Before examining the substance of the reform, it is important to clarify its scope. Federal Decree-Law No. 25 of 2025 Promulgating the Civil Transactions Law (the New Civil Law) forms part of the UAE’s federal civil law framework and, in principle, applies to civil transactions governed by UAE law, including transactions involving entities incorporated in non-financial free zones. This is subject to any special legislation applicable to a particular free zone, sector, transaction or dispute.
However, the UAE’s financial free zones, particularly ADGM and DIFC, operate under separate civil and commercial legal frameworks pursuant to Federal Law No. 8 of 2004 concerning Financial Free Zones. In contrast, non-financial free-zone regulations generally govern matters such as incorporation, licensing, administration, and permitted activities; they do not, by themselves, create a separate civil code or replace the UAE Civil Transactions Law as the underlying civil-law framework.
Introduction: More than just a legislative update
The UAE’s enactment of Federal Decree-Law No. 25 of 2025 on the Civil Transactions Law, effective 1 June 2026, represents one of the most significant developments in the country’s legal framework in recent decades.
While widely described as a “modernisation”, this characterisation understates its true impact. The law does not merely update existing provisions, it reshapes how legal relationships are understood, interpreted, and enforced.
What distinguishes this reform is not only the introduction of new rules, but a clear shift in legislative philosophy: towards fairness, balance, and alignment with commercial reality.
This is not simply a change in law — it is a change in how contracts will be read, challenged, and ultimately enforced.
A more structured approach to legal interpretation
A fundamental yet often overlooked development is how the law approaches the interpretation of contracts.
The new framework confirms that courts are not confined to a purely literal reading of contractual provisions, although Article 119(1) of the New Civil Law preserves the rule that where the wording is clear it is not to be departed from by way of interpretation. Instead, interpretation is grounded in the wording of the text, the intent of the parties, and the broader principles derived from Islamic jurisprudence and legal doctrine.
This approach is further reinforced in the law itself, which provides that where there is room for interpretation, the common intention of the contracting parties must be sought without strict adherence to the literal meaning of the words, and that the contract is to be interpreted in a way that achieves justice and good faith between the parties as per Articles 119(2) and 120(11) of the New Civil Law. In practical terms, this marks a move away from formalism and towards a more substance-driven interpretation.
For businesses, this has a direct implication:
Contracts that rely on ambiguity or overly generic drafting are more likely to be scrutinised and potentially reinterpreted in light of their underlying purpose, particularly when read together with the new provisions on negotiations.
Article 121 of the New Civil Law imposes good-faith obligations in pre-contractual negotiations and a mandatory duty to disclose information of decisive importance to the other party. It is important that companies cannot terminate negotiations in bad faith, i.e. abruptly without a legitimate commercial justification or warning. Under the new provisions, parties will be liable for actual damages if they break off negotiations in bad faith.
Rebalancing contracts in exceptional circumstances
The law also clarifies the framework allowing courts to intervene where exceptional circumstances disrupt the economic balance of a contract. Although this principle existed previously, it is now more clearly articulated and positioned as an active judicial tool. Courts are empowered now to:
· amend obligations
· extend performance timelines
· restore contractual equilibrium when performance becomes exhausting
More precisely, Article (224) of the New Civil Law provides that where exceptional general circumstances that could not have been foreseen make performance onerous and threaten the debtor with grave loss, the court may, after balancing the interests of both parties, reduce the onerous obligation to the reasonable limit or rule for rescission; in addition, Article (223) independently empowers courts to modify or relieve a party from abusive terms in contracts of adhesion.
This development reflects lessons drawn from recent global disruptions and signals a more proactive judicial role in maintaining fairness.
Article (835) also permits a party to seek rescission or termination where an excuse arises preventing the performance, or completion of performance, in a Contract Agreement (i.e. Muqawala contract). For organisations operating in sectors such as construction, infrastructure, and long-term supply arrangements, this change is particularly significant. It requires a reassessment of how risk is allocated contractually, especially in relation to price fluctuation, delays, and unforeseen events.
The central question is no longer whether a contract is binding, but whether it remains fair in changing circumstances.
Clarifying liability and authority
The law introduces clearer boundaries around authority, particularly in relation to management and representation in Articles (142) to (145) of the New Civil Law.
A key principle emerging from the new framework is that powers are no longer presumed to be flexible or informal. Where actions are taken beyond the scope of powers, liability may attach directly to the responsible person. Under Article (142) of the New Civil Law, a representative's actions only legally bind the principal if the representative acts within their authorised limits and explicitly on the principal's behalf.
If the contracting party does not disclose that they are acting as representative, the principal is generally not responsible under Article (143). Instead, under Article (140), the person who signs the contract in their own name is personally bound by it.
Also, Article (145) of the New Civil Law introduces a rule against self-dealing: a legal representative cannot enter into a contract with themselves using the authority of the principal they represent, unless explicitly authorised by the principal. If such an unauthorised contract is made, the principal also may retroactively ratify it.
This reflects a broader emphasis on accountability and governance, and emphasises the importance of clearly defined roles, documented approvals, and structured decision-making processes within organisations.
Revisiting guarantees and credit structures
One of the most commercially relevant changes concerns guarantees and suretyship.
Under the new law, creditors are generally required to pursue the principal debtor before enforcing against the guarantor, subject to certain conditions in Articles (1009) and (1010) of the New Civil Law. This represents a shift towards ensuring that liability is first addressed at its source.
Article 1009 (1) provides that the creditor may not proceed against the guarantor alone, except after proceeding against the debtor, and Article 1009 (2) provides that execution against the guarantor’s assets is not permitted before exhausting the debtor’s assets, unless the guarantor is jointly liable with the debtor or the law or agreement provides otherwise.
This change has practical implications for financing arrangements, group guarantees, and risk allocation in commercial contracts. It may also affect how lenders and counterparties structure their security packages, particularly in transactions where guarantees have traditionally been relied on as an immediate fallback.
What this means for businesses
Rather than viewing the new Civil Transactions Law as a technical legal update, organisations should see it as representing a strategic development.
In particular, businesses should consider:
v reviewing contractual templates to ensure clarity and alignment with commercial intent
v reassessing risk allocation mechanisms in long-term agreements,
v strengthening internal governance and approval structures, including authority and representation controls
v re-verifying all powers of attorney and agency contracts
v preparing for a more principle-driven approach in dispute resolution and negotiations: negotiations must be carried out in accordance with the requirements of good faith
Conclusion: A law that rewards preparedness
The new Civil Transactions Law does not fundamentally alter the nature of contractual relationships, however, it does change how they are evaluated. It places greater emphasis on fairness, clarity, and accountability, while reducing reliance on rigid interpretation; it also states that clear wording is not to be displaced by interpretation. For organisations that engage with these changes proactively, the result will be greater certainty and resilience. For others, the impact of the law may only become apparent in the context of a dispute.
All information provided in this article is for informational and educational purposes only. It does not constitute professional, legal, or tax advice. The contents of this article do not take into account the specific facts, circumstances, or nuances of any individual case. The views expressed herein represent solely our opinion and may not align with the positions of legislators, government agencies, courts, or tax authorities.
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