A new toolkit for construction arbitration
Letizia Santin of BonelliErede examines how the New UAE Civil Code reshapes construction arbitration, clarifying hardship, termination, liquidated damages and contractual risk allocation.
The entry into force of Federal Decree-Law No. 25 of 2025 on June 1, 2026 marks the most significant reform of UAE private law in more than four decades (“the New Code”). In a jurisdiction that has emerged as one of the world’s leading construction and infrastructure markets, the reform is of particular importance to construction arbitration. By replacing the Civil Code that had governed civil obligations since 1985 (“the Old Code”), the new legislation reshapes the substantive legal framework applicable to disputes concerning delay, disruption, price escalation, termination, and liquidated damages.
This article examines the provisions of the New Code that are likely to be of greatest practical significance to commercial parties operating in the construction and engineering sectors. Particular focus is given to the muqawala contract provisions, which continue to occupy a critical position at the intersection of contractual freedom and mandatory statutory protections.
TEMPORAL SCOPE AND APPLICABLE LAW
The New Code applies to contracts concluded on or after June 1, 2026 (Article 4(1)). It does not apply retroactively to preceding facts and acts unless expressly stated. However, limitation periods that had not yet expired under the Old Code are subject to the new limitation rules (Articles 6-7), a transitional feature that may generate jurisdictional and merits disputes in ongoing arbitrations.
In parallel, Article 19 materially reconfigures the UAE’s choice-of-law framework by elevating party autonomy to the primary connecting factor for contractual obligations. While the Old Code treated party choice as an exception to a domicile-based framework, Article 19 now places the parties’ express choice at the apex. Absent agreement, the applicable law defaults to that of the common domicile, with the New Code replacing reliance on lex loci contractus with the law of the place of performance of the principal obligation.
THE DEFINITION OF MUQAWALA
The New Civil Code retains both the definition and structure of the muqawala contract. Articles 812 and 813 continue to characterise it as a contract under which one party undertakes to manufacture a thing or perform work in return for consideration, and require essential terms to specify the subject matter, method of performance, completion period, and remuneration. The majority of the muqawala provisions remain default rules, applicable only in the absence of contrary agreement between the parties.
Although modern construction contracts are typically highly detailed, this regime retains practical relevance. The muqawala provisions provide a statutory baseline against which contractual risk allocation is assessed, and arbitral tribunals applying UAE law are likely to rely on them for interpretation and gap-filling where contracts fail to address an issue or give rise to ambiguity.
FROM FORCE MAJEURE TO HARDSHIP
Under the Old Code, force majeure served as the principal relief mechanism: if performance became impossible, the contract terminated automatically. This binary structure was ill-suited to the realities of construction disputes, where the predominant issues are delay, disruption, and price escalation rather than true impossibility.
The New Code adopts a more nuanced approach under Article 236. While total impossibility in bilateral contracts still leads to the lapse of reciprocal obligations and ipso jure termination, the provision draws a clearer distinction between partial and temporary impossibility, with remedies ranging from proportional discharge and judicial rescission to contractual modification. This graduated structure expands judicial and arbitral discretion, replacing the rigid automaticity of the previous regime with a more context-sensitive framework.
Article 224 introduces a statutory hardship mechanism into the New Code. Where exceptional and unforeseeable general circumstances render performance excessively onerous so as to threaten serious loss, the court or arbitral tribunal is empowered to reduce the onerous obligation or, where appropriate, rescind the contract. Notably, the provision is mandatory in nature: any agreement to exclude or derogate from its application is null and void. This mandatory character underscores its significance in practice, particularly in construction and long-term contracts where allocation of economic risk is frequently the subject of detailed contractual drafting.
For construction contracts, Article 829(3) introduces a dedicated muqawala hardship mechanism under which the court or tribunal may extend time for completion, increase or decrease remuneration, or rescind the contract in order to restore contractual equilibrium. Unlike Article 224, this provision is not mandatory and may be displaced by agreement. Its practical significance is considerable, as it supplies an express statutory basis for remedies—such as extensions of time and price adjustment—that are often absent from FIDIC contracts governed by UAE law. Read alongside Article 224, it operates as a statutory overlay to construction agreements, though relief remains exceptional, requiring unforeseeable circumstances of sufficient gravity to undermine the contract’s economic balance.
CONTRACT TERMINATION FOR DEFECTIVE PERFORMANCE AND NON-PERFORMANCE
Article 818 consolidates and expands the employer’s remedies for defective performance and non-performance under muqawala contracts. The contractor remains bound to complete the works in accordance with the contract, including within the agreed time or, absent agreement, within a reasonable period determined by the nature of the works.
Where defects or non-conformity arise, Article 818(2) establishes a structured cure-and-terminate mechanism. The employer may first place the contractor in default and require rectification within a reasonable period. If the contractor fails to remedy the breach within that period, the employer may rescind the contract or entrust a third party to complete the works at the contractor’s expense. Unlike the Old Code, this route does not require prior judicial authorisation, but its exercise is conditioned on evidential substantiation of the breach.
Article 818(3) further permits immediate rescission without a cure period in exceptional circumstances, including where rectification is impossible, where delay makes timely completion “absolutely unlikely”, or where the contractor evinces an intention not to perform. Although framed as a right to “request” rescission, this remedy is likely to remain subject to court or arbitral determination.
THE EMPLOYER’S RIGHT TO TERMINATE FOR CONVENIENCE
The New Civil Code codifies a right that had previously been recognised in UAE jurisprudence, particularly by the Dubai courts, namely the employer’s right to terminate a muqawala contract for convenience. Article 836(1) now provides that the employer may be “released from the contract and suspend its execution at any time before its completion”, thereby confirming a clear right to withdraw from performance absent contractor default. This marks a notable departure from the Old Code, under which termination of a muqawala contract was confined to completion, mutual consent, or court order.
The exercise of this right is, however, conditioned on a comprehensive compensation obligation. The employer must compensate the contractor for all expenses incurred, the value of work performed, and the profit that would have been earned had the contract been fully completed. Article 836(2) further empowers courts and tribunals to reduce compensation for lost profit where equity so requires, in particular by deducting cost savings arising from non-completion and any earnings obtained through redeployment of resources.
Although standard forms such as FIDIC include termination for convenience clauses, these are often amended or deleted in UAE practice, making Article 836 a significant default rule likely to enhance legal certainty for both parties. Any exclusion of this right must therefore be express and cannot be inferred from silence.
LIQUIDATED DAMAGES
Article 340 represents a shift towards a more structured regime for liquidated damages compared to the Old Code, which allowed courts to adjust agreed compensation “in all cases” to align it with actual prejudice. While this discretion was rarely exercised in practice, its open-textured formulation and absence of statutory thresholds created uncertainty regarding the stability of agreed liquidated damages.
The New Code replaces the former open-ended discretion with a structured framework for judicial intervention. Reduction is now permitted only on specified grounds, such as exaggeration, partial performance, or creditor fault contributing to the loss, while any increase is limited to cases of fraud or gross fault by the debtor.
This marks a clear shift from a general equitable power towards a more defined statutory regime, emphasising party autonomy and constraining judicial intervention to exceptional cases. Parties seeking adjustment must now satisfy clearly defined statutory thresholds rather than invoke an open-ended discretion.
CONCLUSION
The New Code is not merely a modernisation of the 1985 framework but a substantive recalibration of the legal rules governing the most frequently contested issues in construction arbitration, including delay, price escalation, defective performance, termination, and agreed damages.
Across these areas, the New Code simultaneously strengthens party autonomy – most notably in relation to choice of law, termination rights, and liquidated damages – while preserving and, in some instances, reinforcing mandatory statutory controls, particularly through the hardship regime. The result is a more structured but also more interventionist framework, in which contractual freedom operates within clearly defined statutory boundaries.
For practitioners, the implication is clear: drafting and dispute resolution under UAE law now require a more granular engagement with the statutory framework than before. The New Code offers greater doctrinal clarity and flexibility, but only if properly navigated. For parties, counsel, and tribunals operating in one of the world’s most active construction markets, close engagement with this reformed substantive landscape is no longer optional but essential.
Text by:
Letizia Santin, senior associate, international arbitration, BonelliErede (Dubai)
