The United Arab Emirates presents one of the world’s most sophisticated environments for international commercial contracts. It also presents traps that experienced international operators walk into with alarming regularity.
The United Arab Emirates has, over five decades, constructed the legal architecture of a serious international commercial jurisdiction. Federal courts, two offshore common law enclaves, a UNCITRAL-modelled arbitration statute, a transshipment infrastructure that handles a material share of global container traffic, and an insurance market of growing regional dominance – the UAE offers foreign operators more legal tools than most comparable jurisdictions. Beneath the commercial sophistication lies a dual legal system of considerable complexity.
In the UAE, jurisdiction is a strategic choice – and the wrong one is expensive.
The Dual Legal System: Why Your Contracts Face Hidden Structural Risk
The UAE operates two distinct and largely parallel legal orders. The onshore federal system is a civil law jurisdiction, conducting proceedings in Arabic, applying the UAE Civil Code and the Commercial Code and enforcing judgments through a court system that, for all its modernisation, operates on fundamentally different principles from the English common law systems in which most international commercial contracts are negotiated. The Dubai International Financial Centre (DFIC) and the Abu Dhabi Global Market (ADGM) are separate common law jurisdictions – each with their own courts, their own legislation, their own precedents – operating within the UAE’s federal framework but largely insulated from onshore law.
This architecture creates a structural risk that foreign operators routinely underestimate. The choice between onshore and offshore jurisdiction is not a preference – it has legal, practical, and strategic consequences that compound over the life of a contract and become acute at the moment of dispute. Contracts drafted under the assumption of DIFC or ADGM jurisdiction by parties who are not DIFC or ADGM-based entities may find their jurisdiction clauses challenged. Onshore courts have, in a line of cases, addressed the boundary conditions of DIFC court jurisdiction through the gateway provisions that determine when the DIFC Courts can properly exercise authority.
Contracts Under UAE Civil Code: What Foreign Operators Miss
Under the UAE Civil Code, certain contractual provisions that international practitioners treat as standard operate differently, or not at all, in the manner intended. Penalty clauses are a representative example: onshore courts retain an express power to reduce agreed penalties that they consider excessive, or to increase them where actual damages exceed the agreed amount. The commercial certainty that a liquidated damages clause is intended to provide – certainty of quantum, avoidance of proof of loss – is therefore not guaranteed in onshore proceedings in the way that it would be in English law or DIFC/ADGM proceedings.
Similarly, the assignment of contractual rights and obligations, the termination of contracts for breach, and the treatment of conditions precedent all have civil law dimensions that diverge from common law equivalents in ways that matter when contracts are subject to performance pressure. Contracts drafted by international teams, for UAE counterparties, under implicit common law assumptions, and then governed by UAE federal law, carry a systematic mismatch between drafting intent and legal effect that only emerges under stress.
Force majeure under Article 273 of the UAE Civil Code requires that performance of the contractual obligation has become impossible – not impractical, not commercially unattractive, not materially more expensive. The impossibility standard is the operative test. Where performance is suspended by a temporary impossibility, the contract is not discharged – it is suspended for the duration, and the obligation revives when the impossibility passes. Where performance has become permanently impossible, the obligation is extinguished, and neither party bears liability.
Insurance: Regulatory Consolidation and the War-Risk Surge
The UAE insurance market underwent a structural regulatory change when supervisory authority over insurance was transferred from the Insurance Authority to the Central Bank of the UAE. The consolidation, now in operation, creates a unified financial services regulatory framework in which insurance supervision sits alongside banking and monetary policy. For market participants – insurers, reinsurers, brokers, and sophisticated corporate buyers – the transition has involved regulatory adjustment, updated licensing requirements, and a compliance environment in active development.
Marine insurance has been among the most immediately affected commercial lines. War-risk premiums for vessels operating in the region and adjacent waters rose sharply following the escalation of Houthi attacks on commercial shipping. The additional war-risk premium that shipowners, charterers, and cargo interests have been required to absorb represents a cost transfer with direct contractual implications: who bears the additional premium under the charterparty, who carries the war-risk exposure under the cargo sale contract, and whether existing insurance arrangements cover the specific risk category at issue are questions that standard contractual allocations often fail to address clearly.
P&I Club cover – the mutual insurance arrangement that underpins liability coverage for the majority of the world’s commercial shipping fleet – interacts with UAE law in ways that require specific attention in any claim involving UAE-connected parties. The rules of mutual P&I clubs are not insurance policies in the conventional sense, and their enforcement against third parties, and their interaction with UAE court proceedings, involves legal analysis that differs materially from the treatment of conventional insurance contracts. Subrogation rights, the pay-to-be-paid rule, and the direct action rights available to third parties under UAE law all require separate examination.
Sanctions: The FATF Legacy and US Secondary Sanctions Exposure
The UAE’s removal from the Financial Action Task Force grey list in 2024, following a period of enhanced scrutiny, reflected genuine regulatory effort. It did not eliminate the compliance exposure that the grey-list period created, nor did it resolve the structural tension between the UAE’s role as a commercial hub serving a broad range of markets – including markets subject to Western sanctions – and the expectations of US and EU counterparties, banks, and regulators.
US secondary sanctions risk is a live consideration for any company with significant UAE operations and US-connected business. The risk is not theoretical: companies that have maintained business relationships with entities subsequently identified as sanctions-evasion vehicles, or that have processed transactions later determined to involve sanctioned parties, have faced enforcement attention that their UAE-law compliance programmes did not prevent. Contractual representations and warranties on sanctions compliance, supply chain due diligence, and banking counterparty screening are not sufficient on their own – they must be backed by operational processes that are calibrated to the actual sanctions risk profile of the business.
Enforcing Contracts Through UAE Arbitration
The UAE’s arbitration landscape is, by regional standards, developed. Federal Arbitration Law No. 6 of 2018 (as amended), modelled on the UNCITRAL Model Law, provides a statutory framework for domestic and international arbitration that offers the core guarantees of arbitral autonomy, limited court intervention, and award enforceability. The Dubai International Arbitration Centre, operating under rules updated in 2022, and the ADGM Arbitration Centre for ADGM-seated disputes, provide institutional options that are materially more developed than anything available in most comparable regional jurisdictions.
The enforcement of foreign arbitral awards in the UAE – through the New York Convention, to which the UAE is a party – has become more reliable as UAE court practice has developed. The public policy exception to enforcement, which was once applied with a breadth that created material uncertainty for award holders, is now applied with more restraint. Awards against UAE parties in favour of foreign parties are enforced. The process requires local legal management and is not instantaneous, but it is not the enforcement risk it once was.
Conclusion: Sophistication Is Not the Same as Certainty
The UAE offers foreign operators a legal environment that is, in many respects, the most developed in the region. The DIFC and ADGM provide common law certainty for parties that properly establish their jurisdiction. The Federal Arbitration Law provides a credible statutory framework. The courts, onshore and offshore, function. The port and logistics infrastructure is world-class.
None of that eliminates the need for precise legal analysis at the contract drafting stage. The dual legal system creates jurisdictional complexity that generic international contracts do not address. The insurance market is in regulatory transition. The sanctions environment is more demanding than it was. Recent geopolitical events have demonstrated, concretely and at scale, that the risk assumptions embedded in standard commercial contracts were not built for the conditions that now exist.
The companies that manage these risks most effectively are not those with the most sophisticated internal legal teams – they are those that treat UAE legal complexity as a feature of the operating environment to be addressed at the outset, with jurisdiction-specific advice, rather than a problem to be managed when it materialises as a dispute.
In a jurisdiction this sophisticated, the most dangerous assumption is that the contract drafts itself.
This article is written for informational purposes and does not constitute legal advice. All references to UAE legislation are based on publicly available instruments. Companies operating in or entering the UAE market should seek jurisdiction-specific legal counsel.
FAQ: UAE Commercial Contracts
The primary risk is the UAE’s dual legal system. Contracts governed by onshore UAE federal law operate under civil law principles that differ materially from common law assumptions. Penalty clauses, force majeure standards, and termination rights all behave differently than international practitioners expect. The wrong jurisdiction choice is expensive and often irreversible.
DIFC and ADGM are common law jurisdictions operating within the UAE’s federal framework. Contracts seated there benefit from English-style legal certainty. Onshore contracts fall under the UAE Civil Code – a civil law system conducted in Arabic, with different rules on penalties, assignment, and force majeure. The choice between them is strategic, not administrative.
Under Article 273 of the UAE Civil Code, force majeure requires that performance has become truly impossible — not merely impractical or commercially unattractive. A temporary impossibility suspends the contract; a permanent one extinguishes it. This is a stricter and narrower standard than most international contracts anticipate.
Not with the same certainty as under English law. Onshore UAE courts retain the power to reduce penalty clauses they consider excessive, or increase them where actual damages exceed the agreed amount. The commercial certainty that liquidated damages clauses are designed to provide is not guaranteed in onshore proceedings.
The UAE is a New York Convention signatory. Enforcement of foreign awards has become materially more reliable as UAE court practice has developed. The public policy exception – once applied broadly – is now applied with greater restraint. The process requires local legal management but is no longer the enforcement risk it once was.
US secondary sanctions exposure is a live risk for companies with UAE operations and US-connected business. The UAE’s removal from the FATF grey list in 2024 reduced regulatory scrutiny but did not eliminate sanctions compliance obligations. Contractual representations alone are insufficient – they must be backed by operational due diligence calibrated to the actual risk profile.
Ahmad Subhi
As Founding Partner in Baghdad and Managing Partner in Abu Dhabi for Salt & Associates, Ahmad Subhi is recognised for his expertise in private equity, media law, and international arbitration, developed through senior roles at Clifford Chance and Herbert Smith Freehills in London and Dubai. He is well known for advising large institutional investors and UAE government-linked corporates on strategic litigation, arbitration, and complex cross-border transactions. Ahmad has been instrumental in navigating venture capital and media investment structures, leading fund and private equity operations across the Gulf, and representing clients before the ADGM Courts, all UAE arbitration bodies, and the Courts of England and Wales up to the Court of Appeal.
