Choice of applicable law in an international treaty

Mainstream

The choice of applicable law in an international commercial contract is not a technical formality or a matter of habit. It is a strategic asset or liability of your trade.

The question is not which country’s law is considered “neutral” or “prestige.” The question is which law will provide the maximum protection for your business model and will work in conjunction with the dispute resolution mechanism, especially in the context of the United Arab Emirates.

The effective choice of applicable law therefore begins with three checks:

1. Where and how the contract will be executed and where the assets of the parties are located.
2. Which legal system gives the most predictable result under the critical terms of the transaction (limitation of liability, termination, force majeure).
3. Will the chosen right be paralyzed by imperative norms or public order in the UAE?

If these three issues are not resolved at the signing stage, the company risks the inexecutability of key contractual provisions, the refusal to enforce the arbitral award or a litigation whose outcome cannot be predicted.

When the choice of applicable law becomes critical

The choice of law comes to the fore if:

• one of the parties to the transaction is a company registered in the UAE (on the mainland or in the free zone);
• The contract is executed in the UAE (supply, construction, services);
• the assets of the debtor or collateral are located in the Emirates;
• The contract uses an arbitration clause with a place of arbitration in Dubai (DIAC) or Abu Dhabi (ICC);
• The distribution or agency agreement is governed by the UAE’s mandatory regulations (Federal Law No. 3 of 2022). commercial agencies;
• You plan to use constructions such as retention of title, which are interpreted differently in common law and in civil law.
• the contractor insists on applying local law or the law of the country with which you have no experience;
• The transaction is structured with the participation of companies from DIFC or ADGM (financial zones with its own law based on English common law).

The mistake that most negotiators make

Many companies agree to the wording:

“This contract is governed by the law of the seller’s country.” Or: Let’s take English law, that’s the standard.

That's the wrong approach.

The right approach:

What right will give my company the maximum legal and commercial advantages in the event of a conflict, and how will that right interact with the UAE’s mandatory laws?

Sometimes the best result is given by the UAE law (especially in real estate transactions or public procurement). Sometimes it is English law (in complex M&A, financing or shipping). Swiss neutral law is sometimes associated with arbitration. Sometimes a forced compromise with a detailed elaboration of a reservation.

The choice of applicable law does not require a formal template, but a commercial and legal strategy.

Step 1. Analyze the economics of the transaction and the place of execution

The first thing to look at is not the geographical location of the counterparty’s headquarters, but the map of commercial risks.

Key questions:

• Where is the characteristic performance under the contract?
• Where are the supply points, warehouses, construction site?
• Where is the intellectual property transferred under license registered?
• In what currency are the settlements made and in what jurisdiction are escrow accounts opened?
• Is the subject matter of the transaction (e.g. equipment) located in the UAE?

If the contract, regardless of the foreign law chosen, is closely related to the territory of the UAE, the UAE courts or arbitrations with a seat in Dubai will tend to apply mandatory provisions of UAE law. It’s impossible to get around it, and it needs to be embedded in the architecture of the deal.

Step 2. Exclude or confirm application of UAE law

For a contractor from Russia or CIS countries, the UAE law is often terra incognita. It is necessary to clearly understand its hybrid nature:

• It is a system based on continental (Egyptian) law, codified in the Civil Code (Federal Law No. 5 of 1985).
• It is seriously affected by Shariah law, especially in matters of contingency, penalty and validity of treaties.
• There is dualism: Mainland law (onshore) and common law in the DIFC and ADGM financial zones (offshore). Choosing UAE law and choosing DIFC law is a choice of two completely different legal systems.

Unless you are prepared for broad judicial discretion and strict requirements for form and interpretation in Arabic, direct choice of UAE law is often avoided, except where it is mandatory by law (e.g. commercial agency).

Step 3. Rate the DIFC or ADGM right as "quasi-English"

This is one of the strongest strategies for transactions with counterparties from the UAE. You can choose the applicable substantive law of the Dubai International Financial Centre (DIFC Law) as your applicable substantive law.

Advantages:

• It is a written law based on English common law and statutes, but devoid of age-old archaisms.
• It is neutral for both parties (no one gets a home advantage).
• The DIFC/ADGM courts have extensive experience in complex cross-border disputes, and their judges are often former judges of the highest courts of England, Australia or Singapore.
• If arbitration is held in Dubai, the choice of DIFC law as applicable creates a highly stable and predictable platform for dispute.

Step 4. Evaluate the choice of English law as a standard

English law remains the gold standard in international trade, finance and shipping. But his choice must be conscious.

Strengths for international transactions:

• Predictability and detailed study of contractual issues in precedents.
• A rigid approach to the literal interpretation of the contract (which gives assurance to the parties).
• Developed institutions of assurances and guarantees (warranties & representations), compensation for losses (indemnities) and termination by law (termination at law vs. (a) contractual termination).
• The absence of a general good faith doctrine in the broad continental sense, which allows the parties to act strictly within the framework of the contract.

But we have to remember: If the debtor and its assets are located in the UAE, English law will not protect you from applying local mandatory rules at the execution stage.

Step 5. Analyze the impact of the chosen right on the substance of the dispute

Choosing a law is the choice of specific rules that will determine the outcome of your case. It is important to compare how different systems solve painful issues.

Examples of differences critical to the UAE:

Knowing these nuances, you can build the text of the contract in such a way as to minimize risks, even if the right is not chosen the most convenient.

Step 6. Checking the public order of the UAE

Public policy is a red line that cannot be crossed even by an arbitral award.

When choosing any foreign law, it is necessary to exclude from the contract provisions that are contrary to the public policy of the UAE, especially in terms of:

• payment of compound interest;
• rules that are contrary to Islamic finance (if sensitive to the counterparty);
• legalization of provisions on corruption or violation of sanctions legislation;
• Violation of the exclusive rights of commercial agents or distributors protected by local law;
• rules that infringe on the consumer, if he somehow appears in the chain.

Even the perfect London arbitration award awarding capitalized compound interest over 10 years can be cut off by a UAE court at the recognition stage on public policy grounds.

Step 7. Achieving synergies with the arbitration clause

This is the most important structural element. The applicable law and the place of arbitration shall operate as a single mechanism.

Configurations often used in the UAE:

• Reliable construction: Applicable law is England and Wales. The place of arbitration is London (LCIA). (Neutral, but expensive and long to get to assets in the UAE).
• Regional design: The applicable law is DIFC. Place of Arbitration: Dubai (DIAC). (Balanced, fast, and maximum performance in the UAE)
• Hybrid construction: Applicable law is England and Wales. Place of arbitration is Dubai (DIAC) or Abu Dhabi (ICC). (Popularly, but there is an increased risk of local courts interfering in the process if the clause does not exclude their jurisdiction.)

It is a mistake to choose the UAE’s parent law (onshore) and the place of arbitration in Dubai, but not in the DIFC. In this case, the court in charge will be the local court of Dubai, and the arbitration decision risks being challenged on an extremely wide range of grounds, including the expiration of the statute of limitations under the rules of the UAE Civil Code.

Court or arbitral tribunal: How does this affect the choice of law?

The choice of a UAE state court under foreign applicable law almost always means playing in the field of local law. This is a risk for complex M&A agreements.

How to strengthen the contract before a dispute arises

The best clause on applicable law is created when a contract is signed.

An international commercial contract with a UAE counterparty must include:

• clear wording of applicable law: This Agreement shall be governed by and construed in accordance with [England and Wales/DIFC] law, without regard to its conflict of laws rules.
• • The Vienna Convention Exclusion Clause (CISG) (if it is not part of your plan)
• the clause on the exclusion of the UAE’s peremptory norms (not always valid, but serves as an important guideline for arbitrators);
• language of the proceedings and the prevailing language of the contract (English must be explicitly indicated);
• an arbitration clause that completely excludes the jurisdiction of local courts, except for interim measures;
• detailed provisions on fines so that they can be protected as “Liquidated Damages” in English law;
• a provision for the payment of interest with a clear simple rate to avoid the risk of riba;
• sanctions and anti-corruption clauses with the right of immediate termination.

The contract should not be written for a comfortable partnership, but for divorce in a jurisdictional conflict.

Common mistakes in choosing the applicable law

1. Selecting “UAE law” without specifying This creates uncertainty: Does federal law (onshore) or DIFC/ADGM apply? These are two different universes.

2. If the contract does not contain a choice of law, the arbitrators will determine it on the principle of “close connection”, and the UAE court will apply its own law. The outcome is unpredictable.

3. For distribution agreements, the choice of foreign law will not protect the principal from claims by an agent registered in the UAE under local mandatory law.

4. If the contract is written in English, and the counterparty insists on an Arabic translation without specifying the prevailing text, the UAE court will be guided by the Arabic version, in the interpretation of which it will apply local canons.

5. Russia and the UAE are parties to the Vienna Convention on Contracts for the International Sale of Goods. If you choose English law but do not rule out CISG, a dangerous legal hybrid emerges.

Checklist for selection of applicable law

Before finalizing the contract with the UAE element, 15 questions must be answered:

1. Which jurisdiction (England, DIFC, UAE, Switzerland) is most predictable for this type of transaction?
2. Which system best protects my key terms (limitation of liability, termination)?
3. Will the parties choose the DIFC as the ideal compromise?
4. Where are the debtor’s most valuable assets?
5. Is there a hidden application of UAE law in the distribution or agency agreement?
6. Does the arbitration clause exclude the jurisdiction of local courts?
7. Is the penalty and interest mechanism consistent with the UAE’s chosen law and public policy?
8. Is the language of the treaty the predominant language?
9. Is the Vienna Convention (CISG) excluded?
10. Is the arbitration venue friendly to the chosen law (e.g. DIFC for English/DIFC law)?
11. Who will bear the burden of proving the contents of foreign law in a local court if arbitration is not provided for?
12. Does the transaction fall under the DIFC/ADGM regulation by default?
13. How does the chosen law interpret force majeure and sanctions risks?
14. Will this entitle the loser to recover full legal costs?
15. Will the decision made on the basis of this right be enforceable in the UAE or in the country where the assets are located?

What a strong strategy looks like

A strong strategy for choosing applicable law in the UAE usually includes three levels:

1. Legal Audit: Checking how the chosen legal system interprets 5-7 key provisions of your specific contract (forfeiture, refusal of acceptance, assurance). If the choice is not optimal, the compensation mechanism in the contract text is determined.

2. Jurisdictional Engineering: Creating a rigid linkage of “applicable law – place of arbitration – supervising court”. For example, DIFC Law – DIFC Arbitration Place – DIFC Court of Arbitration. This is the golden triangle of executability in the UAE.

3. Identifying UAE imperatives that “break through” the contract, regardless of the law chosen (public order, Commercial Agents Act, Real Estate Registration), and adapting the commercial structure of the transaction to minimize their impact.

FAQ

Can you choose English law for a contract between two companies from the UAE?

Yeah. If a transaction can be described as international (e.g., goods are shipped across borders or services are provided from abroad), arbitration in the UAE recognizes such a choice. UAE courts also recognize it if the dispute is submitted to arbitration rather than to a state court. However, for purely “domestic” contracts related to mainland real estate, the choice of foreign law by a state court is likely to be ignored.

Will English law protect against UAE commercial agents law?

Nope. Federal Law No. 3 of 2022 on Commercial Agencies is a super-mandatory provision. If the agent is registered, the contract in this part will be governed by UAE law regardless of your choice of law. A foreign manufacturer cannot circumvent an agent’s right to commission or block goods by simply choosing English law.

What is DIFC and why is it beneficial?

It is a legal system based on English common law and operates within the Dubai International Financial Centre. By choosing it for a commercial contract with an Emirati company, you get: English conceptual framework, predictability, English language of litigation and arbitration center, and your counterparty from the UAE does not feel that he has fallen under foreign jurisdiction (England). It's the most elegant compromise.

Can the contract simply not specify the applicable law?

You can, but that's the worst strategy. You leave the decision to the discretion of the arbitrators or the court. In arbitration with a seat in Dubai, arbitrators are likely to apply conflict of laws rules that may indicate the UAE’s right as the country with which the treaty is most closely linked. In the UAE state court, the UAE law will be applied directly.

Related services

• International trade, distribution and cross-border transactions
• Commercial contracts
• International Arbitration, Commercial Disputes and Cross-Border Litigation
• Corporate and Regulatory Investigations, Business Integrity
• International regulatory risks and strategic advice

Related material

• How to choose an arbitration clause for an international contract with a counterparty from the UAE
• Agency and Distribution Agreements in the UAE: Protection of local agent
• How to check a foreign counterparty in the UAE before concluding a transaction Execution of foreign arbitration awards in the UAE: New York Convention and the pitfalls
• Sanctions Compliance in Payments with Companies from the UAE
• DIFC vs. UAE Law (Onshore): What to choose for a commercial contract

Conclusion

Choosing the applicable law in an international commercial contract with the UAE element is not about finding the perfect neutral system, but about constructing a legal shield around your transaction.

A strong position is built on understanding how the chosen right treats your key safeguard clauses, how it interacts with arbitration in Dubai, and where it is powerless to the UAE's peremptory norms.

In complex transactions with the MENA region, the winner is not the one who chose the right “like everyone else.” The winner is the one who understands in advance what provisions of his contract will stand in court or arbitration, and how to make the debtor pay using the peculiarities of the local public order, rather than fighting them.