The UAE’s New Civil Code: implications for construction projects

Nabeel Ikram
Vinson & Elkins, Dubai

Giuliano Parlascino
Vinson & Elkins, Dubai

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The United Arab Emirates overhauled its general contract law in January 2026, replacing a statutory framework that had been in place for four decades. Federal Decree-Law No 25 of 2025, the new Civil Transactions Law (the ‘New Civil Code’), introduces significant reforms spanning rules regarding the applicable governing law, pre-contractual obligations, limitation of liability, muqawala provisions (which deal specifically with building contracts) and guarantees. All translations of the provisions of the New Civil Code referenced in this article are unofficial, as no official English translation exists at the time of publication. The New Civil Code came into force on 1 June 2026, replacing Federal Decree-Law No 5 of 1985 (the ‘Current Civil Code’). This article examines a number of the key reforms and their practical implications, with a particular focus on construction projects.

Scope of application

Article 4(1) establishes a general principle of non-retroactivity: the New Civil Code has no application to facts or transactions that predate its commencement, save where an express statutory provision provides otherwise.

The only exception concerns limitation periods, for which Articles 6 and 7 prescribe specific transitional rules, but this is of no consequence for contractors’ or employers’ claims: the only change to limitation periods is effected by Article 431, which reduces the period for unpaid fee claims by certain professionals (eg, lawyers and architects) – from five to three years.

Governing law of contractual obligations

A noteworthy codification in the New Civil Code is its treatment of party autonomy in the selection of governing law.

Article 19 expressly provides that contractual obligations shall be governed by the law selected by the contracting parties. Where the parties have not expressly designated a governing law, the New Civil Code stipulates that the applicable law is that of the state in which the parties share a common domicile or, in the absence of such a common domicile, the law of the state in which the ‘principal’ contractual obligation is to be performed, unless the circumstances indicate that the parties intended another law to apply. This represents a departure from the former default rule, which pointed to the law of the place where the contract was concluded.

Article 19 places the parties’ choice of governing law on an express statutory footing. It remains to be seen, however, whether this codification will alter the established judicial practice under which the party invoking a foreign governing law bears the burden of proving its contents and effects. UAE courts have repeatedly held – including in cases involving English law – that where a party fails to discharge that burden of proof, the court may disregard the parties’ choice and apply UAE law to the merits. Whether Article 19 alters that approach remains unclear.

For UAE-based construction projects, in practice, the absence of an express governing law clause – which is uncommon – is unlikely to displace the application of UAE law. International parties frequently contract through local subsidiaries, bringing them within the common-domicile rule; and even where that is not the case, the principal contractual obligation will almost invariably be performed in the UAE, producing the same result under the default rules.

Lastly, Article 19 is unlikely to have a material impact on international arbitrations seated in the UAE. The applicable substantive law in such proceedings is determined under Article 38 of the Arbitration Law (Federal Law No 6 of 2018, as amended), which empowers the tribunal, in the absence of party agreement, to apply the law with the closest connection to the dispute. Arbitral tribunals are therefore not bound by the default mechanism in Article 19.

Contractual interpretation

Article 120 sets out the principles governing the interpretation of contracts. While the framework broadly restates the approach under the Current Civil Code, the following changes are likely to be relevant, particularly in the construction context.

First, Article 120(11) directs that contracts be interpreted in a manner consistent with ‘justice’ and ‘good faith’. Good faith has long been a foundational principle of UAE contract law, but the inclusion of ‘justice’ as a separate interpretative criterion is new, and it remains to be seen whether this will expand the scope of judicial discretion in contractual interpretation.

Second, Article 120(12) requires the court or tribunal to assess the parties’ obligations by reference to the factual circumstances prevailing at the time the contract was concluded. This aligns with the principle that the mutual intention of the parties should be ascertained not solely from the contractual text but also from objective evidence available at the point of formation. This approach may frequently necessitate recourse to the pre-contractual factual matrix, particularly in construction disputes where there are ambiguities in the parties’ obligations and risk allocation.

Third, Article 120(13) provides that ambiguous contractual terms are to be construed in favour of the obligor or, where relevant, the ‘weaker party’. While the rule in favour of the obligor already forms part of the Current Civil Code, reference to the weaker party is new. Its application in the construction sector is uncertain: major construction contracts are frequently entered into between well-resourced corporate or governmental counterparties, making it difficult to identify a ‘weaker’ party in any meaningful sense. It is possible that the legislator intended the concept to be confined to cases involving, for instance, a manifest financial imbalance between the parties, but this remains to be tested.

Pre-contractual duties of good faith and disclosure

Articles 121 and 122 introduce a comprehensive statutory regime governing pre-contractual conduct, representing a fundamental innovation of the New Civil Code.

Conduct of negotiations

Article 121 enshrines the principle of good faith, which under the Current Civil Code only applies to performance of the contract, across all stages of contract negotiation – from proposal to termination. Article 121(4) specifies that the deliberate non-disclosure of a material statement affecting the contract’s validity is a breach of that duty, although the provision does not purport to be exhaustive, leaving scope for the courts to develop the obligation’s content over time. Recoverable damages are confined to actual loss and do not extend to profit or loss of opportunity, save where the parties have agreed otherwise (Article 121(3)).

Disclosure obligations

Article 122(1) imposes a duty on a party who possesses information ‘of decisive importance’ to the other party’s consent to disclose that information, provided the other party could not reasonably have been expected to obtain it independently or placed its trust in the disclosing party. It additionally defines the threshold for disclosure by reference to information bearing a ‘direct and necessary connection’ to the ‘content of the contract’ or ‘the status of the parties’.

The scope of the obligation appears to be broad. Article 122(2) imposes such disclosure obligations on both parties, requiring them to exercise ‘due diligence’ to provide the other party with ‘data related to the negotiations, the contract to be concluded, and the circumstances and conditions surrounding the contractual process’.

The party alleging concealment bears the onus of establishing that disclosure was not made, while the party asserting compliance must demonstrate that disclosure occurred (Article 122(3)). The disclosure obligations are mandatory and any contractual provision seeking to limit or exclude them is void (Article 122(4)). A party aggrieved by a breach of this obligation may seek annulment of the contract (Article 122(4)).

Implications for construction contracts

The consequences of these provisions for construction contracts, though yet to be tested, may prove significant. The mandatory disclosure regime is broad in scope and potentially burdensome and parties cannot contract out of it.
Employers in particular would be well advised to establish robust processes for the identification and disclosure of relevant and material information, particularly during the tender phase, so as to minimise exposure to subsequent claims by contractors. How the courts and tribunals calibrate the threshold for disclosure – and guard against its abuse – will be an important area to watch.

Limitation of liability and pre-agreed compensation

Exclusion and limitation of tortious liability

The New Civil Code effects significant changes to the rules governing the exclusion and limitation of liability, as well as pre-agreed compensation, with direct implications for construction contracts.

Article 257 prohibits any clause seeking to exempt a party from – or limit – liability arising from a harmful act. Article 296 of the Current Civil Code renders void any clause exempting a party from liability for a harmful act but is silent on clauses that merely ‘limit’ such liability.

The express inclusion of the word ‘limitation’ in Article 257 of the New Civil Code raises a material question: whether contractual liability caps – a ubiquitous feature of construction contracts in the UAE and elsewhere – are now unenforceable insofar as they relate to tortious acts. If they are, this would mark a significant change from the existing position.

Article 257 also expressly permits the parties to agree to increase liability for tortious acts beyond the level that would otherwise be recoverable, unless the law provides otherwise. It appears to permit parties to agree contractually to enhanced or punitive damages for harmful acts – a significant departure from UAE civil law, which has traditionally limited recovery to compensatory damages reflecting actual loss.

Pre-agreed compensation (liquidated damages)

Article 340 replaces the broad judicial discretion under Article 390 of the Current Civil Code – which permits courts to adjust agreed compensation to reflect actual loss – with a defined set of grounds for judicial intervention.

Liquidated damages may be reduced where the agreed sum is excessive or the obligation partly performed (Article 340(2)) and may be reduced or denied entirely where the creditor’s own fault contributed to or absorbed the harm (Article 340(3)).

A claim exceeding the agreed amount remains available to the innocent party where fraud or gross fault is proved (Article 340(4)).

Such factors would likely have guided a court’s exercise of discretion under Article 390 of the Current Civil Code but their express codification now provides clearer parameters for judicial intervention.

A novel feature is the introduction of partial performance as a ground for reducing liquidated damages under Article 340(2), as highlighted above. In a general commercial context this is unremarkable but it is potentially problematic in the context of delay liquidated damages, which are invariably used in construction contracts: a delayed contractor will almost invariably have completed part of the works and may seek to characterise this as ‘partial performance’ warranting a reduction. We consider that, on balance, this is unlikely to have been the legislator’s intent, absent more express wording, but judicial interpretation ought to clarify the position.

Provisions specific to muqawala contracts (construction and work contracts)

Defects in materials

Article 816(3) imposes an express obligation on the contractor to notify the employer ‘immediately’ of any defects discovered in materials provided by the employer or of any other circumstances that would prevent the works from being carried out under ‘suitable conditions’. A failure to provide such notice renders the contractor liable for the consequences of that omission. Contractors should therefore ensure they have processes in place for the prompt identification and reporting of defects in employer-supplied materials.

Gap-filling provisions

Article 818(1) requires the contractor to execute the works in accordance with the contractual terms and within the agreed time frame. Where the contract is silent on either the standard or the timing of performance, the provision stipulates that performance shall be governed by ‘customary principles’ – which likely refers to ‘accepted industry practice’ – and that completion must occur within a period that is reasonable having regard to the nature of the works. Article 818(1) thus operates as a gap-filler, ensuring that muqawala contracts remain valid and operable notwithstanding the absence of express terms on standards or programme.

Rescission by the employer

Article 818(3) identifies specific grounds upon which the employer may seek immediate rescission of the contract without first granting the contractor an opportunity to cure. While the Current Civil Code affords the employer such a remedy only where remedial works are impossible, Article 818(3) broadens the available grounds to include circumstances where correcting defects would be contrary to the contractual terms, where the contractor’s delay renders timely completion ‘absolutely unlikely’ or where the contractor’s conduct manifests an intention not to perform.

These expanded grounds will be welcomed by employers on construction projects, particularly the recognition of anticipatory non-performance and severe delay as standalone bases for rescission, although any decision to invoke them should be approached with caution given the consequences of a wrongful (or lawful) termination.

Separately, Article 836(1) entitles the employer to terminate for convenience at any time prior to completion, provided it compensates the contractor for all expenditure incurred, work completed and the profit the contractor would have earned had it been permitted to complete the works. Article 836(2) grants the court discretion to reduce the contractor’s lost-profit entitlement on equitable grounds, deducting any savings resulting from the employer’s termination and any income the contractor derived from deploying its resources elsewhere.

For construction contracts, this provision broadly mirrors the termination-for-convenience mechanisms commonly found in standard contract forms, but the statutory right to an equitable reduction of lost profits introduces a degree of judicial oversight that parties should factor into their risk assessments.

Decennial liability

In broad terms, the decennial liability regime provides for the contractor and the architect to be strictly liable for any defects which cause a building to collapse or which threaten its structural integrity.

The decennial liability regime, now set out in Article 821, is substantively unchanged from the Current Civil Code, although additional clarity has been provided. In particular, it is now expressly stated that such strict liability does not apply to any right of recourse a contractor may have against its subcontractors. Thus, a contractor seeking relief in respect of a decennial liability event must demonstrate fault or breach on the part of the subcontractor (Article 821(4)).

This is a sensible clarification, particularly in the context of large-scale projects where numerous subcontractors are engaged across different disciplines: on major projects involving multiple subcontractors with distinct scopes of work, it is appropriate that a contractor be required to identify the subcontractor whose scope is relevant to the defect, rather than holding all subcontractors liable irrespective of their involvement.

Article 822(2) further provides that where an engineer’s role is confined to the supervision of execution (or any part thereof), that engineer is jointly and severally liable with the contractor for any defects arising under its supervision. The Current Civil Code addresses the liability of an architect whose role is limited to preparing plans but does not deal expressly with the supervision-only scenario.

Lump-sum contracts and rebalancing of contractual obligations

Article 829(1) provides that a contractor under a lump-sum muqawala contract for a specified design may not claim an increase in the contract price by reason of increases in material prices, wages or other costs.

Article 829(2) confirms that the contractor is likewise not entitled to additional consideration where the design is modified or supplemented, unless the modification or increase results from an error attributable to the employer or the parties have agreed to an increase.

Notwithstanding these provisions, Article 829(3) permits a contractor to apply to the court for an order restoring the contractual equilibrium where unforeseeable ‘exceptional general circumstances’ undermine the financial basis on which the lump-sum price was established. This constitutes a specific statutory ground for relief, in addition to the general ‘exceptional circumstances’ doctrine codified in Article 224 of the New Civil Code (equivalent to Article 249 of the Current Civil Code). Unlike the general doctrine, which permits the court only to reduce an oppressive obligation to a reasonable level, Article 829(3) authorises a more comprehensive rebalancing, including adjustments to the contract price, the time for completion or termination of the contract altogether. Accordingly, contractors now have a statutory basis on which to seek not only price relief but also extensions of time in response to exceptional and unforeseeable events.

Causes of action against guarantors

Article 1009 effects a material change to the law governing claims against guarantors. Under the new provision, a creditor may not proceed directly against a guarantor until it has first taken action against the principal debtor. Furthermore, the creditor may not execute against the guarantor’s assets until those of the debtor have been exhausted, unless the guarantor is jointly and severally liable or the law or the agreement provides otherwise. The guarantor must expressly invoke this defence before the court.

This clearly departs from the former regime, where a creditor could proceed directly against the guarantor, provided the guarantor had not required the creditor to pursue the debtor first.

For large construction projects – where parent company guarantees are a standard component of the employer’s security package – the practical consequences are immediate. Employers would be well advised to guard against the effect of Article 1009 by drafting guarantees that expressly impose joint and several liability on the guarantor or that otherwise disapply the requirement to exhaust remedies against the principal debtor. A further option is to govern the guarantee under a separate law – such as DIFC law or ADGM law (DIFC and ADGM are common law jurisdictions within Dubai and Abu Dhabi, respectively) – thereby insulating the guarantee from the operation of Article 1009.

Conclusion

The New Civil Code represents the most significant reform of the UAE’s general contract law since 1985. For parties to construction contracts and dispute resolution practitioners, the changes examined in this article are of immediate practical relevance. While the new legislation brings welcome clarity to a number of areas, several provisions – particularly those governing pre-contractual conduct, the limitation of tortious liability and pre-agreed compensation – will need to be tested before the courts and tribunals before their scope and effect can be fully assessed. Parties entering into contracts governed by UAE law ought to acquaint themselves with the new framework which came into force on 1 June 2026.

Nabeel Ikram is Head of International Disputes – MENA at Vinson & Elkins in Dubai. He can be contacted at nikram@velaw.com. Giuliano Parlascino is an associate at Vinson & Elkins in Dubai. He can be contacted at gparlascino@velaw.com.