Civil Law And UAE – Unenforceable Agreements

1. Introduction

An unenforceable agreement is an agreement that may appear to have been made between the parties, but the court will not compel performance of it, usually because of a legal defect affecting its validity, enforceability, legality, certainty, required form, licensing, or the particular contractual obligation.

A very important distinction is:

Void, voidable, and unenforceable are not always the same thing.

An agreement may be:

valid and enforceable;

valid but temporarily or specifically unenforceable;

void/invalid from the outset;

voidable at the option of an affected party;

illegal, so that courts will not enforce it;

partly unenforceable, while the remaining provisions survive.

For UAE study purposes, the governing regime must first be identified: UAE mainland law, DIFC law, ADGM law, or another expressly chosen law.

The new UAE Civil Transactions Law, Federal Decree-Law No. 25 of 2025, repealed the 1985 Civil Transactions Law and entered into force on 1 June 2026. (UAE Legislation)

2. Meaning of an Unenforceable Agreement

An agreement may be described as unenforceable where:

A court recognises that an apparent agreement exists, but the law prevents one or both parties from obtaining judicial enforcement of some or all of its terms.

Examples include:

an agreement to perform an illegal act;

an agreement lacking sufficient certainty;

an agreement requiring a prohibited activity;

an agreement made without a required licence;

a contract containing an unenforceable provision;

an agreement defeated by mandatory statutory requirements;

an agreement that cannot practically or legally be performed;

a jurisdiction or arbitration clause that is legally ineffective;

an agreement to agree where essential terms remain unsettled.

3. Main Causes of Unenforceability

A. Illegality

A court will generally not enforce a contract whose performance requires an unlawful act.

For example:

A party agrees to conduct an activity prohibited by mandatory legislation.

The court may refuse enforcement because judicial enforcement would effectively assist an unlawful transaction.

B. Lack of Certainty

Contractual terms must normally be sufficiently certain for a court to determine:

what each party promised;

what performance is required;

when performance is due;

what consequences follow from breach.

An agreement saying:

"The parties will agree the price later."

may be unenforceable if no objective mechanism exists for determining the price.

The DIFC Court has specifically held that certainty of terms is a requirement for a valid binding contract. (DIFC Courts)

4. Agreement to Agree

An agreement to agree occurs when parties intend to enter a future contract but leave essential terms unresolved.

Example

A and B sign:

"A will purchase B's company at a price to be mutually agreed later."

If there is no mechanism for determining the price, the court may be unable to enforce the supposed future obligation.

Important exception

A future agreement may sometimes be enforceable where:

essential terms are sufficiently determined;

an objective valuation mechanism exists;

a third party can determine the missing term;

the parties have created an enforceable framework.

5. Illegality and Licensing

A contract may become unenforceable where its performance requires a licence or regulatory approval that the relevant party does not possess.

This is particularly important in:

banking;

financial services;

insurance;

commercial agency;

securities;

regulated professional services;

employment;

real estate.

The court examines the purpose and effect of the regulatory prohibition, rather than simply assuming that every regulatory breach automatically destroys the entire contract.

6. Unenforceability vs Void Agreement

The exact consequences depend on the governing legislation.

7. Unenforceable vs Voidable

Void

The agreement is legally ineffective.

Voidable

The agreement remains effective unless and until the entitled party elects to avoid it.

Unenforceable

The agreement or particular term cannot be judicially enforced in the relevant circumstances.

Memory rule:

Void = no legal effect.
Voidable = effective until avoided.
Unenforceable = cannot obtain judicial enforcement.

8. UAE/DIFC Case Laws

Case 1 – Abdel Mohsen Bader Al Khorafi v Bank Sarasin-Alpen [2009] DIFC CFI 026

Direct authority on unenforceable agreements

This is one of the most important DIFC authorities for the topic.

The dispute concerned financial services carried on in circumstances involving the regulatory prohibition applicable to the relevant activity.

The Court considered Article 65 of the DIFC Regulatory Law, which expressly dealt with "Unenforceable Agreements".

The provision prevented a person who entered an agreement while breaching the Financial Services Prohibition from enforcing the agreement against the relevant party. It also allowed the affected party to seek recovery of money or property transferred and compensation for qualifying loss. (DIFC Courts)

Principle

Where legislation expressly declares an agreement unenforceable because of regulatory misconduct, the court must apply that statutory consequence.

Importance

Useful for:

financial services;

licensing;

regulatory prohibitions;

restitution;

statutory unenforceability.

Case 2 – NS Investment Ltd v Ajay Sethi [2020] DIFC CFI 055

This is another important regulatory unenforceability case.

The claimant had been lending money and charging interest without the necessary financial authorisation.

The Court concluded that the claimant could not rely upon the agreement to enforce the interest claim. The Court treated the unauthorised financial activity as an illegality affecting enforceability. (DIFC Courts)

Principle

A party cannot ordinarily obtain judicial enforcement of contractual rights arising from an activity that the applicable regulatory law prohibits it from carrying out.

Exam point

This case illustrates the relationship between:

Licence → Regulatory prohibition → Illegality → Unenforceability

Case 3 – Hexagon Holdings (Cayman) Ltd v DIFC Authority & DIFC Investments LLC [2019] DIFC CFI 013

This is a leading authority concerning certainty and agreements to agree.

The Court considered an obligation requiring the parties to negotiate and ultimately execute a shareholders' agreement.

The Court held that an obligation to negotiate was generally unenforceable under DIFC contract law where the agreement lacked sufficient certainty.

The judgment emphasised:

Certainty of terms is a requirement for a valid binding contract. (DIFC Courts)

Principle

A court cannot normally enforce an obligation where the parties have left the essential substance of their future bargain to further agreement without a sufficiently certain mechanism.

Exam example

"We agree to enter into a detailed shareholders' agreement later on terms to be mutually agreed."

If essential terms remain entirely open, enforceability becomes problematic.

Case 4 – Vegie Bar LLC v Emirates National Bank of Dubai Properties PJSC [2016] DIFC CFI 009

This case involved issues concerning the legality and enforceability of a lease arrangement.

The Court considered the argument that performance of the lease was legally impossible because of statutory restrictions. It stated that a contract entered into for the purpose of performing an act prohibited by statute could be illegal and unenforceable. (DIFC Courts)

Principle

Where statutory law prohibits the contemplated performance, the resulting contractual obligation may be unenforceable.

Importance

The case is useful for:

statutory illegality;

property agreements;

regulatory restrictions;

impossibility in law.

Case 5 – Dutch Equity Partners Ltd v Daman Real Estate Capital Partners [2006] DIFC CFI 001

This case involved allegations that a management agreement was illegal because of regulatory/registration issues.

The Court stressed an important procedural principle:

Illegality must be properly pleaded and supported by evidence.

The claimant had not established illegality merely by asserting that one party was an unregistered foreign company. (DIFC Courts)

Principle

An agreement is not rendered unenforceable simply because a party labels it "illegal."

The party relying on illegality must establish:

the relevant prohibition;

the facts triggering it;

the legal consequence;

the connection between the prohibition and the agreement.

Case 6 – Sky News Arabia FZ-LLC v Kassab Media FZ (LLC) [2016] DIFC CA 010

This case concerned an alleged UAE commercial-agency arrangement and the effect of statutory registration requirements.

The appellant argued that the agreement was unlawful and void because it had not been registered as required by the applicable commercial-agency regime.

The case illustrates the importance of identifying:

whether a statutory registration requirement applies;

whether non-registration makes the agreement void;

whether the entire agreement or only particular activities are affected;

whether contractual severability preserves other obligations. (DIFC Courts)

Principle

The legal consequence of non-registration must be determined from the applicable statute; the court must not simply assume that every unregistered agreement is entirely void.

Case 7 – Stelian Gheorghe v BSA Ahmad Bin Hezeem & Associates LLP [2025] DIFC CFI 045

This case is especially useful where arbitration agreements are involved.

The defendant argued that the underlying escrow agreement was illegal.

The Court held that an allegation that the underlying agreement was illegal did not automatically make the arbitration clause unenforceable. Whether the escrow agreement was illegal was a matter for the arbitral tribunal under the agreed arbitration clause. (DIFC Courts)

Principle

The alleged invalidity of the underlying contract does not necessarily destroy a separable arbitration agreement.

Exam significance

This demonstrates the principle of separability:

Main contract → allegedly invalid

does not necessarily mean:

Arbitration clause → invalid

Case 8 – Stephenson Harwood Middle East LLP v Mark A B Capital Investment LLC [2025] DIFC CFI 009

This case involved an argument that an asymmetric jurisdiction clause was unenforceable because of uncertainty or lack of mutuality.

The Court rejected that argument.

It held that asymmetric jurisdiction clauses can be recognised under English and DIFC law where the clause clearly identifies the agreed forum and the contractual mechanism is sufficiently certain. (DIFC Courts)

Principle

A contractual provision is not unenforceable merely because its rights are asymmetric; the actual wording and applicable law determine enforceability.

This is useful for sophisticated commercial contracts.

9. Case-Law Table

10. Partial Unenforceability

A particularly important contractual concept is severability.

Suppose a contract contains:

Clause 1 – lawful sale;

Clause 2 – lawful payment;

Clause 3 – prohibited activity;

Clause 4 – dispute resolution.

The invalidity of Clause 3 does not necessarily destroy the entire agreement.

The court may ask:

Can the illegal term be separated?

Is the remaining contract workable?

Did the parties intend severability?

Does legislation require the whole agreement to fail?

Does removing the term fundamentally change the bargain?

Formula

Invalid clause ≠ automatically invalid entire contract.

11. Illegality Must Be Distinguished From Breach of Contract

Ordinary breach

A party fails to perform a lawful promise.

Example:

Seller fails to deliver goods.

The contract remains enforceable and damages may be available.

Illegal agreement

The promised performance itself violates law.

Example:

Agreement requires an unlicensed regulated activity that legislation prohibits.

The court may refuse enforcement.

12. Unenforceable Agreements and Public Policy

Public policy can restrict enforcement where contractual performance would conflict with fundamental legal principles.

Potential examples include:

prohibited financial activity;

unlawful transactions;

evasion of mandatory legislation;

transactions contrary to public order;

agreements designed to circumvent regulatory requirements.

The court must distinguish between:

A contract that is merely commercially undesirable

and

A contract that the legal system refuses to enforce.

13. Unenforceability and Regulatory Licences

This is particularly important in UAE commercial law.

Consider:

Example

Company A agrees to provide regulated financial services.

Company A has no required licence.

Company B refuses to pay.

Company A sues for payment.

The court will need to examine:

Was the activity regulated?

Was a licence legally required?

Did Company A possess the licence?

Does the legislation prohibit the activity?

What consequence does the legislation prescribe?

Does the prohibition affect the whole contract or only particular services?

Are restitutionary claims available?

NS Investment v Ajay Sethi illustrates this type of analysis. (DIFC Courts)

14. Unenforceable Agreements and Certainty

The court needs sufficient certainty to know what it is enforcing.

Uncertain

"The parties will negotiate a reasonable price later."

More certain

"Price shall be determined by an independent valuer appointed by the parties; if they cannot agree within seven days, the chairperson of the relevant professional body shall appoint the valuer."

The second formulation creates an objective mechanism.

Therefore:

The more completely an agreement leaves essential terms to future agreement, the greater the risk of unenforceability.

This principle is central to Hexagon Holdings. (DIFC Courts)

15. Unenforceability of Arbitration Agreements

An arbitration clause can itself be unenforceable where it is:

null and void;

inoperative;

incapable of being performed;

insufficiently certain;

not properly incorporated;

made by a person without authority.

But an important principle is separability.

Example

Main contract:

"Supply of goods."

Arbitration clause:

"Any dispute shall be resolved by arbitration."

If the supply contract is alleged to be invalid, the arbitration clause may nevertheless survive to determine the dispute concerning the contract's validity.

The Stelian Gheorghe case illustrates this principle. (DIFC Courts)

16. Unenforceable Agreements and Jurisdiction Clauses

A jurisdiction clause is not automatically unenforceable because the contract is disputed.

The court normally examines:

wording;

governing law;

parties' intention;

statutory jurisdiction;

whether the clause is exclusive;

whether it is sufficiently clear.

In Stephenson Harwood, the DIFC Court found the asymmetric jurisdiction clause valid and enforceable. (DIFC Courts)

Likewise, DIFC case law has repeatedly emphasised that the wording of jurisdiction clauses must be interpreted objectively in context. (DIFC Courts)

17. Unenforceability and Evidence

A party alleging unenforceability should normally produce evidence concerning:

the agreement;

applicable legislation;

licences;

regulatory status;

correspondence;

payment records;

registration documents;

performance;

the circumstances of formation;

the exact contractual wording.

Important rule

The allegation "this contract is illegal" is not itself evidence of illegality.

Dutch Equity Partners v Daman demonstrates the importance of proper pleading and proof. (DIFC Courts)

18. Effect of Unenforceability

Depending on the circumstances, the court may:

1. Refuse specific performance

The court will not compel performance of the unenforceable obligation.

2. Refuse damages for non-performance

Where enforcement is legally prohibited, contractual damages may also be unavailable.

3. Order restitution

Money or property already transferred may sometimes be recoverable.

4. Sever the offending provision

The remaining agreement may continue.

5. Declare rights

The court may determine what legal consequences follow from the defective agreement.

6. Stay or dismiss proceedings

Where a valid arbitration or jurisdiction agreement applies, the court may decline to determine the merits.

19. Important Exam Distinctions

Unenforceable vs illegal

An illegal agreement may be unenforceable, but the precise consequence depends upon the governing statute and legal doctrine.

Unenforceable vs void

Voidness concerns legal validity; unenforceability concerns the ability to obtain judicial enforcement.

Unenforceable vs voidable

Voidable agreements remain operative until avoided by the entitled party.

Unenforceable vs impossible

An agreement may be legally valid but impossible to perform because circumstances have changed.

Unenforceable vs uncertain

Uncertainty concerns whether the court can identify the parties' enforceable obligations.

20. UAE Mainland and DIFC Comparison

21. Practical Example

Facts

A company without a required financial licence signs a loan agreement charging interest.

The borrower refuses to pay.

Legal analysis

Step 1: Identify the activity.

It is financial lending.

Step 2: Identify regulatory requirements.

Was a licence required?

Step 3: Determine whether the lender was licensed.

If not, examine the statutory prohibition.

Step 4: Determine consequence.

Does the legislation make the transaction:

void;

unenforceable;

voidable;

subject to penalties;

partly enforceable?

Step 5: Consider restitution.

Can principal or property transferred be recovered?

Step 6: Consider procedural provisions.

Is there an arbitration or jurisdiction clause?

This is broadly the type of analysis illustrated by NS Investment v Ajay Sethi. (DIFC Courts)

22. Golden Rules

Not every defective agreement is void.

Unenforceability depends on the applicable law.

Illegal performance may prevent judicial enforcement.

Certainty of essential terms is fundamental.

An agreement to agree may be unenforceable if essential terms remain uncertain.

Regulatory licensing can be critical.

Illegality must be properly pleaded and proved.

An invalid clause does not necessarily invalidate the whole contract.

An invalid underlying contract does not necessarily destroy a separable arbitration clause.

A contractual label such as "binding" cannot override mandatory legislation.

Asymmetry alone does not necessarily make a jurisdiction clause unenforceable.

Always identify whether the dispute is governed by UAE mainland, DIFC, ADGM or another legal regime.

23. Ultra-Short Revision Formula

UNENFORCEABLE = I + C + R + F + S

I = Illegality
C = Certainty problems
R = Regulatory/licensing defect
F = Formal/legal requirement
S = Statutory prohibition

Remember:

Illegal + Uncertain + Unlicensed + Statutorily prohibited = possible unenforceability

But the precise legal consequence must always be determined from the applicable legislation and governing law.

24. Exam-Ready Conclusion

An unenforceable agreement is not simply an agreement that one party does not want to honour. It is an agreement or contractual provision that the applicable legal system refuses to enforce because of a recognised legal defect or prohibition. In the UAE/DIFC context, the most important issues are illegality, regulatory licensing, certainty of terms, statutory restrictions, contractual formalities, separability and public policy.

The DIFC decisions in Al Khorafi, NS Investment, Hexagon Holdings, Vegie Bar, Dutch Equity Partners, Sky News Arabia, Stelian Gheorghe, and Stephenson Harwood demonstrate different routes by which contractual enforcement may be restricted. (DIFC Courts)

Final memory line:

“A contract may be signed, but signature alone cannot make an illegal, uncertain, prohibited or legally unenforceable obligation enforceable.”