Contracting with Counterparties and Suppliers in the UAE: Key Risks and Protection of Interests

Key Points

Contracting in the UAE is not merely a matter of formalities. It is a risk-management strategy in a legal environment that combines elements of civil law, Islamic principles, and a unique judicial architecture (onshore courts, DIFC, ADGM). The key question is not whether a contract can be signed. The key question is whether your interests can actually be protected and the money recovered in the event of a breach. Effective protection in the UAE begins with three checks: 1. Verification of the counterparty and its authority. Has the contract been signed by an authorized body, and are there fraud risks? 2. Verification of the contract's legal construction. Does it comply with the mandatory norms of the UAE, and has the correct jurisdiction for disputes been chosen? 3. Verification of security and enforcement mechanisms. Where are the debtor's assets located, and how will a judgment be enforced? If these questions are not resolved in advance, a company may obtain a favorable court judgment but face the impossibility of enforcing it, or the court may revise the terms of the contract.

When the Need to Protect Interests in the UAE Arises

Working with counterparties in the UAE requires heightened attention in the following situations: the counterparty is registered in a free zone with an opaque ownership structure; the supplier demands prepayment without providing a bank guarantee; the contract contains a "pay-when-paid" condition; the counterparty invokes force majeure or a material change in circumstances; a dispute arises over the quality of goods or works performed; the debtor is withdrawing assets or changing its ownership structure; the dispute concerns the interpretation of contract terms drafted in a foreign language; recovery of a debt is required from a company registered in the UAE but having a foreign owner.

The Mistake Most Foreign Companies Make

Many companies begin with the question: "Which law should be chosen and in which court should the claim be filed?" This is the wrong first question. The right question is: "Which dispute resolution mechanism will provide the maximum probability of actual recovery, taking into account the specifics of the UAE?" Sometimes the best result is achieved through DIAC arbitration. Sometimes through the DIFC or ADGM courts. Sometimes through an onshore court if the assets are located in the UAE and swift interim measures are needed. Sometimes through negotiations, given the threat of criminal prosecution for fraud.

Step 1. Verify the Counterparty and Its Authority

The first thing to examine is not the commercial terms but the identity of the counterparty and the authority of the signatory. In the UAE this is critically important because: Director's authority. In limited liability companies (LLCs), the manager may be restricted in his powers by the articles of association or a resolution of the general meeting. A transaction concluded in excess of authority may be challenged. Arbitration clause. For public joint-stock companies (PJSCs), consent to arbitration requires special approval by the general meeting or a direct provision in the articles of association. Without this, the arbitration agreement may be invalid. Beneficial owners. Concealment of information on ultimate beneficial owners (UBOs) may result in fines of up to AED 100,000 for each violation and sanctions-related risks.

Step 2. Verify the Contract's Compliance with Mandatory Norms

In the UAE, freedom of contract is limited. A number of conditions customary in international practice may be held invalid or adjusted by a court.

Key provisions requiring attention:

1. Limitation of liability. The parties may agree on a liability cap; however, Article 390(2) of the UAE Civil Code gives the judge the right to revise the agreed amount (penalty or cap) upward or downward to bring it into line with the actual damage. Any agreement to the contrary is void. 2. "Pay-when-paid" conditions. UAE courts are increasingly restricting the application of such conditions, especially in subcontracting, in order to protect the rights of lower-tier suppliers and workers. 3. Damages and lost profits. The UAE does not recognize punitive damages. Lost profits are awarded extremely rarely and require strict proof that they were inevitable and foreseeable. 4. Force majeure. Article 273 of the UAE Civil Code automatically terminates the contract upon the occurrence of force majeure. Courts apply this provision strictly: it is necessary to prove impossibility of performance, unforeseeability, and the absence of a causal link with the party's actions. Important update: The new UAE Civil Code (Federal Law No. 25 of 2025), which enters into force on 1 June 2026, introduces pre-contractual duties — the parties are obliged to act in good faith and disclose material information during negotiations. Breach of these duties entails liability for actual damage. This means that the negotiation process is now regulated by law.

Step 3. Choose the Correct Jurisdiction

There are four main dispute resolution paths in the UAE, and the choice between them critically affects cost, speed, and enforceability of the decision.

UAE Onshore Courts

Suitable if the debtor and its assets are located in the UAE and the amount in dispute does not justify expensive arbitration. Risks: proceedings are conducted in Arabic (documents require certified translation), the procedure includes appeal and cassation, which may prolong the process. Foreign judgments are enforced on the basis of the reciprocity principle, which is not always guaranteed.

DIFC and ADGM (Financial Free Zones)

These are common-law enclaves with English-language proceedings and judges from common-law countries. Advantages: predictability, effective interim measures (including worldwide freezing orders), judgments are enforced onshore through interaction protocols. DIFC and ADGM have an extensive network of agreements on mutual recognition of judgments.

DIAC (Dubai International Arbitration Centre)

The largest onshore arbitration institution after the merger with DIFC-LCIA. Suitable for complex international disputes, ensures confidentiality and enforceability of awards under the New York Convention.

Step 4. Use Interim Measures

If there is a risk of asset withdrawal, delay is fatal. In the UAE the following are available: arrest of bank accounts; prohibition on disposal of real estate; prohibition on registration actions; disclosure of information on assets; freezing of assets (especially effective in DIFC/ADGM). The DIFC and ADGM courts demonstrate a readiness to grant powerful interim measures, including worldwide freezing orders, which makes them attractive for urgent asset protection.

Step 5. Take Fraud Risks into Account

The following schemes are common in the UAE: forged bank guarantees (especially in construction); falsification of the signatory's authority; collusion involving kickbacks; manipulation of electronic contracts. Federal Decree-Law No. 46 of 2021 on electronic evidence allows the use of digital audit logs to confirm manipulations with contracts. In cases of fraud, civil claims may be combined with criminal prosecution.

Typical Mistakes in Contracting in the UAE

1. Ignoring language. A contract in English is convenient, but an onshore court will require a certified translation. In case of discrepancies, priority may be given to the Arabic version. 2. Including conditions contrary to mandatory norms. A liability cap that the court considers unfair will be adjusted. A condition on punitive damages will not be enforced. 3. Incorrect assessment of the counterparty. A company in a free zone may have nominee directors and hidden beneficiaries. Without UBO verification, there is a risk of encountering sanctions restrictions or fraud. 4. Choosing an onshore court when assets are located abroad. A judgment of a UAE onshore court is more difficult to enforce abroad than an arbitral award or a DIFC judgment. 5. Skipping pre-litigation procedures. If the contract provides for mandatory negotiations or mediation before arbitration, skipping them may result in refusal to consider the claim.

Checklist Before Signing a Contract with a Counterparty in the UAE

Have the signatory's powers been verified (articles of association, power of attorney, board resolution)? Has the counterparty's beneficial owner been disclosed? Do the liability terms comply with the mandatory norms of the UAE? Has the jurisdiction been chosen taking into account the location of assets and enforceability of the decision? Is an arbitration clause included that complies with the requirements of UAE legislation? Have pre-contractual duties (good faith, disclosure of information) been taken into account? Are security mechanisms provided (bank guarantee, letter of credit)? Is there an action plan in case of non-performance (interim measures, asset tracing)?

What a Strong Protection Strategy in the UAE Looks Like

A strong strategy includes five levels: 1. Due Diligence. Verification of the counterparty, authority, and beneficiaries. 2. Contract Architecture. Drafting the contract with due regard to the mandatory norms of the UAE and choosing the correct jurisdiction. 3. Security Package. Security mechanisms (guarantees, pledges, letters of credit). 4. Procedural Strategy. Choice of forum (DIAC, DIFC, ADGM, onshore) and timely application of interim measures. 5. Enforcement Strategy. Understanding where the assets are located and how the decision will be enforced. Without the fifth level, the first four may prove useless.

FAQ

Can foreign law be chosen for a contract with a UAE company?

Yes, the parties may choose foreign law. However, in a UAE onshore court, the application of foreign law will require proving its content as a matter of fact, which complicates the process. For complex transactions it is often preferable to choose DIFC or ADGM law if disputes are referred to the respective courts.

What should be done if the counterparty invokes force majeure?

It is necessary to verify whether the claimed event meets the criteria of Article 273 of the UAE Civil Code: unforeseeability, impossibility of prevention, causal link. UAE courts apply force majeure strictly. In addition, check whether the event is a consequence of the debtor's own actions.

Can liability be limited under a contract?

Yes, but with a caveat: a UAE court has the right to revise the agreed cap if it considers it unfair in relation to the actual damage. Conditions excluding liability for intent or gross negligence are invalid.

How can a debt be recovered from a company in a free zone?

It depends on the type of free zone. For DIFC and ADGM, their own courts with effective interim measures are available. For other free zones (e.g., JAFZA, DMCC), the dispute will most likely be considered in an onshore court or arbitration, if provided for by the contract.

What interim measures are available before filing a claim?

In DIFC and ADGM, urgent interim measures are possible, including freezing orders, before the main proceedings commence. In onshore courts, asset arrest is also possible, but the procedure may be less prompt.

Conclusion

Contracting with counterparties and suppliers in the UAE requires not a standard approach but an understanding of the local legal architecture. A strong position is built on verification of the counterparty, regard for mandatory norms (which may rewrite the terms of your contract), the correct choice of jurisdiction (onshore, DIFC, ADGM, or DIAC), and a pre-planned enforcement strategy. In the UAE, the winner is not the one who files a claim first. The winner is the one who has understood in advance which court will issue an enforceable decision, where the debtor's assets are located, and how to turn a legal victory into real money.