In commercial disputes, “simulated contracts” often arise when parties allege that an apparent transaction was not genuine but a façade concealing a different agreement. A recent judgment by the Abu Dhabi Court of Cassation in Case No. 2025-98-Commercial provides critical insights into the application of simulation under UAE law, evidentiary requirements, and the principles of fairness in contractual disputes.

Case Summary

The plaintiff, a minority shareholder in a limited liability company (LLC), sought judgment against co-shareholders, alleging misconduct that deprived him of rightful profits. The plaintiff claimed a 16% ownership stake entitled him to specific profits for the fiscal year ending December 31, 2023.

Key allegations included:

Co-shareholders established competing companies, using the LLC’s proprietary information to harm its financial standing.

The manager failed to prepare annual financial statements or distribute profits in line with Articles 237 and 244 of the UAE Commercial Companies Law.

The plaintiff also alleged that certain contractual modifications were simulated agreements designed to obscure the true ownership structure and profit entitlements.

Lower Courts’ Decisions

The trial and appellate courts dismissed the plaintiff’s claims, citing insufficient evidence of simulation or misconduct.

Court of Cassation Analysis

1. Simulated Contracts Under UAE Law

The court referred to Article 395 of the UAE Civil Code, which defines simulation as:

• A scenario where parties agree to create an apparent contract that conceals their true intentions.
• The concealed agreement prevails if it aligns with public order and mandatory legal provisions.
• The burden of proof lies with the party alleging simulation, who must present written evidence or rely on alternative proofs as allowed by law.

2. Evidentiary Requirements

Simulation claims require robust evidence, particularly where written contracts exist.

The court emphasized that:

• Written evidence is mandatory unless fraud or deceit is involved, which may permit broader evidentiary methods.
• Clear and explicit contractual terms cannot be overridden by ambiguous or unsupported allegations.

3. Unfair Competition and Fiduciary Duties

The court examined allegations of unfair competition under Article 102 of the UAE Commercial Companies Law, which prohibits managers from engaging in activities detrimental to the company. It concluded that the plaintiff failed to demonstrate quantifiable harm resulting from the competing companies established by the co-shareholders.

4. Judicial Discretion and Precedents

The court reaffirmed the principle of judicial discretion in weighing evidence, relying on its precedent in Case No. 1983-12-Commercial, where the court ruled that simulation must be proven by unambiguous evidence demonstrating the existence of the concealed agreement.

Judgment and Rationale

The Court of Cassation dismissed the appeal, upholding the lower courts’ findings:

1. The plaintiff failed to provide credible evidence of simulation or misconduct.

2. Written contracts explicitly outlined the ownership and profit-sharing terms, which the plaintiff’s claims could not override.

3. Allegations of harm caused by competing companies were unsupported by quantifiable evidence.

4. The court also ordered the plaintiff to bear legal costs under Article 133 of the UAE Civil Procedures Law.

Key Takeaways for Business Owners

1. Ambiguities in contractual terms can lead to disputes. Ensure all agreements and amendments are meticulously documented and aligned.

2. Claims of simulation or misconduct must be substantiated by robust evidence, particularly when challenging written agreements.

3. Managers and shareholders must comply with corporate governance norms, including the preparation of financial statements and profit distribution, to avoid potential liabilities.
4. Engaging in activities detrimental to the company’s interests can lead to legal challenges. Shareholders must ensure that competing activities do not harm the company or its stakeholders.

Conclusion

The Abu Dhabi Court of Cassation’s ruling underscores the importance of evidence, clarity in agreements, and adherence to corporate governance principles. For parties navigating similar disputes, meticulous documentation and compliance with statutory obligations are critical to protecting their interests.

For professional advice on simulated contracts, corporate governance, or related legal matters, consult an experienced legal practitioner.