disputes.

Third-party rights and unintended beneficiaries

The new law clarifies that contracts do not impose obligations on third parties but may confer enforceable rights where this is intended. Unless expressly excluded, third parties may be able to rely directly on contractual provisions drafted for their benefit. This highlights the importance of expressly addressing third-party rights in commercial agreements, particularly in group structures, financings, and complex contractual arrangements.

Performance and abuse of rights

Good faith is elevated from a general principle to a guiding rule governing performance, interpretation, and the exercise of contractual rights. The law reinforces that rights must not be exercised abusively, including where they are used solely to cause harm, without legitimate interest, or in a disproportionate manner. This increases exposure for aggressive or overly technical enforcement strategies that fail to account for the broader contractual context.

Civil companies and structure

The new Civil Transactions Law modernizes the regime governing civil companies by expanding the ways in which they may be established and maintained. For the first time within the civil law framework, it explicitly allows a company to be formed and owned by a single individual, removing the traditional requirement for multiple partners. This development aligns civil companies more closely with commercial company structures and provides additional flexibility for professional activities, investment vehicles, and other non-commercial enterprises. The law also addresses the impact of partner exit in companies of unlimited duration. Rather than treating withdrawal as an automatic trigger for dissolution in all cases, it permits the remaining partners to agree on the continuation of the business. Where only one partner remains, continuation is still possible if the relevant legal form allows conversion into a single-person entity. These changes are designed to preserve business stability and avoid unnecessary disruption when commercial activity can realistically continue.

Transitional considerations

The new law will not apply retroactively. Contracts entered into before 1 June 2026 will remain governed by the 1985 Civil Code unless amended or novated. That said, parties should be mindful that future amendments or renegotiations may bring existing arrangements within the scope of the new framework.

Conclusion

The new Civil Transactions Law brings welcome clarity and modernization to UAE contract law, while embedding higher standards of good faith, proportionality, and balanced risk allocation. As its effective date approaches, businesses would be well advised to begin reviewing their contract templates, negotiation practices, and long-term arrangements to ensure they are aligned with the new legal landscape.

Our team continues to advise clients on the practical implications of the new legal framework and on aligning contractual arrangements and standard documentation accordingly.