In commercial transactions, parties often reach an understanding on the principal terms of a proposed transaction before they are ready to execute a final agreement. A Letter of Intent (“LOI”) is commonly used at this stage to record the parties’ commercial understanding and establish a framework for further negotiations.
However, the term “Letter of Intent” does not carry a predetermined legal effect. Depending on its wording, the terms agreed between the parties and the circumstances surrounding its execution, an LOI may be non-binding, fully binding, or binding only in respect of certain provisions.
For businesses operating in the UAE, understanding this distinction is important, particularly following the introduction of Federal Decree-Law No. 25 of 2025 Promulgating the Civil Transactions Law (“Civil Transactions Law”), which came into force on 1 June 2026.
Article 125 of the Civil Transactions Law addresses offer and acceptance as expressions of the parties’ intention to conclude a contract. Article 126 further recognises that contractual intention may be expressed orally, in writing, through an understood gesture or through conduct which demonstrates consent.
Accordingly, the title given to a document is not necessarily determinative of its legal effect. The relevant question is whether its terms, considered together with the surrounding circumstances and conduct of the parties, demonstrate an intention to create legal obligations.
Article 131 is particularly relevant in this context. It provides that a contract is not concluded unless the parties have agreed upon the essential elements of the obligation and any other lawful conditions which they regard as essential. Where the essential elements have been agreed but secondary matters are left for future agreement, the contract may nevertheless be regarded as concluded unless the parties have stipulated otherwise.
This is significant for LOIs because the mere fact that a more detailed agreement is intended to follow does not necessarily mean that the parties have not already created contractual obligations.
Relevant considerations may include whether the LOI expressly states that it is binding or non-binding, whether the essential commercial terms have been agreed, whether significant matters remain subject to negotiation and whether the transaction is expressly made conditional upon execution of a definitive agreement.
The conduct of the parties may also be relevant. For example, signing the LOI or commencing performance of obligations contemplated by it may form part of the assessment of whether the parties intended to be legally bound.
Conversely, an LOI that expressly states that the transaction is “subject to contract” or “conditional upon execution of a definitive agreement” may indicate that the parties did not intend the principal transaction to become binding at that stage.
Such provisions may include confidentiality, exclusivity, non-solicitation, allocation of transaction costs, access to information, governing law and dispute resolution.
For example, the parties may state that confidentiality and exclusivity obligations are legally binding upon execution of the LOI while expressly providing that the remainder of the document merely records their present intentions and does not oblige either party to complete the proposed transaction.
Clearly identifying the provisions intended to be binding allows the parties to continue negotiations while avoiding any unintended commitment to the underlying transaction.
Article 121 requires the initiation, conduct and termination of pre-contractual negotiations to be consistent with good faith. Importantly, entering into negotiations does not, by itself, create an obligation to conclude the proposed contract.
The provision therefore distinguishes between an obligation to complete the transaction and the manner in which negotiations are conducted. A party may decide not to proceed with a transaction, but bad-faith conduct during negotiations may give rise to liability for actual damage in accordance with Article 121.
This is particularly relevant to non-binding LOIs. The fact that an LOI does not oblige the parties to complete the transaction does not necessarily mean that no legal consequences can arise from their conduct during negotiations.
This issue arose in Nureen v (1) Nikir (2) Niplu [2023] DIFC SCT 298, which concerned an LOI for the proposed acquisition of a 50% shareholding in the First Defendant. The LOI expressly provided that completion of the proposed transaction was subject to the negotiation and execution of definitive agreements, including a share purchase agreement. It further provided that the LOI would cease to have force and effect upon the earlier of the execution of the definitive agreement or 90 days from its effective date.
No definitive agreement was ultimately executed, although the parties continued negotiations beyond the 90-day period and thereby extended the LOI by their conduct. The DIFC Small Claims Tribunal found that the LOI contained a condition requiring the parties to execute and deliver the definitive agreement. The defendants argued that this requirement had subsequently been varied through the parties’ discussions and conduct but failed to provide sufficient evidence to support that position. The Court also considered the defendants’ partial refund as demonstrating that the LOI had expired and ultimately ordered repayment of the outstanding AED 300,000 (UAE Dirhams Three Hundred Thousand only).
Although the decision turned on the particular wording of the LOI and the parties’ conduct, it demonstrates the importance of clearly stating whether execution of a definitive agreement is a condition to completion of the proposed transaction.
The Civil Transactions Law provides the framework for this assessment. Articles 125 and 126 address contract formation and the expression of contractual intention, while Article 131 focuses on agreement upon the essential elements of the obligation. Article 121 separately regulates the conduct of pre-contractual negotiations and confirms that negotiations do not, by themselves, oblige the parties to conclude a contract.
Parties entering into an LOI should therefore clearly identify which provisions are intended to be binding, which remain subject to further negotiation and whether execution of a definitive agreement is a condition to the underlying transaction becoming enforceable. Clear drafting at the outset can preserve commercial flexibility while reducing the risk of unintended contractual obligations and subsequent disputes.
Note: This Legal Update / Newsletter is intended for general informational purposes only and should not be construed as legal advice. It is based on laws and legal interpretations in effect as of the date of publication. Laws and regulations may change over time, and their application can vary depending on individual circumstances. Readers are strongly encouraged to seek specific legal counsel before acting on any of the information provided herein.
However, the term “Letter of Intent” does not carry a predetermined legal effect. Depending on its wording, the terms agreed between the parties and the circumstances surrounding its execution, an LOI may be non-binding, fully binding, or binding only in respect of certain provisions.
For businesses operating in the UAE, understanding this distinction is important, particularly following the introduction of Federal Decree-Law No. 25 of 2025 Promulgating the Civil Transactions Law (“Civil Transactions Law”), which came into force on 1 June 2026.
Contract formation under UAE law
The Civil Transactions Law does not specifically regulate LOIs. Their legal effect must therefore be considered by reference to the general principles governing negotiations and contract formation.Article 125 of the Civil Transactions Law addresses offer and acceptance as expressions of the parties’ intention to conclude a contract. Article 126 further recognises that contractual intention may be expressed orally, in writing, through an understood gesture or through conduct which demonstrates consent.
Accordingly, the title given to a document is not necessarily determinative of its legal effect. The relevant question is whether its terms, considered together with the surrounding circumstances and conduct of the parties, demonstrate an intention to create legal obligations.
Article 131 is particularly relevant in this context. It provides that a contract is not concluded unless the parties have agreed upon the essential elements of the obligation and any other lawful conditions which they regard as essential. Where the essential elements have been agreed but secondary matters are left for future agreement, the contract may nevertheless be regarded as concluded unless the parties have stipulated otherwise.
This is significant for LOIs because the mere fact that a more detailed agreement is intended to follow does not necessarily mean that the parties have not already created contractual obligations.
When is an LOI binding?
An LOI may have binding effect where the essential terms of the proposed arrangement have been agreed and the document demonstrates an intention that those terms should create immediate legal obligations.Relevant considerations may include whether the LOI expressly states that it is binding or non-binding, whether the essential commercial terms have been agreed, whether significant matters remain subject to negotiation and whether the transaction is expressly made conditional upon execution of a definitive agreement.
The conduct of the parties may also be relevant. For example, signing the LOI or commencing performance of obligations contemplated by it may form part of the assessment of whether the parties intended to be legally bound.
Conversely, an LOI that expressly states that the transaction is “subject to contract” or “conditional upon execution of a definitive agreement” may indicate that the parties did not intend the principal transaction to become binding at that stage.
Can an LOI be partially binding?
An LOI need not be entirely binding or entirely non-binding. In commercial transactions, parties frequently agree that the principal transaction will remain subject to a definitive agreement while particular provisions take immediate legal effect.Such provisions may include confidentiality, exclusivity, non-solicitation, allocation of transaction costs, access to information, governing law and dispute resolution.
For example, the parties may state that confidentiality and exclusivity obligations are legally binding upon execution of the LOI while expressly providing that the remainder of the document merely records their present intentions and does not oblige either party to complete the proposed transaction.
Clearly identifying the provisions intended to be binding allows the parties to continue negotiations while avoiding any unintended commitment to the underlying transaction.
Pre-contractual negotiations and good faith
The Civil Transactions Law also expressly addresses the conduct of parties during negotiations.Article 121 requires the initiation, conduct and termination of pre-contractual negotiations to be consistent with good faith. Importantly, entering into negotiations does not, by itself, create an obligation to conclude the proposed contract.
The provision therefore distinguishes between an obligation to complete the transaction and the manner in which negotiations are conducted. A party may decide not to proceed with a transaction, but bad-faith conduct during negotiations may give rise to liability for actual damage in accordance with Article 121.
This is particularly relevant to non-binding LOIs. The fact that an LOI does not oblige the parties to complete the transaction does not necessarily mean that no legal consequences can arise from their conduct during negotiations.
The importance of a definitive agreement
The relationship between an LOI and a contemplated definitive agreement should be clearly addressed.This issue arose in Nureen v (1) Nikir (2) Niplu [2023] DIFC SCT 298, which concerned an LOI for the proposed acquisition of a 50% shareholding in the First Defendant. The LOI expressly provided that completion of the proposed transaction was subject to the negotiation and execution of definitive agreements, including a share purchase agreement. It further provided that the LOI would cease to have force and effect upon the earlier of the execution of the definitive agreement or 90 days from its effective date.
No definitive agreement was ultimately executed, although the parties continued negotiations beyond the 90-day period and thereby extended the LOI by their conduct. The DIFC Small Claims Tribunal found that the LOI contained a condition requiring the parties to execute and deliver the definitive agreement. The defendants argued that this requirement had subsequently been varied through the parties’ discussions and conduct but failed to provide sufficient evidence to support that position. The Court also considered the defendants’ partial refund as demonstrating that the LOI had expired and ultimately ordered repayment of the outstanding AED 300,000 (UAE Dirhams Three Hundred Thousand only).
Although the decision turned on the particular wording of the LOI and the parties’ conduct, it demonstrates the importance of clearly stating whether execution of a definitive agreement is a condition to completion of the proposed transaction.
Conclusion
An LOI is not inherently binding or non-binding under UAE law. Its legal effect depends on its terms, the intention of the parties, the matters agreed between them and, where relevant, their subsequent conduct.The Civil Transactions Law provides the framework for this assessment. Articles 125 and 126 address contract formation and the expression of contractual intention, while Article 131 focuses on agreement upon the essential elements of the obligation. Article 121 separately regulates the conduct of pre-contractual negotiations and confirms that negotiations do not, by themselves, oblige the parties to conclude a contract.
Parties entering into an LOI should therefore clearly identify which provisions are intended to be binding, which remain subject to further negotiation and whether execution of a definitive agreement is a condition to the underlying transaction becoming enforceable. Clear drafting at the outset can preserve commercial flexibility while reducing the risk of unintended contractual obligations and subsequent disputes.
Note: This Legal Update / Newsletter is intended for general informational purposes only and should not be construed as legal advice. It is based on laws and legal interpretations in effect as of the date of publication. Laws and regulations may change over time, and their application can vary depending on individual circumstances. Readers are strongly encouraged to seek specific legal counsel before acting on any of the information provided herein.