The law can appear boring and confusing, we know, but your business should never operate without a proper contractual legal framework in place.
As a busy stakeholder juggling lots of priorities, you may be inclined to act quickly to secure a new revenue stream and not bother putting a properly considered written contract in place to save time and money. In our experience, however, it is much more cost-effective to be proactive rather than reactive when it comes to commercial contracts and business agreements in the UAE.
Relying on verbal conversations, emails, letters, texts or a gentleman’s handshake as the basis for a business arrangement has its pitfalls and can prove to be a false economy in the long run. A well-drafted commercial contract provides clarity, protects your business interests and establishes what each party is expected to do.
Here are our top reasons why your business should have written contracts, together with some specific recommendations relating to their content.
Navigating UAE Business Law
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 is common for businesses to fall foul of the law because they do not fully understand their legal obligations. A contract drafted by a specialist UAE commercial lawyer can help ensure that the terms reflect your business and comply with the applicable legal requirements.
Of course, there are DIY contract templates available online, but these will rarely reflect the specific nature of your business, the transaction or the risks involved. A commercial contract drafted specifically for your business can provide significantly greater protection.
Getting Paid and Recovering Debts
Getting paid is one of the top priorities for any business.
A contract can clearly establish when invoices will be issued, when payment is due, what happens if payment is late and what rights the business has if a customer fails to pay.
Should a customer decide not to cooperate, a properly drafted and legally enforceable contract can support any legal action you take to recover outstanding debts or unpaid invoices, potentially making the process more straightforward and cost-effective.
Minimising Commercial Disputes
While a contract cannot completely prevent disputes, it can help to minimise them.
A well-drafted agreement encourages the parties to understand their respective obligations and provides a clear framework for dealing with problems. It can also include a procedure for complaints, negotiations or mediation, allowing the parties to attempt to resolve a dispute before incurring significant legal costs.
If mediation or negotiation fails, the contract provides an important foundation for any subsequent commercial litigation, arbitration or debt recovery proceedings.
Protecting Intellectual Property Rights
Protecting your business and its assets is crucial. Intellectual property rights (IPR) can often confuse customers because they may incorrectly believe that they have full or unrestricted ownership of, or rights to use, any intellectual property relating to goods or services once they have paid for them.
A contract should clearly communicate who owns the intellectual property, who has rights to use it, the extent of those rights, who may use it and for what purposes.
IPR can be a valuable part of your business, so it is important to ensure that it is protected against unauthorised use, misuse or exploitation.
Limitation of Liability
A commercial contract can set out limitations on each party’s liability under the agreement, providing clarity and certainty as to the maximum potential exposure or risk between the parties.
This is important when evaluating commercial risks and ensuring that appropriate insurance is in place to cover potential liabilities.
Creating Certainty for Your Business
Yes, things can be agreed verbally or by email, but how much legal certainty do they provide?
A properly drafted contract can set out the operational, trading and sale or supply processes between the parties, including:
- How the customer can use the goods or services purchased;
- The respective rights, duties and obligations of each party;
- The duration of the contract;
- How and when the contract can be terminated;
- What happens upon expiry or termination;
- Procedures for dealing with disputes, complaints and disagreements;
- Confidentiality obligations; and
- Non-competition or other protective undertakings where appropriate.
By communicating this information in a written contract, you create greater certainty about what the customer needs to know and how both parties are expected to act.
Managing Expectations and Providing Good Service
When contractual terms are clear, you can more easily manage customer expectations.
The customer can refer to the agreement if they have a problem, giving them the information they need to understand their rights and obligations and potentially resolve the issue more quickly.
Clear terms and conditions and commercial agreements can therefore contribute to a better customer experience while protecting the interests of your business.
Building Trust and Providing Peace of Mind
Putting a proper legal framework in place shows your customers that you take your business relationships seriously.
A written contract provides both you and your client with peace of mind because the transaction, services and respective obligations are clearly documented and protected.
By providing clear contractual terms, you can also build greater trust in your business and establish a professional approach to commercial relationships.
Creating Business Value
Having your business trading arrangements clearly documented through properly prepared and legally binding contracts can, in many cases, enhance the value and credibility of your business.
This can be particularly important when preparing for a business sale, financing or investment, as potential acquirers, lenders and investors may want to understand how the business’s key commercial relationships are documented and protected.
Governing Law
The contract should clearly establish, in the event of a dispute, whether each party has the right to take legal action through the courts or whether the dispute should be referred to arbitration, and whether proceedings should take place in the UAE or abroad.
If litigating abroad, enforcing a foreign judgment in the UAE can be difficult, so foreign jurisdiction should be considered carefully.
If litigation in the UAE is chosen, the jurisdiction should ideally correspond with the governing law applicable to the contract. For example, a contract intended to be enforced through the Dubai Courts should ideally provide for the laws of the UAE as applied in the Emirate of Dubai.
The position before the Dubai International Financial Centre (“DIFC”) Courts is somewhat different, as they may more readily apply the governing law specified in the contract.
Within arbitration proceedings, there can be greater flexibility when choosing the law applicable to the contract, subject to mandatory provisions of local law and public policy.
Jurisdiction and Dispute Resolution
If the other party to the contract has assets located only in the UAE, an appropriate forum for dispute resolution may be the Dubai Courts or, where the relevant requirements are met, the DIFC Courts and the DIFC Courts’ Small Claims Tribunal (“SCT”).
For SMEs in particular, the DIFC SCT can be an attractive option for eligible claims, as proceedings are generally designed to be more straightforward and parties do not necessarily need to be represented by lawyers.
If a business has a contractual relationship with a company that has assets outside the UAE, or indeed across multiple jurisdictions, international arbitration may provide a more suitable dispute resolution mechanism. The Dubai International Arbitration Centre (“DIAC”) is one of the key arbitration institutions available to businesses operating in the UAE.
Legal Costs
The contract should clearly stipulate the position regarding the recovery of legal fees.
This is important because the applicable arbitration rules may not automatically provide for the recovery of all legal expenses incurred by the parties. Therefore, where DIAC arbitration is selected, the contractual provisions concerning legal costs should be carefully considered.
In litigation, the position is that the Dubai Courts will generally award only nominal legal fees to the successful party at each stage of the litigation process. The DIFC Courts, except the SCT, will usually have greater scope to award the successful party its reasonable legal costs, subject to the applicable rules and circumstances.
Including an appropriate legal costs provision in a commercial contract can therefore provide greater clarity regarding the financial consequences of a potential dispute.
James Berry & Associates Legal Consultants
We have extensive experience preparing and negotiating a wide range of complex commercial agreements, business contracts and trading documentation across all business sectors, as well as providing effective dispute management and legal support when things do not 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.
Whether you need help drafting a commercial contract, reviewing terms and conditions, negotiating an agreement or resolving a contractual dispute, our experienced commercial lawyers can advise you on the best approach for your business.
Contact James Berry & Associates today to discuss your commercial contract requirements and protect your business with a properly drafted legal agreement.
