Setting the Scene
It is a happy moment when two parties sit down at the table for a contract negotiation. Aligning on the commercial terms, they are hopeful of a shared prosperous future. In the UAE's hospitality and real estate sectors, the agreements such as hotel management contracts, commercial leases, operator agreements, and joint venture arrangements, are usually anchored on certain assumptions such as expected occupancy rates, revenue streams, stable supply chains, and a market following a relatively predictable trend.
But markets rarely cooperate with projections. Mere numbers shift, prices go up, the revenue declines. What a while ago was considered a fair agreement can later seem like a big disadvantage. The operator is no longer able to meet the KPIs that do not even correspond to the current reality. The owner is paying out management fees that are draining the cash flow instead of giving back returns. The landlord is insisting on the tenant abiding by the rental commitments even if the tenant can only do so at the expense of the business itself.
The million-dollar question is, what is there to be done with the deal that has stopped working not because a party acted in bad faith but due to altered circumstances?
This is the question I receive most often from hotel owners, developers of real estate, and corporate operators across the UAE. I believe it deserves some reflection as the answer is not as simple as the parties may wish it to be. The contract is binding. The law stands behind it. Enforcement, however, as we shall see, does not always mean resolution.
The Legal Foundation: Why Contracts Still Matter
Let me start by telling you one brutally honest fact: changes in circumstances will not in any way affect the validity of a contract under UAE law. Per Article 246 of the UAE Civil Code, a very basic premise that the parties to hospitality or commercial contracts should be aware of is set forth the contract is like a law for the parties thereto. What you have signed is what you owe. It is not an option or a mere recommendation. This is, in fact, the very basis of commercial certainty in the UAE and the main reason international operators, investors, and hotel brands trust this jurisdiction.
Good faith, another important component incorporated in Article 246, brings a whole new layer a bit further. The law goes beyond parties just performing their duties it demands performance in a manner that is honest, transparent, and which upholds the integrity of the contract. This leads to a situation that if an operator who, for instance, enforces a tough performance criterion that even the best hotel cannot meet, is not merely taking advantage of their contractual right but may be going against the very principle that legitimatizes this right.
Nonetheless, here is where the discussion can get quite complex and I encourage every owner and operator, to evaluate their options very thoroughly. A contract that one side is finding is a burden should not be necessarily grounds for terminating it from a legal point of view. Force majeure as interpreted in the UAE law conditions only the situation where performance becomes literally impossible. If your hotel doors are still open, staff getting paid, guests arriving, then work is not impossible. Performance may be considered as difficult, unprofitable, and against commercial rationality but it is not impossible. And the law clearly differentiates between burden and impossibility.
This is where Article 249 of the UAE Civil Code, in my opinion, comes in very handy and, I would say, probably the most powerful and yet least used provision that parties in hospitality and commercial disputes have. The article focuses on force majeure cases where the parties have to perform but because of factors beyond their control, the performance becomes very difficult and onerous. It gives the parties the possibility to ask a court to review their obligations and reduce them to a level which is fair to all. It is a very pragmatic provision that considers the realities of business without being completely unmindful of contractual discipline. It does not provide for cancellation. It is not about termination. The concept revolves around adjusting or rebalancing. This is basically a clause that acknowledges commercial reality while maintaining contractual discipline.
Let me emphasize one point in case you are still wondering what this means for you practically. Article 249 is not a golden ticket that allows parties to simply walk out of their commitments whenever the market takes a turn for the worse. It is, in fact, an enormously restrictive mechanism based on a narrow interpretation of the concept of "exceptional hardship" to give parties an opportunity to adjust the contract rather than terminate it. The point is not just incidental but quite important as I often refer to it in my discussions with clients.
The Question Worth Asking
I often take a moment to consider the issue and pose a question which in fact opens up a completely new dimension of the discussion:
Is enforcement always the strongest position or simply the most immediate one?
To illustrate a human element here. A hotel owner who exercises the strict right to terminate a management agreement after a failed RevPAR test of the operator may be perfectly within his rights from a legal standpoint. However, in practice, what next? The owner initiates a rebranding that will take months. Loss of the loyalty programme. Uncertainty among staff. Guest disruption. Lender anxiety. All these are negative consequences which a single enforcement action may trigger and which greatly overshadow the original underperformance problem in terms of cost and impact.
Now, think of the other way round. The same owner, seeing the underperformance decides to raise the issue with the operator under a structured dialogue. They agree on the realities of the market conditions. They produce evidence that the performance shortfall is a market-wide issue and not due to the operator. They jointly decide on a temporary relaxation of the KPI marks, a postponement of the incentive fees, and a modification of the FF&E reserve contribution schedule, all this being recorded in a side letter that does not affect the main agreement. The operator consents, as the other option, losing the property and the associated fee stream, is worse. The relationship is kept intact. The hotel business is allowed to run under a well-known brand. The owner successfully retains the value.
Which scenario stands for the stronger position?
Mediation: A Sophisticated Tool, Not a Concession
At this stage let me talk about a tool that, in my opinion, is very much underrated and misunderstood in the UAE, particularly in the hospitality sector - mediation. This is mainly because very often it is treated as something that you resort to when you are not confident enough to rely on law and your rights. Actually, mediation is a step that you take when you are savvy and understand that there are times when enforcing your rights and achieving what you want commercially are not going to be the same things.
When the contract no longer serves its intended purpose, what does a win look like for both parties?
For example in a hotel management dispute the owner's success may be measured by fee reduction, KPI adjustment and a realistic budget. The operator's here success could mean the relationship preserved, continued fee income (although decreased), and avoiding a public dispute damaging the brand. These are hardly mutually incompatible, but on the other hand, it is almost impossible to get them both through hard enforcement. They need discussion. They need imagination. They also need a system that helps parties to move beyond their fixed positions and find out what they really want.
That system is mediation. It guarantees privacy so it keeps your internal numbers (RevPAR, GOP margins, and financial forecasts) away from the public. At the same time, it is adaptable, allowing you to devise a solution consistent with the commercial realities of the property, a formal adjudicator might be limited by the four corners of the contract and thus unable to do the same. And finally, it is very quick. I have witnessed disputes over fees between hotel owners and internationally renowned operators being thoroughly solved within three mediation sessions. If one compares it to the drawn-out legal proceedings with all their attendant costs and uncertainties, the logic is overwhelmingly in favour of mediation.
In my view, with your legal knowledge backing you up, your mediation position can be very strong. And this is no paradox but a tactic. You negotiate from a position of power if you come to mediation confident that the law supports your claims (Article 249 for adjustment, Article 246 for good faith, and Article 267 for mutual modification). You are not pleading for a favour, you open the door to a commercially reasonable outcome that the law itself allows.
Two Pathways, One Objective
It is enlightening to look at what options one has if faced with a contract that does not suit anymore.
The first one is the way of strict enforcement. Your rights under the contract are as real as they get. The law is on your side. If your operator did not meet the performance criteria, you have the right to terminate their service. If the tenant did not pay rent, you may have the right to take immediate remedies. If the supplier did not follow through with the delivery, you may seek damages. However, a word of warning here don't give up your rights lightly and definitely don't ignore them just because you are wishing for the problem to sort itself out.
Secondly, the option is an organised discussion, be it through direct talks, assistance from a third party, or mediation. This choice would allow you keep your legal rights; the decision would be to use them in a way that makes most business sense. The contract in hospitality and commercial real estate is not the ultimate story, it is only the framework within which the actual business relationship unfolds. And, more than any clause, it is the relationship that decides whether your investment will bring you value in the long term.
Is it not the case that at times preserving the relationship yields more benefits than enforcing the clause?
Almost always, if done on the right terms, with the right protections, and with full knowledge of the legal fallback position - yes, it will be a case of the relationship being more valuable. A deferral of fees that is well recorded in side letters, with clearly outlined triggers for repayment, and with subordination is not a concession but a restructuring piece of equipment that helps the parties to stay on their feet. An adjustment in KPIs that actually matches the real conditions of the market, and which has a mechanism built-in for when the market recovers, is not a retreat but a display of commercial wisdom. A supply contract that replaces an unworkable exclusivity clause with a more flexible sourcing arrangement, and yet preserves the long-term vendor relationship, is not giving up but is a case of pragmatism.
A Reflection for Decision-Makers
Here I want to end with a thing I always tell every hotel owner, every real estate developer, and every corporate operator I work with.
Don't rush to lock into every enforceable right. The law has a purpose, Article 246 represents good faith, Article 249 for exceptional hardship, Article 267 permits mutual modification, and Article 272 makes for proper notices and cure procedures. These are not barriers to enforcement, rather they articulate a legal system that values both certainty and fairness.
Nevertheless, it is strategy that really shapes the results. The owner who is aware of and understands both courses of action, enforcement and dialogue, and uses them with commercial and legal savvy, is the one who is able to protect value, preserve relationships, and get the business ready for a comeback. The contract is the baseline. What you make of it is what counts.
Hospitality is a lot more than just constructing buildings. It is, in fact, a network of relationships with operators, with brands, with guests, with communities. When the deal stops working, the issue is not whether you possess the legal right to enforce. You almost certainly do. The issue is whether enforcement alone will get you to where you want to be. If the answer to that question gives you a second thought, then you may be ready for a different sort of conversation.
I would be glad to have this conversation with you. Drop me a line at m.darwish@darwishadvocates.com, or just reply to this email, and I will get back to you.
