Formation of Contract

The main objective of a contract is to set out the obligations of the parties, the terms of the contract, duration and how the contract will be terminated. Ideally, a contract is an agreement that is made between two or more parties about a particular subject matter for an agreed duration. It is an expression of ‘consensus ad idem’ a meeting of the minds between the parties in the contract. The primary objective of this essay is to make a rigorous analysis of the contract for the subscription advantage of maintenance for citrix metaframe software XPE-150 users between M/s Abu Dhabi National Oil Company for Distribution and M/s Solutions Middle East. It will bring to force some of the legal issues that arise from the contract and the gaps that ought to have been filled when drafting the contract.

Article 265 of the United Arab Emirates (UAE) Civil Transactions Law No 5 of 1985 (the Civil Code) provides that the parties in the contract have an obligation to perform their obligations in good faith. This implies that M/s Abu Dhabi National Oil Company for Distribution and M/s Solutions Middle East should strictly adhere to the terms of the contract and perform all fundamental obligation embodied in the contract.

For a contract to be formed there must be an offer and an acceptance. Pursuant to Article 125 of the United Arab Emirates Civil Code a contract has been defined as the making of an offer by one or more parties in a contract and the acceptance or acknowledgment of the offer by another party in the contract.

Article 129 of the UAE Civil Code provides that a contract is formed when the following elements are present in the contract;

1. An agreement made between two parties about certain essential contractual terms
2. Subject of the agreement
3. A lawful purpose that arises out of the terms of the contract.

An offer is an expression of willingness to enter into a legal relationship that is made through an invitation made by one party to a contract. Ideally, the offer must be certain and communicated to the party who is expected to be a party in the contract upon acceptance. The offer must not contain ambiguous term that may make it difficult for the other party to accept. In addition, an offer must be one that will give rise to a legal relationship been the parties upon acceptance. In this case M/s Abu Dhabi National Oil Company for Distribution has made a clear offer where it is expressing its interest in form of a tender to contract M/s Solutions Middle East to provide of maintenance servces for citrix metaframe software XPE-150 users. The offer has been clearly communicated to M/s Solutions Middle East.

Subject of Contract

Conversely, acceptance in contract law is defined as an indication, made either through words or conduct that a party has agreed to the terms of the offer. Acceptance must be made in relation to the offer that was made. In addition, acceptance must be made unconditionally. Article 151 of the UAE Civil Code provides that if a party makes a commitment to abide by the terms made in a contract, he is bound by the term in the contract. M/s Solutions Middle East has validly accepted the terms of the offer and has unconditionally expressed its commitment to be bound by the contract. However, since M/s Solutions Middle East has not yet signed the contract it can be argued that acceptance is not complete. It is a well settled principle in law that a contract will be binding and enforceable on the parties once it has been signed by both parties. The significance of the signature in a contract is that it is an indication that the party agrees to be bound by the terms in the contract. Therefore, the offer made by M/s Abu Dhabi National Oil Company for Distribution will be deemed to have been fully accepted and the contract will be enforceable on M/s Solutions Middle East once it has appended its signature through its representative or the company seal.

Typically, the subject of the contract is a term of the contract explaining hat the parties undertake to do. On the other hand, it can be defined as a clause in the contract that explains the primary obligations of the parties. According to Article 129 of the UAE Civil Code subject of the agreement must be something that is practicable, is clear and one that is not outlawed.  Clause 1.1 of the contract is an example of the subject of the agreement clause since it provides for the primary obligation of the contractor, M/s Solutions Middle East. The subject of the agreement is clearly defined since it explains the scope of the contractor’s work. It can be argued that Article 1.2 of the case study contract is an extension of the definition of ‘subject of the agreement’. This stems from the fact that it provides that contractor will only be responsible for managing the Subscription Advantage program. In addition, clause 1.2 satisfies the requirement of subject of agreement under Article 129 of the UAE Civil Code by defining the nature of the subscription Advantage. It is imperative to note that the subject of the agreement in the case study contract is practicable and one that is not outlawed in UAE. However, it is recommended that the subject of the agreement ought to have been robust and extensive enough so to lay out the complete scope of the contactors work. Precisely, the subject of the agreement is narrow.

Remedies for Contract Breach

A contract must manifest an intention to legally bind the parties upon acceptance and consequently a willingness to sign the contract. It can be argued that since the case study contract is commercial in nature a lawful purpose to be bound by the terms of the agreement exists.

Remedies for Contract Breach

The UAE contract law has a myriad of remedies that a party to a contract will be awarded in the event of breach of any contractual obligation set out in the contact.  

According to the Dubai Court of Cassation in petition no 41/2007 liability for a breach of contract will arise if the following factors exist;

1. If one of the parties in the contract fails to perform the contractual imperatives stipulated in the contract
2. If due to the fault of one party there is delay in performance of the contract
3. If there is a proven damage
4. If one party can prove a causal link between the damage that has been suffered and the acts of the party  

According to section 113 of the UAE Civil Code the claimant alleging breach of contract has the obligation of proving his claim and the other party to refute the claims. The Dubai Court of Cassation in petition no 134 2006 held that a claimant in a case of breach of contract case must prove the damage that he has suffered as a result of the breach and that the breach was caused as a result of the fault  the other party.

The general rule in the award of damages as a remedy for breach of contract is that damages will be awarded for a risk of damage that was reasonably foreseeable.

Pursuant to article 390 of the UAE Civil Code the parties in a contract can fix a clause in the contract indicating the amount of damages that a party will pay in the event a specific breach of contract occurs. This type of compensatory damages is referred to as liquidated damages or exclusive remedy clause. It is evident that the contract between M/s Abu Dhabi National Oil Company for Distribution and M/s Solutions Middle East does not contain such a clause. Due to the nature of the contract it can be agued that the contract ought to contain a clause providing for damages in the event of breach.  However, it is instructive to note that according to section 309 (2) of the UAE Civil Code the court has the power to overturn the liquidated damages stipulated in the contract to award  damages to a value that is proportionate to the amount of damages suffered. An exclusive remedy clause ought to provide for damages in the event of delay in performance of the contract or failure to perform a contract.

The  Dubai Court of Cassation, petition no 130/2006 held that in case of breach of contract direct damages will be awarded for damages that was expected by the parties at the time they entered into the agreement and which was envisaged by the contract (UAE Civil Code, Article 389).  This implies that if the amount of damages to be paid in the event of breach of the contract is not agreed by the parties at the time of signing the contract the court has the discretion to award damages that are commensurate to the injury that has been suffered. Further, article 160 (2c) provides that the desired remedy of damages will be unlawful if the amount to be awarded is not proportionate the actual loss that has been suffered by the other party will be unlawful.  It bears noting that direct damage will either be set by law through a statute or by the parties though a clause in the contract. Since the case study contract does not contain a specific provision for damage (direct damage clause) in case there is breach of contract, it will be incumbent upon the court to asses and award the damages.

Liquidated Damages

3.3 Loss of Profit Damages

Article 292 of the UAE Civil Code read together with the decision of the Dubai Court of Cassation in petition no 51/2007 the court has power award loss of profit damages in the event of  breach of the contract  by a party in the contract. These are damages that have accrued in the course of performance of the contract.  It is worth noting that the court will only award this type of damages if the event leading to loss of damage was foreseeable.  What is more is that the court will not award a remedy of damages arising out of a probable or hypothetical cause.

The court will award damages for loss of opportunity arising out of a breach of contract or termination the contract.  The court will award such damages even in the event that that the case is hypothetical (Dubai Court of Cassation in Petition no 51/2007). This type of damages will be awarded to the innocent party in case of ‘breach of the subscription advantage of maintenance for citrix metaframe software XPE-150 users’ contract where one party loses is profits as during the performance of the contract s a result o the fault that party.

Moral Damages  

Pursuant to Article 293(1) of the UAE Civil Code moral damage for breach of contract are awarded if a party in the contract violates the dignity, liberty, honor or the current financial status of another party.  Moral damages will be awarded by the court if a party to a contract intentionally violates the rights of another party in the contract or intentionally and recklessly breaches essential term of the contract. Although this type of damage is awarded for damages arising out of liability for a tort the courts in UAE have also awarded it in cases of breach of contract. It can therefore be argued that either M/s Abu Dhabi National Oil Company for Distribution or M/s Solutions Middle East will be liable to pay moral damages for intentional and reckless breach of contract.

Penalty Clause

Damage for breach of contract in UAE will also be award following a breach of a penalty clause embodied in a contract. By dint of Article 390 parties in a contract have the free will to include a penalty clause in the clause. Ideally, a penalty clause in a contract imposes an obligation on the party at fault for breach of contract to pay certain some of money as compensatory damages to the innocent party incase a breach of contract occurs.  The amount of damages in the contract is in form of liquidated damages. The significance of the penalty clause in a contract is that the parties may avoid settling any dispute in court in the event of breach of contract. Accordingly, the Federal Supreme Court of Abu Dhabi, petition no 356/2004 noted that the judge bears an imperative to adhere to Article 390 of the UAE Civil Code and to asses the damages to be paid to an innocent party in a case of breach of contract in a manner that is consistent to the actual damage suffered. The court in Dubai Court of Cassation petition no 28/2004 held that will interfere with the amount of damages payable under the penalty clause if it is more than the actual damage suffered by the innocent party.  It is submitted that the case study contract lacks a penalty clause should a provide remedy of damages arising out of a penalty clause  for breach of contract cases cause by delay in performance or part performance of the contract.

Direct Damages

Implementation of the Contract

The general rule is that a contract must be implemented in a manner, even if it was  agreed by the parties in exercise of their free will, will not  be enforceable if it is contrary to UAE contract law legislations or has not be provided for in the UAE contract law. In addition, international legal concepts regarding remedies for breach of contract will not be applicable where there is a lacunae in the UAE contract law or where the UAE contract law is silent bout a certain legal aspect. On the other hand, the English/ Common Law concept of damages including punitive damages and exemplary damages are also not enforceable under UAE law guiding breach of contract.   

Article 1 of the UAE Civil Code provides that the dictates of the legislation will be applicable to all matters that are related to the provisions of the contract. However, the aforementioned provision disallows the application of imaginative reasoning in implementing the contract. Pursuant to Article 124 of the UAE Civil Code when determining the validity, interpretation and implementation or performance a contract the sources of the law giving rise to personal obligations and right under the contract shall emerge from the UAE dispositions, law and other legal actions recognized by the law. Ideally, if one fails to find a solution to an issue regarding the implementation of a contract under the existing law he is obligated to apply customs. However, the customs must not contravene public order and morals. Therefore, while it is evident that the contract between M/s Abu Dhabi National Oil Company for Distribution and M/s Solutions Middle East lacks sufficient remedy clauses to protect the innocent party in case of breach of contract, it is submitted that any remedy clause they undertake to add before M/s Solutions Middle East appends its signature must be recognized by and is consistent with UAE sources of law.

Risk Management Techniques

Indemnification / Indemnity Clause

The indemnity clause is a clause in the contract which provides that a party in a contract accepts responsibility for loss and damage that has been caused by his own actions. Ideally, indemnification is an agreement that is made by the parties in a contract with the primary objective of protecting one of that from any loss or damage that he may suffer as a result performing his contractual obligations. It is apparent that the case study contract contains an indemnity clause under Article 15 which seeks to protect the company from loss and damage caused by the contractor’s employees.

Loss of Profit Damages

Insurance Clause

This is a clause where a contractor avers that it has an extensive and sufficient insurance cover to cover any risks that may emerge due to the nature of the contractors work. This provisions entails an assurance from the contractor has the financial capability indemnify through its insurance policy incase of any loss and damage.  It is evident that the case study contract lacks an insurance clause. This clause should be included to protect M/s Abu Dhabi National Oil Company for Distribution and give an assurance that the contractor will leave the institution harmless during its operations.  

This clause protects a party in the contract from risks such as delay in performance or poor performance of the contract.  This clause entails a promise by party that in the vent of delay or underperformance or breach of contract certain specific amount of money will be awarded the innocent. The award must be agreed by the parties before signing the contract. Further, the specific amount must be incorporated directly into the contract as liquidated damages. This mechanism has not been applied in the case study contract.

It is a well established fact that most legal disputes involve the determination of the rights and obligation of the parties in contract, the interpretation of the terms of the contract, validity and breach of the contract will be determined by the courts. This mode of solving disputes is referred to as litigation. According to Article 265(2) of the UAE Civil Code, in solving a contract dispute between the parties the court will take account of; the common intention manifested by the parties as opposed to the literal meaning of the wording of the contract in dispute, the nature of the dealings of the parties and the existing customs applicable to the type of dealing.

Apart from litigation the UAE law allows the parties to solve their disputes through Alternative Dispute Resolution Mechanisms such as arbitration and mediation. However, it bears noting that arbitration is the most common alternative dispute resolution mechanism where parties involved are commercial and business entities.  This stems from the fact that arbitration does not apply the rigid and complex processes and the parties are free to mutually agree on the choice arbitrator or mediator.  Suffice to say, it is easy to enforce and implement the decision of the arbitral tribunal since they emerge from a mutual agreement of the parties.  

Moral Damages

The Dispute Resolution Clause

Parties in a contract in UAE have the liberty of including a dispute resolution clause in their contract. The significance of the dispute resolution clause is that it gives the parties an early opportunity to determine the nature of the process and mechanism that will be used to resolve any dispute arising from the contract. It is evident that the contract between M/s Abu Dhabi National Oil Company for Distribution and M/s Solutions Middle East has dispute resolution clause under article 8 of the agreement. However, the dispute resolution clause is not sufficient because, while it suggests that the parties will first attempt to solve any dispute outside court before resorting to litigation. The case study contract lacks a proper arbitration clause.  It is thus submitted that the case study contract should contain an arbitration clause that clearly sets out the rules for choosing an arbitrator, the seat of the arbitration, the language to be used and the applicable substantive law.

The method of payment can be stipulated the parties in the contract.  Traditionally, the parties agree on the method of payment which the ‘employer’ party in the agreement to pay the amount of money agreed as compensation for the services received. As a rule the payment and compensation clause must entail different methods of payment that will be convenient to both parties. Notably, the method of payment identified in the contract must be specific. The payment clause should also entail a provision for the consequences for delay or default in payment. The case study contract has set the method of payment under article 5 of the contract. In addition, the payment clause in the case study contract has failed to identify the consequences for delay or default in payment.

The owner has an obligation to ensure that the contractor is sufficiently compensated. The owner should thus compensate the contractor proportionately. This implies that the value of compensation must be commensurate to the quality and quantity of service rendered. The compensation clause must also entail the date and time of payment and whether payment will be made in full or installments. The compensation clause which has been indicated the currency and price clause under Article 2 of the contract case study does not identify the date and time the contractor will be paid and whether the payment will be made in full or in installments.

Conclusion

It can be conceded that there are numerous gaps in the contract between M/s Abu Dhabi National Oil Company for Distribution and M/s Solutions Middle East as has been revealed in this paper. To address these gaps, it is incumbent upon the parties to take account the spirit and the letter of the UAE Civil Code. The parties must ensure that the terms of the contract are tailored to avert any possible risk of loss and damage. However, the terms should not arbitrarily violate or diminish the rights any party in the contract. Accordingly, the provisions of the contract should be fair, just  and lawful.

References

Dubai Court of Cassation petition no 51/2007

Dubai Court of Cassation, petition no 130/2006

Dubai Court of Cassation, petition no 134 2006

Dubai Court of Cassation, petition no 41/2007

Federal Supreme Court of Abu Dhabi, petition no 356 19/10/2004

Lambert, S., & Singh, K. (2015). Privity on Contract in the UAE: More Power to the Third Parties. Const. L. Int’l, 10, 20.

United Arab Emirates Civil Transactions Law No 5 of 1985 (the Civil Code