The UAE’s new civil code has banking and finance implications

Seya Rahnema, Hala Abdulghani and Matthew Escritt of Pinsent Masons said the UAE’s new civil code, Federal Decree Law No. 25 of 2025, which will govern civil transactions in the UAE and enter into force on 1 June 2026, has significant implications for banking and finance transactions.

Rahnema said: “The new civil code represents more than a technical update to existing civil law principles. Taken together, the new law liberalises the old law, by improving legal certainty and aligning the law with global practice. The new law also introduces clearer statutory frameworks and enhances certainty.”

Abdulghani added: “The new civil code raises the codified legal standard to align with modern commercial practices.”

Under the new law, parties to civil contracts in the UAE will gain more autonomy when it comes to the governing law of their contracts in a change that aligns with global practice.

Under the old law, by default, contracts were governed by the law of the state where the parties were located, and if the parties resided in different countries, the law of the state where the contract was made would apply, unless agreed otherwise. The new law states that contracts are governed by the law expressly agreed upon by the parties. If there is no agreement, the governing law of the contract will be the law where both parties are located or, where the locations differ, the law of the state where the contract is performed. 

When the new law takes effect, the ‘age of maturity’ in the UAE will be reduced – from 21 lunar years to 18 Gregorian years – in a move that will align the UAE’s civil code with the country’s commercial transactions law. For banks, the change means individuals aged 18 and above will be able to open bank accounts as well as enter into loan or guarantee agreements. Rahnema and Abdulghani said banks should consider updating their ‘know your customer’ and onboarding policies to account for this update.

A further development under the new law is the express recognition of framework agreements as binding contracts, a status they did not enjoy under the former law. Escritt said: “From a lender’s perspective, this places greater emphasis on the careful negotiation of term sheets and mandate letters, given that this new approach may be subject to judicial scrutiny.”

Rules concerning contractual interpretation will also be updated from June, requiring ambiguities to be resolved in favour of the party bearing the burden of the obligation, or the weaker party. Rahnema and Abdulghani said that, for lenders, this puts added emphasis on ensuring contracts are clearly drafted, so that there is reduced reliance on implied terms, to avoid ambiguities that could be construed against them.

Escritt said that one important change under the new civil code concerns the hierarchy of legal sources where legislation is silent: “While both the old and the new law recognise Islamic Sharia, the new law elevates it above custom, requiring courts to consider Sharia before custom. It also removes the prescribed hierarchy of jurisprudential schools, instead allowing judges to adopt the solution most aligned with the public interest, thereby increasing judicial discretion.”

The new code also has implications for awarding damages, by giving parties scope to pre-determine the amount of compensation by contract, and more tightly regulating how the courts determine disputes over what is agreed.

Courts may reduce the agreed compensation if the debtor proves that the assessment was excessive or that the original obligation has been partially performed. Courts may remove the amount of the agreed compensation if creditors contribute to the cause of or increase the harm, by their own fault. Courts may not award compensation if the creditor's fault is shown to be in excess of the debtor's fault. Creditors may also claim more than the agreed compensation if they can show that the debtor has committed fraud or gross negligence. 

Rahnema and Abdulghani said the changes support contractual certainty for default interest, break costs and early termination amounts. However, they said that since damages aren't absolute, banks should ensure reasonableness of agreed damages and maintain evidence of actual loss. 

The new law also prohibits the creditor executing against the guarantor's property unless the creditor has exhausted attachment against the debtor's property, unless the guarantor is jointly and severally liable or the guarantee provides otherwise. Rahnema and Abdulghani said this change may have an impact on the enforcement of guarantees if not expressly addressed in the guarantee. 

Escritt said: “Taking everything into consideration, the new civil code represents one of the most significant changes to civil and commercial practice in the UAE in decades. The welcome clarifications that the new law brings will serve to cement the UAE’s position as a leading commercial hub in the Middle East.”