Pre-Contractual Liability under UAE Civil Transactions Law: A Structural Shift in Contractual Risk

With the introduction of Federal Decree-Law No. 25 of 2025, effective 1 June 2026, the UAE is undertaking a fundamental reform of its civil law framework. The new law replaces the long-standing Civil Transactions Law of 1985 and introduces a more structured, modern approach to contractual relationships.

Among the most significant developments is the codification of pre-contractual liability, which brings the negotiation phase itself within the scope of enforceable legal obligations.

This raises a critical question for businesses:
To what extent can parties negotiate freely without incurring legal risk?

A Shift from Informal Negotiations to Regulated Conduct

Under the previous legal framework, the obligation of good faith was largely confined to the performance of concluded contracts. The negotiation stage remained relatively unregulated, with liability arising only in limited circumstances such as fraud or misrepresentation.

The new law departs from this position in a fundamental way.

Article 121 now requires that the initiation, conduct, and termination of negotiations must all be carried out in good faith. This effectively transforms negotiations from a purely commercial exercise into a legally relevant phase, where conduct is capable of giving rise to liability even before a contract is signed.

The Emergence of a Positive Duty of Disclosure

A key feature of the new regime is the introduction of a mandatory duty of disclosure under Article 122.

A party is required to disclose information that is of decisive importance to the transaction where:

• the information is known to that party; and

• the counterparty is reasonably unaware of it

This marks a clear shift away from the traditional caveat emptor approach.

From a practical standpoint, this means that silence can now create liability. A party may be exposed not only for misrepresentation, but also for failing to disclose material facts that could influence the other party’s decision.

In commercial terms, this obligation becomes particularly relevant in situations involving undisclosed liabilities, regulatory constraints, financial instability, or risks affecting performance. Importantly, the duty is a matter of public order, and therefore cannot be excluded by contract.

Confidentiality as a Statutory Obligation

The new law also introduces a statutory framework for confidentiality during negotiations.

Under Article 123, information shared in the course of negotiations must be used strictly for evaluating the transaction and must not be disclosed to third parties. This obligation applies regardless of whether a non-disclosure agreement has been executed.

While NDAs will continue to play an important role in defining scope and remedies, the law now provides a baseline level of protection, strengthening the position of parties sharing commercially sensitive information.

Termination of Negotiations and Bad Faith Liability

The law continues to recognise that parties are not obligated to conclude a contract. However, it places clear limits on how negotiations may be terminated.

Under Article 121(3), liability arises where negotiations are conducted or terminated in bad faith. This may include situations where a party engages in discussions without genuine intent, induces the counterparty to incur costs, or withdraws in a manner that is opportunistic or unjustified.

While compensation is limited to actual losses incurred, the broader implication is significant. The ability to walk away from negotiations remains intact—but it must be exercised responsibly and in good faith.

Legal and Commercial Implications

The impact of this reform is particularly evident in complex commercial transactions such as mergers, acquisitions, and joint ventures.

Parties involved in such transactions will need to approach negotiations with greater structure and discipline. In particular:

• sellers will need to ensure that all material risks and liabilities are properly disclosed during the negotiation stage;

• buyers will benefit from enhanced transparency and statutory protection of shared information; and

• preliminary documents such as term sheets may now carry increased legal exposure if followed by bad-faith conduct.

The law also formally recognises framework agreements, allowing parties to establish long-term commercial arrangements with pre-agreed terms. This is expected to reduce negotiation timelines and provide greater contractual certainty across sectors such as construction, infrastructure, and supply chain arrangements.

Where Does the Risk Now Sit?

A key takeaway from this reform is that legal risk is no longer confined to the final contract.

Instead, exposure now arises throughout the negotiation lifecycle—based on how parties conduct themselves, what they disclose, and the manner in which they choose to disengage.

In practical terms, this places greater importance on:

• maintaining clear records of discussions and disclosures;

• ensuring alignment between commercial and legal teams during negotiations; and

• adopting structured internal processes to manage negotiation conduct.

Our View

The introduction of pre-contractual liability marks a significant evolution in UAE contract law.

The negotiation phase—once treated as flexible and relatively low-risk—is now a regulated legal environment governed by enforceable duties of good faith, transparency, and confidentiality.

For businesses, this requires a clear shift in approach. Negotiations must now be handled with the same level of care as contract drafting and execution. Failure to do so may result in exposure not only to commercial loss, but also to legal liability before any agreement is concluded.

How We Can Assist

At Malhotra Legal Consultancy, we regularly advise clients on structuring transactions and managing legal risk under evolving UAE regulations.

Our team can assist with:

• reviewing and structuring negotiation processes;

• advising on disclosure obligations and risk exposure;

• drafting term sheets, NDAs, and framework agreements; and

• mitigating pre-contractual liability risks in complex transactions.