Duty of Good Faith in Contracts

In brief:

• Review of the concept of good faith in civil law and common law jurisdictions, and identifies some of the main differences

• Considers the situation where a UAE Court is asked to interpret the duty of good faith in contracts governed by foreign law, and how this may be resolved

Background

The concept of the duty of good faith in contract law differs greatly between common law and civil law legal systems.

Common law jurisdictions, such as the US and England, view good faith as an implied covenant in contracts; or more simply stated, there is a general presumption that each party to a contract will deal with each other contractual party honestly, fairly, and in good faith, so as not to extinguish the other contractual party(ies)'s rights to the benefits of the contract. Therefore, under common law, good faith is implied in contracts in order to reinforce the express promises of the contract.

In contrast, the United Arab Emirates ("UAE"), which is a civil law legal system, has codified the duty of good faith in Federal Law No. 5 of 1985, as amended, Concerning the Civil Transactions Law ("Civil Code"). Article 246(1) of the Civil Code states "[t]he contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith". Subparagraph (2) of that Article further states that "[t]he contract shall not be restricted to an obligation upon the contracting party to do that which is [expressly] contained in it, but shall also embrace that which is appurtenant to it by virtue of the law, custom, and the nature of the transaction".

The Civil Code does not define the meaning of good faith nor the elements required in order for one contracting party to claim against another for breaching that duty. Furthermore, the Civil Code does not define the requirements of Article 246(2). However, Article 246(2) appears to extend the requirements by contracting parties to act not only as expressly stipulated in the contract between them; but, to also act in accordance with the virtues of law, custom and the overall nature of the contract.     

The Official UAE Ministry of Justice Commentary on the Civil Code explains, in part, the concept of custom and usage as "numerous general rules for the adoption of custom and usage in defining the scope of contracts including 'established usage', and the practices of people, as a material factor to be followed".

One thing is clear: there is a stark difference in the interpretation of the duty of good faith between UAE law and in common law jurisdictions. The view under UAE law is that good faith is a behavioural requirement on every contracting party which is far beyond the common law notion of an implied term.

An important question is how a UAE Court would interpret the duty of good faith, where the contracting parties have elected for the underlying contract between them to be governed by foreign law, e.g. English law.

It should be noted that Article 19 of the Civil Code provides that the form and substance of contractual obligations are governed by the law of the state in which both contracting parties reside, but if they reside in different states, then the law of the state in which the contract was concluded applies, unless the parties have agreed on another law, or it is apparent from the circumstances that the parties intended for another law to apply.

Article 19 inherently permits contracting parties to agree to any governing law. However, in practice, UAE Courts invariably apply UAE law and disregard foreign governing law provisions in contracts if the UAE Court considers it has competent jurisdiction to adjudicate a dispute. It is important to note that UAE Courts willingly accept jurisdiction over disputes.

Therefore, contracting parties who have expressly chosen a foreign law to govern their contract may be faced with a duty of good faith under UAE law, rather than their choice of law, in the event a dispute arises where the UAE Courts have accepted jurisdiction. In such circumstances, contractual parties may have a more onerous duty of good faith than they would have anticipated at the time of agreeing to be contractually bound to one another.

The duty of good faith as interpreted pursuant to UAE law has interesting effects on contractual disputes, governed by foreign law. It is prudent for contractual parties to be aware of whether their dealings under the contract between them will be carried out in the UAE giving rise to UAE Court jurisdiction and as such UAE legal interpretation of, inter alia, the duty of good faith.

The full article was published in Marasi News in July 2016 and can be viewed here www.marasinews.com/sites/default/files/marasi%20%2017%20Full.pdf.

© Hadef & Partners 2016