Why your U.A.E. business needs written contracts
08 Oct 2019
Why your U.A.E. business needs written contracts
The law can appear boring and confusing we know but your business should never do business without a proper contractual legal framework in place. As a busy stakeholder juggling lots of balls, you may be inclined to act quickly to secure a new revenue stream and not bother putting in place a properly thought-through written contract to save you time and money. In our experience, it is much more cost effective to be proactive rather than reactive in these types of situations. Relying on verbal conversation, emails, letters, texts or a gentleman’s handshake as the basis for a contract has its pitfalls and this approach will probably prove to be false economy in the long run. Here are our top reasons why your business should have written contracts and some specific recommendations relating to their content.
Many people find the law complex and confusing. A contract will help to make the law more accessible and allow you to navigate it correctly. It’s common for businesses to fall foul of the law because they don’t understand it, so a contract drafted by a specialist will ensure that you always stay on the right side of the law. Of course, there are DIY contract templates available online, but these will not reflect your own business and offer you full protection.
One of the top priorities. A contract can communicate when the customer can expect an invoice and when they need to pay their bills. Should they decide not to cooperate; a legally enforceable contract will support (and make it easier and less expensive to progress), any legal action you take to recover the debt.
- Minimising disputes or problems
Whilst a contract won’t completely stop disputes or problems, it can help to minimise them. It encourages the customer to cooperate, but if this doesn’t happen a well drafted contract allows you to mediate to try and resolve the problem, rather than paying expensive legal fees. If mediation fails then the contract is a legally enforceable document so it will support you with any legal action or debt recovery.
- Protecting intellectual property rights (IPR)
Protecting your business and its assets is crucial. IPR can often confuse a customer because they may believe (incorrectly) they have full/unrestricted ownership of, and/or rights to use, any IPR in or relating to goods and/or services once they have paid for them. A contract will communicate who owns, or has rights to use, any IPR and to what extent it can be used and by whom and for what purposes etc. IPR is a valuable part of your business and you need to ensure that it is protected so that it cannot be stolen, misused, or devalued.
A contract sets out limitations on each party’s liability under it so each party has clarity and certainty as to what their maximum potential exposure/risk is to each other, which is important for commercial evaluation purposes and ensuring adequate insurance is in place to cover the potential liability.
Yes things can be agreed verbally, or by email, but how much legal standing do they have? Very little. A contract will set out the operational, trading, and sale/supply processes to take place between the parties; how the customer can use the goods/services purchased; the respective rights, duties and obligation of the parties; the duration of the contract, how and when it can be terminated, and what happens on expiry/termination; a procedure for dealing with any disputes, complaints, or disagreements between the parties; and confidentiality and non-competition undertakings from the customer to protect your business. By communicating this information in a contract, you are creating certainty as to all the things that the customer needs to know so all parties understand how to act and what is expected from them.
- Managing expectations and providing good service
When there is certainty as to contractual terms, you can more easily manage the customer’s expectations. They can refer to the contract if they have a problem and it will give them all the information they need to try and resolve it. They will feel they are getting a good service and be encouraged to use your business again.
- Trust and giving peace of mind
Putting a legal framework in place shows the customer you care about them, as well as your business. A contract gives you and the client peace of mind because you know any transactions and work are protected. By providing this to clients you are allowing them to have trust in the business.
Having your business trading arrangements clearly identifiable under properly prepared and legally binding contract documentation will in most cases enhance the value and credibility of your business for sale or financing raising purposes and make it a much more attractive and viable proposition to potential acquirers, lenders or investors.
The contract should be clear, in the event a dispute between parties, as to whether each party has the right to take legal action through the courts for a remedy or if it should be referred to arbitration, and in either case whether in the UAE or abroad. If litigating abroad, it is difficult to enforce a foreign judgment within the courts of the UAE, so foreign jurisdiction should be avoided. If litigation in the UAE is chosen then the jurisdiction should ideally be the same as the governing law applicable to the contract. E.g. a contract to be enforced in the Dubai Courts should have the governing laws of the UAE as applied in the Emirate of Dubai. The position in the Dubai International Financial Centre (“DIFC”) Courts is a little different as they will more readily apply the governing law specified in the contract. Within arbitration proceedings there will be some discretion of choice as to the law applicable to the contract subject to mandatory provision of local laws and public policy.
If the other party to the contract has assets located in the UAE only, the best forum for dispute resolution would be to proceed via the Dubai Courts, the DIFC Court of First Instance (where the claim is over AED 1,000,000) or the DIFC Courts’ Small Claims Tribunal (“SCT”) where the claim is not over AED 1,000,000. For SME’s especially, the DIFC SCT is an ideal choice of jurisdiction as hearings in the SCT take place without lawyers needing to be present, they are generally quicker (many cases settle even before the Tribunal stage) and further and it is easier to enforce a domestic judgment in the UAE than a foreign one. If a business has a contractual relationship with a company which has assets located outside of the UAE, or indeed across the world, then it would be better to opt for arbitration via the DIFC-LCIA Arbitration Centre or the Dubai International Arbitration Centre (“DIAC”).
The contract should clearly stipulate the position regarding the recovery of legal fees. One reason why this is important is because the DIAC rules make no reference to the recovery of legal expenses incurred by parties. Therefore, in a contract with a jurisdiction of the DIAC, unless the parties clearly mention the recovery of legal fees, the arbitral tribunal would have no power to allow the recovery of fees under the DIAC rules. In litigation, the position is that Dubai Courts will only award nominal legal fees to the successful party (of around AED 1,000 – AED 2,000) at each stage of the litigation process. The DIFC Courts (except the SCT) will usually provide the successful party with an award for their reasonable legal costs, reasonably incurred (subject to some further provisions).
James Berry & Associates Legal Consultants
We have extensive experience preparing and negotiating wide ranging complex commercial agreements and trading documentation across all business sectors and providing effective dispute management legal support when things don’t go to plan. We offer private and business legal services as a recognised and viable alternative to the “big law firms” with highly competitive pricing and flexible billing options. Our areas of expertise span:https://jamesberrylaw.com/legal-services