It is customary to prepare a letter of intent (commonly also referred to as a term sheet/memorandum of understanding). The main commercial terms are commonly not legally binding, however certain boilerplate provisions (e.g., costs, confidentiality, exclusivity, assignment, governing law and jurisdiction) are usually legally binding.

• Exclusivity: It is customary to include provisions on exclusivity.
• Break fee: Break fees are not commonly included in private M&A transactions.
• Confidentiality: It is customary to include provisions on confidentiality.

Exclusivity, break fee(s) and confidentiality can be either dealt with in separate agreements or included in the term sheet. There is no specific legal reason for this; it is usually a question of timing.

Existence of a contract

In the absence of a contractual relationship, there is no duty on the parties to negotiate in good faith under UAE law.

However, even if a purchase agreement has not been entered into, a contract may be deemed to have already been entered into if the following are true:

• The essential elements of the contract are agreed between the parties
• The details of the contract are defined or capable of being defined at a later stage
• The purpose of the contract is lawful (Article 129 of the Civil Code)

If these elements are established, a contractual relationship can be inferred between the parties even if the contract has not been executed. If the parties do not want their contract to be qualified as binding, it is important to make an express stipulation to that effect.

Duty of good faith in UAE contracts

If the existence of the purchase agreement can be inferred subject to the above conditions, the parties have a duty to conduct themselves in a manner that is consistent with the principle of good faith under UAE law. Generally, the principle of good faith is defined as a negative obligation, i.e., a party should not act in bad faith or in a way so as to seek unfair advantage or to exploit the other. Conversely, a party would be seen to be acting in good faith if it is cooperative and, if possible, seeking to avoid conflict.

While the principle of good faith is certainly recognized, it may be difficult for a party to demonstrate that failure to sign a purchase agreement is an act of bad faith (or a lack of good faith), as there may be a number of other considerations at play. UAE courts will have ultimate discretion in determining whether damages commensurate with the time and money expended in connection with the purchase agreement can be awarded.

Termination for misrepresentation

Parties have the right to terminate a contract if the other party makes a misrepresentation and the contract has been entered into by a "gross cheat" (Article 187 of the Civil Code). Deliberate silence about a fact or circumstance will be treated as a misrepresentation if it is proved that the person misled the other and thereby would not have agreed to the contract if aware of that fact or circumstance (Article 186 of the Civil Code).

Although the courts are not bound to adhere to case precedents under UAE law, they do have persuasive value and, in the past, UAE courts have established the following factors as to how liability should be determined under Article 187:

• It is necessary to prove that there has been both a "misrepresentation" and a "gross cheat."
• For a "gross cheat" to be found, there must be a serious discrepancy between the true value of the thing sold and the price for which the buyer is buying it, to the extent that the victim would not have entered into the contract if the "gross cheat" had not occurred.
• The burden of proving that there has been a "gross cheat" lies with the party making that allegation.

Depending on the facts of the case, the above provisions could be used to imply an obligation to disclose material information even where the seller has not specifically been asked to confirm the same as part of the due diligence process.

However, as this is ultimately at the discretion of the courts, it is recommended that buyers do not rely solely on this provision and try to make the due diligence questionnaire process as comprehensive as possible.

Sellers, on the other hand, should be cautious of this provision and note the risk that there may be liability issues if any relevant facts are not disclosed that they might be obliged to disclose under this obligation of good faith.