Every deal has a moment when one side wants to walk away. The buyer’s diligence has run for months, advisers have been paid, a term sheet has been initialled, and then the seller receives a better offer, the investor loses appetite, or the developer decides to hold the plot. The question that reaches our desk in those moments is always the same: nothing has been signed, so can anyone really claim anything? Until this year the honest answer in the UAE was “rarely, and not much”. From 1 June 2026 that answer has changed. The new Civil Transactions Law, promulgated by Federal Decree-Law No. 25 of 2025, regulates pre-contractual negotiations in express terms for the first time, in Articles 121 to 123, and in doing so redraws the boundaries of what a party may do, must say and can recover before a contract exists.
1. The position before 1 June 2026: negotiations as a “material act”
The 1985 Civil Transactions Law contained no provision on negotiations. The courts filled the gap with the general law of tort, and the Dubai Court of Cassation settled the principle in its judgment of 11 August 2016 in Civil Appeal No. 267/2016: negotiations are no more than a material act producing no legal effect of their own; each negotiator is free to break them off whenever it wishes, without incurring liability and without being asked to justify its withdrawal; withdrawal may give rise to liability only where it is accompanied by fault, and that liability is tortious rather than contractual, so the burden of proving the fault lies on the party harmed by the withdrawal.
The practical consequence was that a disappointed counterparty had to prove a positive wrong, such as deceit or an abusive manoeuvre, before it could recover anything, and the courts were understandably cautious about penalizing a party for exercising its freedom not to contract. Sophisticated parties therefore protected themselves contractually, through letters of intent with cost-sharing clauses, exclusivity undertakings and break fees, while everyone else negotiated at their own risk.
2. Article 121: good faith from the first proposal to the last breakdown
Article 121 keeps the freedom and adds the discipline. Its first paragraph requires that the proposal of pre-contractual negotiations, their conduct and their termination all comply with the requirements of good faith. Its second paragraph preserves the essential freedom of the earlier case law: negotiating a contract creates no obligation to conclude it. The third paragraph then supplies the sanction that the 1985 law lacked. A party who negotiates, or ends negotiations, in bad faith is liable to compensate the actual damage suffered by the other party. The compensation does not extend to the benefits expected from the contract that was never concluded, nor to the lost opportunity of realizing those benefits, unless the parties have agreed otherwise. The fourth paragraph gives the courts a concrete example of bad faith: deliberately failing to make a material statement that affects the validity of the contract.
Three features of this provision deserve attention. First, the trigger is no longer “fault” in the abstract but bad faith in the proposal, conduct or breaking-off of negotiations, a standard that invites the courts to examine the whole course of dealing: a party that opens negotiations it never intended to complete, keeps a counterparty at the table to block a competitor, or withdraws abruptly after inducing heavy expenditure is exposed in a way it was not before. Second, the measure of recovery is now fixed by statute. The claimant recovers its reliance loss, meaning the costs actually incurred because of the negotiations, such as due diligence, professional fees, financing commitments and travel, but not the profit it expected from the deal or the chance of that profit. Third, that ceiling is a default rule. The words “unless otherwise agreed” mean that parties can now bargain for more: a term sheet can validly provide that a party withdrawing in breach of an exclusivity or good-faith undertaking will compensate lost opportunity or pay an agreed sum, and the courts will have a statutory basis on which to enforce that choice.
3. Article 122: the duty to disclose decisive information
Article 122 is the provision that will change the most in transactional practice. Under its first paragraph, a party to negotiations or to a contract who knows information of decisive importance to the consent of the other party must inform that party of it, whenever the other party’s ignorance of the information is to be presumed or the other party has placed its trust in its counterparty. The article then defines what is decisive: information that has a direct and necessary connection with the content of the contract or with the status of the parties. The second paragraph makes the duty mutual and gives it a standard of care: each side must exercise the diligence necessary to supply the other with the information and data relating to the negotiations, the intended contract, and the circumstances surrounding the transaction.
The third paragraph allocates the burden of proof in a way that rewards discipline. The party who alleges that information it was entitled to receive was concealed must prove that the information should have been disclosed to it; the other party must then prove that it did in fact disclose it. In practice, the seller, developer or promoter who cannot show a documented disclosure will lose the argument, and the data room index, the disclosure letter and the written answers to due diligence questions become the decisive evidence.
The fourth paragraph is the one that boards and general counsel should read twice. The duty to disclose decisive information cannot be limited, waived or excluded by agreement; any clause providing otherwise is void; and the injured party may apply to annul the contract for the other party’s breach of the duty. This strikes at a generation of drafting habits. The non-reliance clause, the entire-agreement clause and the acknowledgment that the buyer has relied solely on its own investigations will continue to have a role in defining the contractual representations, but they will not shield a party who knowingly withheld information of decisive importance. In that respect the UAE has moved decisively away from the principle that the buyer must look out for itself and towards a statutory duty of candor that operates alongside the existing rules on misrepresentation and fraud.
4. Article 123: confidentiality without a confidentiality agreement
Article 123 completes the framework. Whoever uses or discloses, without authorization, confidential information obtained in the course of negotiations or of a contract is liable under the general rules. The provision does not depend on the existence of a non-disclosure agreement: the duty arises from the negotiations themselves. Non-disclosure agreements remain valuable, because they define what is confidential, fix the permitted uses, set the duration and can stipulate agreed damages, but a party that received a business plan, customer list or pricing model in a failed negotiation can no longer treat the absence of a signed NDA as a license to use it.
5. What this means for acquisitions, real estate and investment agreements
In mergers and acquisitions the new rules touch every stage of the process. A seller who runs a competitive process must now conduct it in good faith towards every bidder, and a bidder who is kept in the process as a stalking horse, or who is induced to complete confirmatory diligence while the seller has already committed elsewhere, has a statutory claim for its wasted costs. A buyer who withdraws after exclusivity for reasons unconnected with the diligence findings faces the same exposure. On disclosure, matters that go to the content of the contract or the status of the parties, such as pending litigation, regulatory investigations, change-of-control provisions in key contracts, undisclosed liabilities, the ownership structure or the licensing status of the target, are now the subject of a mandatory duty that no warranty package can exclude. Disclosure letters, which UAE practice has often treated as a formality, become the seller’s principal defense.
In real estate the provisions reach both the primary and the secondary market. A developer or seller who withdraws from an agreed sale after the buyer has paid for valuations, arranged financing and paid a broker’s fee will answer for those costs if the withdrawal was in bad faith, and a buyer who negotiates in parallel with several sellers with no intention of completing is equally exposed. The disclosure duty will apply to encumbrances, service-charge arrears, structural defects, planning or usage restrictions, disputes with the owners’ association and the actual status of the seller’s title, all of which have a direct and necessary connection to the content of a sale contract. Brokers and agents who hold information of decisive importance should expect to be drawn into these disputes.
In investment agreements and joint ventures the emphasis shifts to the status of the parties. Information about the licensing, ownership, sanctions exposure, regulatory standing or financial capacity of a prospective partner is precisely the kind of information “relating to the status of the parties” that Article 122 treats as decisive. An investor who commits capital, forgoes other opportunities or restructures its business in reliance on negotiations that its counterparty was never in a position to complete will now have both a reliance claim under Article 121 and, if a contract was signed on incomplete disclosure, a right to seek its annulment under Article 122.
6. A practical protocol for boards and general counsel
The new regime rewards organizations that treat negotiations as a regulated process rather than a conversation. In our view, five habits will separate those who benefit from Articles 121 to 123 from those who are surprised by them. Deal teams should record the reasons for entering, continuing and ending negotiations contemporaneously, because good faith will be judged on the documents. Letters of intent and term sheets should state expressly whether they are binding, how costs are allocated if the deal fails, and, where the parties wish to depart from the statutory ceiling on damages, what a withdrawing party will pay; the “unless otherwise agreed” language of Article 121 makes such clauses enforceable. Disclosure should be organized as a process with an index, a written record of every question and answer, and a disclosure letter that is updated to signing, because Article 122 places the burden of proving disclosure on the disclosing party. Confidential information should still be exchanged under a written NDA, because Article 123 establishes liability but not scope, duration or agreed damages. Finally, existing templates should be reviewed, since non-reliance and exclusion clauses that purport to limit the disclosure duty are now void and may undermine the credibility of the rest of the document.
7. The questions the courts will have to answer
Several questions remain open and will be resolved by the courts in the coming years. The boundary of “actual damage” will need definition, in particular whether internal management time and the cost of financing commitments count as reliance loss. The relationship between the statutory duty of disclosure and the existing rules on misrepresentation will need to be worked out, including how a claim for annulment under Article 122 interacts with the time limits and remedies for fraud. The courts will also have to decide how the new provisions apply to negotiations that began before 1 June 2026 and continued after it. What is already clear is that the principle laid down by the Dubai Court of Cassation in 2016, that negotiations are a material act carrying no legal consequence, no longer describes the law as it stands. Negotiations now carry duties of good faith, candour and confidentiality, and a counterparty who ignores them will pay for the costs it caused.
Conclusion
The freedom not to contract survives; the freedom to negotiate carelessly does not. Under the new Civil Transactions Law a party may still walk away from a deal it has not signed, but it must do so in good faith, it must have told the other side what it needed to know, and it must keep to itself what it learned at the table.
Sources: Federal Decree-Law No. 25 of 2025 promulgating the Civil Transactions Law, Articles 121–123 (in force from 1 June 2026); Dubai Court of Cassation, Civil Appeal No. 267/2016, judgment of 11 August 2016 (Principle No. 76, Collection Issue 27 of 2016, Civil, p. 699); Federal Law No. 5 of 1985 (the previous Civil Transactions Law).
If you have any questions or need further advice on related matters, please feel free to contact Ahmed Yehia Hamdalla: yehia@sat-law.com
Written by Ahmed Yehia Hamdalla
September 11 , 2026
