Not Every Contract Begins with a Signature

A Reading of the Regulation of Pre-Contractual Liability under the New UAE Civil Transactions Law

Introduction

This development gives rise to a fundamental question: Does legal liability arise only upon the conclusion of a contract, or can it emerge earlier during the negotiation stage?

This question has gained particular significance following the promulgation of Federal Decree-Law No. (25) of 2025 Issuing the Civil Transactions Law, which introduced a dedicated legal framework governing pre-contractual negotiations. This legislative approach reflects an increasing recognition of the pivotal role negotiations now play in modern civil and commercial transactions. Rather than merely introducing new legal rules, the Law reshapes the legal framework governing conduct during the pre-contractual stage and defines the circumstances under which civil liability may arise before a contractual relationship is formally established.

This article proceeds on the premise that the UAE legislator has not restricted the principle of freedom of contract. Instead, it has reorganized the exercise of that freedom during the pre-contractual phase through a legal framework built upon three fundamental pillars:

1. Good faith in the conduct of negotiations; 
2. The duty to disclose material information; and 
3. The protection of confidential information exchanged between the negotiating parties. 

Accordingly, the significance of this legislative framework lies not merely in regulating negotiations themselves, but in redefining the point at which civil liability may begin to arise.

Against this background, this article first examines the reasons that prompted the legislator to regulate the negotiation stage independently, before analysing the legal obligations imposed during that phase and concluding with an assessment of the legislative philosophy underlying these provisions and their practical implications for legal practice and the business community.

I. Why Has the Negotiation Stage Become the Subject of Independent Legislative Regulation?

For many years, the traditional principles of civil law were founded upon the premise that contractual obligations arise only upon the conclusion of a contract. Consequently, negotiations were generally regarded as falling within the parties' freedom to commence, continue, or terminate without giving rise to contractual obligations. This approach was well suited to a contractual environment characterised by relatively simple transactions and short negotiation periods, where discussions rarely extended beyond the exchange of offers leading either to the conclusion of a contract or the abandonment of negotiations.

However, the evolution of commercial and investment transactions has fundamentally altered the nature of this stage. In many cases, negotiations have become an independent phase possessing both legal and economic significance. They may continue for extended periods, involve extensive legal and financial due diligence, require the exchange of strategic information, and entail considerable costs before any final decision regarding the proposed transaction is reached.

Within this context, potential harm is no longer confined to breaches occurring after the contract has been concluded; rather, it may arise even before the contract itself comes into existence. A party may restructure its business operations, incur substantial transaction costs, or forego alternative business opportunities in reliance upon the seriousness of ongoing negotiations, only to discover later that the other party failed to observe the minimum standards of conduct required during that stage.

This development reflects a broader shift in the scope of legal protection. Whereas traditional contract law primarily sought to safeguard obligations arising after the conclusion of a contract, the new legislative framework extends protection to the legitimate expectations that may arise before the contract is formed, recognising that negotiations have become, in many instances, economically as significant as the contract ultimately contemplated.

Importantly, this evolution does not suggest that the legislator has replaced the principle of freedom of contract with an obligation to conclude a contract. Rather, it reflects an attempt to strike a more balanced approach. While parties remain free to terminate negotiations, the exercise of that freedom is now subject to the prohibition of abusive conduct and must not be exercised in a manner inconsistent with the requirements of good faith or that unlawfully causes harm to the other negotiating party.

This legislative policy is reflected in several notable features, including:

• Enhancing legal certainty by providing a clear statutory framework for a stage that had previously depended largely upon general legal principles and judicial interpretation; 
• Promoting confidence in the business and investment environment by extending legal protection to negotiating conduct and reducing practices capable of undermining transactional stability. 

Despite the clarity of this framework, its practical application raises important questions, foremost among them how courts will distinguish between the legitimate termination of negotiations—which remains an expression of contractual freedom—and conduct amounting to bad faith that justifies the imposition of civil liability. The success of the new legislative framework will therefore depend largely upon the standards developed by the judiciary in balancing freedom of negotiation against the duty to negotiate in good faith.

This naturally leads to a further question: How has the legislator translated these general principles into concrete legal obligations? The answer begins with Article 121, which establishes good faith as the cornerstone of the legal framework governing the pre-contractual stage.

II. Redefining Good Faith During the Pre-Contractual Stage

The inclusion of the principle of good faith among the provisions governing negotiations does not merely extend the general principles of civil law; rather, it reflects a deliberate legislative policy aimed at subjecting the pre-contractual stage to an independent legal framework. Consequently, good faith is no longer confined to the interpretation or performance of contracts, but has become the governing standard for conduct preceding the formation of contractual relations.

The legislator begins this framework with Article 121(1), which provides:

"The initiation, conduct and termination of pre-contractual negotiations shall be carried out in accordance with the requirements of good faith."

This wording demonstrates that the obligation extends throughout the entire negotiation process—from its commencement until its termination—making good faith the governing principle of the negotiation process as a whole.

At the same time, the legislator was careful to preserve the principle of freedom of contract. Article 121(2) expressly provides:

"Where negotiations have taken place in respect of a contract, such negotiations shall not oblige either party to conclude that contract."

Accordingly, each party retains the right to discontinue negotiations whenever it considers that continuing them is no longer worthwhile, without such termination, in itself, giving rise to legal liability.

The practical significance of this framework becomes evident in Article 121(3), which links liability to the improper conduct of negotiations rather than to the failure to conclude the contract itself. Compensation is therefore limited to the actual damage suffered by the other party, while excluding any anticipated profits or expected benefits that would have arisen from a contract that was never concluded, unless the parties agree otherwise. This reflects a careful balance between protecting the negotiating party acting in good faith and preserving the parties' freedom not to contract.

It should also be noted that liability at this stage is not based on the breach of a contract that has yet to come into existence, but rather on the breach of the legal obligations governing the negotiation process itself—principally the duties of good faith, disclosure, and confidentiality. Accordingly, pre-contractual liability differs from traditional contractual liability in both the source of the obligation and the legal basis upon which it rests, although it remains, as a general rule, subject to the ordinary principles of civil liability unless the law provides otherwise.

Completing this framework, Article 121(4) recognises the deliberate concealment of material information affecting the validity of the contract as a manifestation of bad faith. This provision illustrates the close relationship between the duty of good faith and the duty of disclosure, while paving the way for the more detailed regulation of disclosure obligations contained in Article 122.

This legislative framework achieves several important practical objectives, including:

• Preserving the balance between protecting negotiating parties and maintaining freedom of contract; 
• Establishing a clear statutory standard for evaluating conduct during negotiations; and 
• Limiting compensation to actual loss while excluding speculative profits or expected contractual benefits. 

Nevertheless, the practical application of these provisions will ultimately depend upon the standards developed by the judiciary in determining the meaning of bad faith and distinguishing between the legitimate termination of negotiations and conduct that exceeds the permissible limits of contractual freedom so as to justify civil liability.

This naturally gives rise to a further question: If good faith constitutes the overarching principle governing negotiations, what is the scope of the duty to disclose material information? The legislator addresses this issue through the dedicated provisions of Article 122.

III. The Duty of Disclosure as a Safeguard for Informed Consent

While Article 121 establishes the general framework governing conduct during negotiations, Article 122 develops that framework by introducing a more specific obligation: the duty to disclose material information. This reflects a legislative policy recognising that protecting a party's consent cannot be achieved merely through compliance with the principle of good faith; rather, it requires ensuring that each party is able to form its will on the basis of accurate and material information.

Article 122(1) imposes a duty on any party to negotiations or a contract who possesses information of decisive importance to the other party's consent to disclose such information, where the other party is presumed to be unaware of it or has reasonably placed its trust in the disclosing party. The Article further defines material information as information that bears a direct and essential connection to either the subject matter of the contract or the characteristics of one of its parties.

Similarly, Article 122(2) provides that the duty of disclosure is imposed upon both negotiating parties, each of whom is required to exercise reasonable care in providing the other with information relating to the negotiations, the proposed contract, and the surrounding circumstances of the contemplated transaction. This confirms that disclosure constitutes a mutual obligation based on the exercise of reasonable care, rather than an obligation to achieve a specific result.

This legislative framework produces several important practical consequences, including:

• Promoting transparency throughout the negotiation process; 
• Protecting the validity of consent against the concealment of material information; and 
• Maintaining a fair balance between the negotiating parties. 

The legislator further strengthens this framework through Articles 122(3) and 122(4), which regulate both the safeguards surrounding the duty of disclosure and the legal consequences of its breach.

Article 122(3) establishes rules governing the allocation of the burden of proof between the parties, thereby striking an appropriate balance between protecting a party alleging a breach and avoiding any presumption of liability based solely upon such allegation.

Moreover, Article 122(4) prohibits any agreement seeking to limit or exclude the duty to disclose material information, declaring such agreements void. It also grants the aggrieved party the right to seek rescission of the contract where the breach of the disclosure obligation has impaired the validity of that party's consent.

The significance of this legislative framework lies in the fact that it:

• Establishes clear rules governing the allocation of the burden of proof; 
• Provides statutory protection for the duty of disclosure; and 
• Prescribes remedies proportionate to the purpose of the obligation by safeguarding the integrity of contractual consent. 

Despite the clarity of these provisions, their practical application will depend largely upon the proper documentation of negotiations and disclosures, as well as upon the standards developed by the courts in determining both the scope of the disclosure obligation and the consequences of its breach.

Having regulated the information that must be disclosed, the legislator then turns to the protection of information that must remain confidential, which is addressed separately under Article 123 as part of the broader framework governing the pre-contractual stage.

IV. Protecting Confidential Information: The Other Side of the Duty of Disclosure

The legislator's regulation of the pre-contractual stage extends beyond identifying the information that must be disclosed to encompass the protection of information that must remain confidential. This reflects an appreciation that the trust established during negotiations depends not only upon transparency but also upon safeguarding confidential information against misuse.

Article 123 imposes liability on any person who, without authorization, uses or discloses confidential information obtained in connection with negotiations or a contract, in accordance with the general principles of civil liability. This wording makes it clear that legal protection is not contingent upon the conclusion of a contract but arises from the negotiation relationship itself whenever confidential information has been exchanged.

This framework gives rise to several important practical effects, including:

• Strengthening mutual trust between negotiating parties and encouraging the exchange of information necessary for successful negotiations; 
• Providing legal protection for confidential information even where negotiations do not culminate in a contract; and 
• Promoting commercial certainty by discouraging the misuse of confidential information. 

Nevertheless, practical application may raise important questions regarding the criteria for determining what constitutes confidential information and how such information should be distinguished from information that is publicly available or capable of being obtained through lawful means.

Accordingly, Articles 122 and 123 should be viewed as complementary provisions. While the former governs the information that must be disclosed, the latter protects the information that must remain confidential. Read together, they form an integrated legal framework governing the pre-contractual stage, leading naturally to an examination of the legislative philosophy underpinning these provisions.

V. Understanding the Legislative Philosophy: Has the Law Redefined the Starting Point of Civil Liability?

A combined reading of Articles 121, 122, and 123 demonstrates that the legislator has not enacted isolated provisions addressing separate legal issues. Rather, it has established an integrated framework governing the pre-contractual stage. As a result, this phase is no longer merely preparatory to contract formation but has become an independent legal sphere governed by specific obligations, the breach of which may give rise to civil liability.

Importantly, the legislator does not appear to have intended to restrict the principle of freedom of contract. On the contrary, it expressly preserves each party's right not to conclude a contract while subjecting the exercise of that right to the requirements of good faith, the duty of disclosure, and the protection of confidential information. This reflects a legislative policy aimed at balancing contractual freedom with the protection of the legitimate expectations of parties negotiating in good faith.

Viewed from this perspective, the new legislative framework rests upon three principal obligations:

• Conducting negotiations in accordance with the requirements of good faith; 
• Disclosing material information capable of influencing contractual consent; and 
• Protecting confidential information exchanged during negotiations. 

These obligations operate as complementary components of a unified framework rather than as isolated duties. Good faith provides the overarching standard governing negotiations, disclosure safeguards the validity of consent, while confidentiality preserves the trust necessary to facilitate the exchange of information between negotiating parties.

This integrated framework achieves several important objectives, including:

• Establishing a clear statutory framework governing the pre-contractual stage; 
• Enhancing confidence in the business environment by protecting negotiating conduct; and 
• Maintaining an appropriate balance between freedom of contract and the protection of parties acting in good faith. 

At the same time, the effectiveness of this framework will largely depend upon judicial interpretation, particularly in relation to defining bad faith, determining the scope of the duty of disclosure, identifying confidential information, and assessing the damage resulting from breaches of these obligations.

The practical implications of this framework extend well beyond legal theory. The management of negotiations has now become an essential component of legal risk management, underscoring the importance of properly documenting negotiations and managing the exchange of information prior to contract formation.

Although the Law regulates obligations arising during the pre-contractual stage, it does not establish an independent regime of pre-contractual liability. Rather, breaches of these obligations remain subject to the general principles of civil liability, while being supplemented by specific statutory provisions governing compensation, disclosure obligations, and the protection of confidential information.

VI. Practical Implications for Contracting Practices

The regulation of the pre-contractual stage is no longer confined to resolving theoretical questions concerning the scope of civil liability. Instead, it carries significant practical implications for companies, investors, and legal practitioners alike. As negotiations are now subject to defined legal obligations, it is no longer sufficient to focus solely on the validity and performance of the contract after its conclusion. Rather, the negotiation process itself must be managed as an integral component of legal risk management.

Within this framework, the proper documentation of negotiations becomes one of the most effective means of demonstrating compliance with the duty of good faith and other statutory obligations. Such documentation includes preserving email correspondence, minutes of meetings, draft agreements, negotiation notes, and any documents evidencing the nature or timing of disclosures made during the negotiation process. These records may prove decisive in resolving disputes arising at the pre-contractual stage.

The use of Non-Disclosure Agreements (NDAs) also assumes increased importance where negotiations involve the exchange of commercial, financial, or technical information. Such agreements should clearly define the scope of confidential information, identify the persons authorised to access it, specify the duration of confidentiality obligations, and set out the consequences of any breach, thereby reinforcing the statutory protection afforded to confidential information exchanged during negotiations.

From a practical perspective, it may also be advisable to utilise Letters of Intent (LOIs) or Memoranda of Understanding (MOUs) where appropriate. These instruments may serve to define the general framework of the negotiations, regulate the exchange of information, identify matters already agreed upon and those that remain under negotiation, and expressly specify the binding or non-binding nature of each provision. Doing so helps minimise uncertainty and avoid disputes concerning their legal effect.

This legislative framework also requires companies to reassess their internal policies governing negotiations by identifying individuals authorised to negotiate, establishing protocols for the disclosure of material information, and implementing clear procedures for safeguarding confidential information. Such measures reduce the risk of civil liability arising from conduct occurring before the conclusion of a contract.

Accordingly, the management of the negotiation process can no longer be regarded merely as a commercial or administrative function. It has become an integral component of legal compliance and risk management, requiring legal practitioners and businesses alike to devote to the pre-contractual stage the same degree of attention traditionally afforded to the conclusion and performance of contracts.

Against this background, it is important to consider the principal practical implications of this legislative framework for legal practitioners and the business community, which are summarised in the following conclusion.

Conclusion

The regulation of pre-contractual negotiations under the new UAE Civil Transactions Law reflects a legislative approach aimed at governing legal conduct prior to the conclusion of a contract through an integrated framework founded upon the principles of good faith, the duty of disclosure, and the protection of confidential information. This framework demonstrates an increasing recognition of the central role that negotiations now play in modern civil and commercial transactions.

These provisions should not be understood as restricting the principle of freedom of contract or compelling parties to enter into a contract. Rather, they affirm that contractual freedom must be exercised within a framework of transparency and legitimate expectations, thereby balancing the interests of negotiating parties while promoting transactional certainty and commercial stability.

From a practical perspective, this legislative framework requires companies, investors, and legal practitioners to devote greater attention to the negotiation stage by properly documenting negotiations, managing disclosures of material information, and safeguarding confidential information exchanged between the parties, recognising that this stage may itself give rise to independent legal consequences.

Perhaps the most significant feature of this reform is that it no longer treats the conclusion of a contract as the sole starting point of civil liability. Instead, it extends legal protection to the stage preceding contract formation, thereby enhancing confidence in commercial transactions and aligning the law with the realities of the modern business environment, while preserving the principle of freedom of contract as a cornerstone of UAE civil law.

References

• Federal Decree-Law No. (25) of 2025 Promulgating the Civil Transactions Law.
• Official Gazette of the United Arab Emirates, Issue No. (809), Supplement (2), dated 14 October 2025.
• Mayer Brown, Examining the New UAE Civil Code—Part 3: Contract Negotiation, Formation and Interpretation, 15 June 2026. 
• A&O Shearman, New UAE Civil Code: What Construction Parties Need to Know, 3 June 2026.

Written by:

Ahmed Harb | Ahmed Harb for Legal Consultancy