After more than four decades, the legal foundation of construction work in the UAE has changed. Federal Decree-Law No. 25 of 2025, issuing the new Civil Transactions Law (the “New Civil Code”), came into force on 1 June 2026, replacing Federal Law No. 5 of 1985 (the “Old Civil Code”). For the construction sector, the most consequential provisions are those governing the muqawala (contracting) relationship, which now appear in Articles 812 to 839 of the New Civil Code (previously Articles 872 to 896). As a transitional matter, contracts concluded before 1 June 2026 remain governed by the Old Civil Code, while contracts concluded on or after that date fall under the new regime. Employers, contractors, consultants and developers should understand what has changed before signing their next agreement.
Termination for convenience is now codified
Under the Old Civil Code, an employer’s right to terminate a contractor “for convenience” was not expressly stated, although the UAE Courts of Cassation had long recognised it in practice. Article 836 of the New Civil Code now codifies this right: the employer may withdraw from the contract at any time before the work is completed, provided it compensates the contractor for its expenses, the value of the work already carried out, and the profit the contractor would have earned had it completed the works. Crucially, the court retains the power to reduce the lost-profit element to reflect any savings the contractor made by being released early, or profit it earned from alternative work. Contractors should therefore keep clear records of cost and progress, while employers should appreciate that “convenience” termination carries a real and quantifiable price.
A clearer framework for penalty (liquidated damages) clauses
Delay penalties and pre-agreed compensation sit at the heart of construction contracts. Article 340 of the New Civil Code (formerly Article 390) confirms that the parties may fix compensation in advance, but it refines the court’s power to adjust that figure. Under Article 340(2) and (3), a court may reduce the agreed amount where the debtor proves it was exaggerated, where it exceeds the loss actually suffered taking account of partial performance, or where the creditor contributed to or aggravated the harm. Conversely, Article 340(4) allows a creditor to claim more than the agreed figure only by proving fraud or gross negligence — a deliberately high threshold. A continuing point of caution: the UAE courts have held that a penalty clause generally cannot be invoked after a contract is terminated, leaving the employer to prove its actual loss. That position has not been codified and remains a matter of court practice.
Lump-sum pricing and relief for exceptional circumstances
Many UAE projects are let on a lump-sum basis. Article 829 (formerly Article 887) confirms that, in a lump-sum contract, a contractor is entitled to additional payment for a change or increase in scope only by agreement of the parties — but it adds an entitlement where the change results from the employer’s fault. More significantly, Article 829(3) empowers the court, where exceptional and unforeseeable general circumstances arise that undermine the basis on which the contract was made, to restore balance between the parties: by extending the completion period, increasing or decreasing the remuneration, or even terminating the contract. This statutory hardship relief may prove valuable in the event of another pandemic-style disruption or extreme cost inflation.
A new duty to notify
The New Civil Code also introduces a clearer notice obligation. Under Article 816(3), a contractor must immediately notify the employer of any event or circumstance that may impede the proper execution of the works; if it fails to do so, it bears the consequences arising from that event. In practice, a contractor that does not give timely notice may lose its entitlement to additional time or cost, or become liable in damages. The Code does not define what amounts to “proper” notice, so its contours will be shaped by the onshore courts — making disciplined, contemporaneous notification more important than ever.
Decennial liability preserved — and refined
The cornerstone protection of UAE construction law, decennial (ten-year) liability, continues under the New Civil Code. Article 821 (formerly Article 880) holds the contractor and the supervising engineer jointly liable for ten years from handover for any total or partial collapse of the building, and for any defect that threatens its stability or safety. This liability is strict: it arises even where the defect originates in the ground itself, and even where the employer approved the works. Article 822 confines the liability of an engineer whose role was limited to the design to design defects alone, while Article 823 renders void any agreement that purports to exclude or limit decennial liability. The New Civil Code also makes clear that a contractor retains a right of recourse against its subcontractors and suppliers, while clarifying that the strict decennial standard does not govern that recovery claim.
Practical takeaways
Two themes run through the new muqawala provisions. First, they bring welcome clarity, codifying rights and remedies that previously depended on case law. Second — and crucially — most of these provisions are not mandatory: they apply only where the contract is silent. The parties remain free to allocate risk differently, so the quality of drafting matters more than ever. Even for contracts signed before 1 June 2026, the new framework is likely to influence how the onshore courts reason. Owners, developers and contractors would be well advised to review their template agreements, payment and variation mechanisms, notice procedures and termination clauses against the New Civil Code.
At Mohamed Al Azazi Advocates & Legal Consultants, we advise employers, contractors and consultants on construction contracts and disputes across the UAE. For tailored advice on how the new Civil Transactions Law affects your projects and agreements, our team is available to assist.
This article is provided for general information only and does not constitute legal advice. Specific matters should be referred to qualified counsel.