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Overview about hedge funds in UAE

Published on : 07 Aug 2018

Contract law and the position of third parties

Contractual relations are relations we enter into every day of our lives, whether express or implied, whether formally or informally. When people go to the grocery store, at the check-out counter, they enter into a contractual relationship with the store. They accept the obligation to pay the relevant amount to the store in exchange for the store agreeing to provide quality produce. This transaction is what we consider an informal contractual relationship. On the other hand, we have formal contractual relations; it is here that written contracts with expressed terms and provisions are necessary. However, contractual requirements and obligations of two parties are seldom affecting only those parties. If one considers the instance of a motor vehicle accident, prior to such an accident, the individual drivers have both acquired motor vehicle insurance, in particular third-party insurance, this contractual relationship between the insurance company and the insured person has no bearing on the third party involved in the accident until such time as an accident takes place. Thus, such third party then becomes a beneficiary of the contractual relationship between two other persons.

In the instance of this concept, the United Arab Emirates Civil Code Article 125, defines a contract as follows; the making of an offer by one of the contracting parties with the acknowledgment and acceptance of the other. This agreement is together with the recognition of them both in a manner that determines the effect of the subject matter of the contract and from which results in the creation of obligations upon each of them concerning that which each party is bound to do for the other. Within the UAE, there also exists the doctrine of privity of contracts, this principle entails that the rights and obligations associated with an agreement arise only between the parties to the contract and are only enforceable between those such parties, and no third party may exercise such rights or obligations.

According to Article 129 of the Civil Code the elements that need to be present for the bringing about of a contract are: -

  1. That the two parties to the agreement should agree upon the essential contractual elements;
  2. The reason and subject of the agreement must be something which is capable of being dealt in and possible and defined and allowed; and
  3. There needs to be a lawful purpose for the obligations arising out of the contract.

The abovementioned goes hand-in-hand with the doctrine of privity, the basis of this principle is on the premise that only the parties who contracted have accepted the terms, conditions, and responsibilities stipulated in the contract. According to the Doctrine of Privity, an agreement cannot confer rights or impose obligations arising in connection with it to any person who is not a party to the deal. According to Article 141 of the Civil Code, a contract may only come into existence when there is an agreement between the two parties to the contract concerning the essential elements of the obligation. Article 151 of the Civil Codes also states that if a person makes a commitment on his own and for his account, then he shall be bound by the provisions of it to the exclusion of other persons.

An example of the doctrine of privity would be, the case of Dunlop Pneumatic Tyre Company Ltd v Selfridge, [1915] UKHL 1 (26 April 1915), [1915] AC 847 Dunlop sued Selfridge on the premise that the imposition of the promise between Dew and Selfridge was possible as Dew were acting as Dunlop's agent. The action failed because Dunlop had provided no consideration for the promise of Selfridge, for the presentation of the payment by Dew. These two abovementioned cases are both consistent with the view that the claimants could not sue because they had not provided any consideration for the defendant's promise.

Contracts to which the doctrine applies


In the United Arab Emirates, in pursuance of Article 891 of the UAE Civil Code, "a sub-contractor shall not have a claim concerning the employer for an amount due to him from the main contractor unless he has made an assignment to him against the employer."

The Court of Cassation (457 Judicial Year 24) in a decision dated 20 April 2005 held as under:

The result of articles 891 and 892 of the Civil Code is that the liability of the main contractor remains in place as against the employer, and there is no direct contractual relationship between the employer and the sub-contractor. Thus, the contract between the main contractor and the sub-contractor defines the rights and responsibilities of each of them towards the other, and the employer may not rely on it unless the original contract provides to the contrary.

Sub-contracting has become an essential aspect of the construction industry in the UAE, with more complex and specialized projects, it is incomprehensible for one company to have the capabilities to complete the entire task. In this instance one could consider the incompatibility of a situation where the main contractor of a project, being the sole contractor would need to maintain and pay an enormous workforce, with an extensive range of capabilities and specializations to work on such project, this is ultimately economically unsustainable.

The use of sub-contractors has aided the reduction of project costs in the industry dramatically, such use of sub-contractors also has the advantage of sharing the project risks between the contractor and sub-contractor. The UAE recognizes the benefits and need of such sub-contracting, the law goes as far as allowing the main contractor to sub-contract the whole of the works. This sub-contracting of the whole of the works is possible, unless: -

  1.  The construction contract contains a provision to the contrary; or
  2. Where the selection of the contractor is due to his specific personal qualities.

In the context of subcontracts, which is ultimately a contract between the main contractor and a subcontractor, this means that the employer of the main contractor will be a third party to this subcontract and will thus have no rights or obligations concerning this subcontract.

This concept brings with it questions for its applicability in the construction industry. The nature of such projects coupled with an employers’ desire to be in control of certain aspects of the project has created a need for new regulation in which the employer does retain some rights in respect of the subcontract. Such reasons include the requirement for the subcontractor to provide the employer with certain warranties in connection with the work that is carried out directly to the employer, or the employer retains to the right to assign to him of the subcontractors should the main contract be terminated.

The Court of Cassation (Case 499 of 2002 decided on 25 September 2002) has in its judgment outlined the following:

The work of a subcontractor - the contractor is obligated to execute his/her works in compliance with the conditions and specifications that are stated in the contract, i.e. his/her responsibility for fixing any defects caused in violation to the professional ethics. In return, the original contractor is obligated to pay the outstanding allowances of the work. Each of them has the right to retain part of the work or allowances until they get their outstanding payment. They may agree in advance that the original contractor may retain a certain amount of the allowances until the subcontractor fulfills his/her commitments. This is considered an application of the right of retention (Articles (414 - 419) of the Civil Transactions Law). The original contractor is the one who delays delivery, not the subcontractor, which deprives the original contractor of the right of retention.


There is a legislative provision found in Section 3(2) of the Civil Code which provides that the heirs, beneficiaries, and successors of the contracting parties of that specific contract are included in the ambit of the contract. Article 250 of this Section states that the effects of the agreement shall extend to the contracting parties and their general successors without prejudice to the rules relating to inheritance, unless it appears from the contract or the nature of the transaction or from the provisions of the law that the effects were not to extend to a general successor. 

Article 254(1) of the Civil Code states that it shall be allowed for a contracting party to contract in his name imposing a condition that rights in the contract are to create a benefit to a third party if he has a personal interest, whether moral or material, in the performance stated in the agreement. Article 254(2) goes further in that it provides for a direct right afforded to the third party against the Undertaker for the performance of that contractual provision, enabling him to demand the execution thereof, unless there is an agreement to the contrary. Article 254(3) then provides for the enforcement of such condition in that either the contracting party providing the provision may demand the performance thereof, unless there is a contractual provision which states that the beneficiary alone has such right.

Article 256 of the Civil Code provides the following in respect of beneficiaries to contracts by providing for a condition in favor of a third party. It states that it shall be permissible for the recipient to be a future person or future body, and the beneficiary may also be a person or entity not specified at the making of the contract if such beneficiary is ascertainable at the time the agreement is to be given effect to following the condition.

Agreements to which a third party has a claim

According to Article 252 of the Civil Code, there are some exceptions to the general rule provided by the doctrine of privity, following this law, a contract may confer a right on a third party. However, such an agreement may not impose an obligation upon a third party.

Bank guarantee

Another instance in which a third party may become involved in the contractual obligations of another is in the specific form of a bank guarantee. Concerning Article 411 of the Commercial Transaction Law Number 18 of 1993, "a bank guarantee is a commitment issued by a bank to settle the customer's debt to a third party following the conditions agreed and included in the guarantee, which may be for a definite or indefinite term.

Article 414 of the Commercial Transaction Law Number 18 of 1993 provides that a letter of guarantee is an undertaking issued by a bank (the guarantor) at the request of its customer (the person making the order) to pay unconditionally and without restrictions, a certain specified or determinable sum to another person (the beneficiary). In this regard, the recipient is a third party to the contract between the bank and its customer.

Dubai Court of Cassation (Case number 284 of 2007 decided on 12 February 2008) relying on Articles 411, Article 412, Article 413, and 414 of Commercial Transactions Law discussed the role of the bank when dealing with bank guarantees, it reads:

The bank will not be regarded, in respect of its obligation under the bank guarantee, as being the proxy of its customer.  Rather, it will have an obligation as a principal.  The obligation of the bank that issues the letter of guarantee is separate from the obligation of the guaranteed debtor, in the sense that it is separate from any other relationship apart from the relationship between the bank and the beneficiary, as is the case in respect of a documentary credit.  That is to say, the obligation of the bank that issues the guarantee does not follow the obligation of the debtor with regard to its validity or nullity, because the bank is always bound by the letter whatever be the status of the guaranteed account holder, and whatever may happen to the relationship between the guaranteed account holder and the beneficiary under the letter.

Documentary credit

Under Chapter 4 of the Commercial Transaction Law, Number 18 of 1993, documentary credit involves the rights of third parties into the contracts of another. Article 428 of this Law provides that this agreement is a contract according to which a bank opens a credit at the request of its customer (the person ordering the opening of the loan) within the limits of a specified amount and for a definite term in favor of another person (the beneficiary). This agreement is against the security of documents represented goods transported or intended for carriage. This chapter states further that a documentary credit contract is deemed to be independent of the contract which caused the opening of the credit, and the bank shall remain a stranger to such an agreement.

Discharging the debt of another

Article 333 of the Civil Code provides for another exception in that another person takes care of the liability of another person concerning a previous agreement. This Article states that should a person discharge the obligations of a third party upon such third parties directions, such person shall have a right of recourse against the person s directing him for what he has performed on his behalf, this person will take the position of the original oblige in his right to claim against the obligor. 

However, this Article does provide a limitation to such position in Article 334, such Article states that should the person discharge the relevant obligations of the third party, without the necessary directions, there will be no right of recourse concerning the obligor for the discharge, unless the following circumstances are present, namely those found in Article 325. This Article states that if pledger dischargers the debt of a third party to release his property pledged by way of security for such debt, he shall have a right of recourse against the debtor for the money he has paid.

Dubai Court of Cassation (Case 163 of 2007 decided on 11 September 2007) held as under:

"It is settled law in the precedents of this court under the provisions of Articles 325 and 334 of the Civil Code. Whoever pays the debt of another without being ordered by him to do so is not entitled to have recourse against the debtor for what he has paid, unless he has been compelled by necessity to discharge the debt.  In that latter event, the payer will be regarded as the proxy of the debtor in payment of the debt.  The assessment of the circumstance of necessity is a matter of fact within the independent jurisdiction of the trial court, provided that its assessment is sound and based on matters proved in the papers."

Third party insurance law

The provisions for third party insurance, which provides a beneficial right to third parties concerning an agreement between the insurer and the insuree is another exception to the application of the doctrine. In the United Arab Emirates, such authority is the Unified Motor Vehicle Insurance Policy Against Third Party Liability issued according to the Regulation of Unifying Motor Vehicle Insurance Policies according to Insurance Authority Board of Directors' Decision Number (25) of 2016. This provision provides that the entering into of any policy as per the law was to cover liability towards a third party. Thus, the entering into of this policy or agreement was for the benefit of an unspecified third, additional party.

Criticism of the Doctrine of Privity

Objections that have developed at the doctrine of privity are that it failed to give effect to the expressed wishes of the parties and could lead to results regarded as fundamentally unjust and parties that should have benefited according to the contract did not receive what was intended. Due to a large number of exceptions to this rule, the law has mainly become complicated, and ultimately the doctrine has become commercially inconvenient.

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