Key Changes in UAE's New Civil Code: Impact on Muqawala Contracts

According to the previous Civil Code, employers could not terminate contracts at will. However, UAE courts permitted it, provided that compensation was paid for expenses, completed work, and potential profits (e.g., Dubai Court of Cassation Case No. 223 of 2023).

The new Civil Code codifies this right (Article 836) by allowing employers to terminate contracts early, provided they compensate for expenses, completed work, and potential lost profits. However, the court may adjust the compensation amount based on any savings the contractor gained by being released or taking on other work.

Under the Old Civil Code, parties could agree in advance on liquidated damages, and courts had the authority to adjust these amounts based on actual losses (e.g., Dubai Court of Cassation Case No. 194/2024).

The New Civil Code maintains this ability but imposes stricter conditions. Articles 340(2) and 340(3) allow courts to reduce compensation if it is excessive, exceeds actual losses, or if the creditor’s negligence contributed to the harm. Additionally, creditors can only claim more than the agreed amount if they prove fraud or gross negligence by the debtor, raising the threshold for revisions.

These changes should also be viewed in the broader context of construction law in the UAE.

However, UAE courts have historically ruled that liquidated damages cannot be claimed following the termination of a contract, as termination invalidates the liquidated damages clause (e.g., Dubai Court of Cassation Case No. 590 of 2025). Therefore, employers must prove the actual losses incurred after termination.

The New Civil Code does not directly codify this principle. Its enforceability will still be determined by the approach taken by UAE courts.

According to Article 829 of the New Civil Code, contractors can seek an increase in payment for lump-sum contracts under certain conditions. According to subsection 2 of Article 829, contractors are only entitled to additional payment if both parties agree to a change in the scope of work or if the change is the employer’s fault.

Additionally, according to Article 829(3), contractors may request adjustments if unforeseen circumstances, such as a global pandemic or extreme cost inflation, undermine the foundation of the contract. In such cases, the court may extend the completion period, adjust the remuneration, or terminate the contract.

While the Old Civil Code did not explicitly address notice obligations, the New Civil Code adopts a more stringent approach. According to Article 816(3), contractors must notify the employer immediately if circumstances arise that could hinder the proper execution of the work. Failure to provide such notice may result in the contractor being held liable for damages or excluded from claiming additional time or payment.

The precise interpretation of what constitutes proper notice will be determined by the UAE courts.

The New Civil Code's provisions regarding muqawala contracts represent a positive development, offering clearer rights and remedies for parties involved in construction contracts. However, these provisions are largely non-mandatory and will only apply if the contract is silent on the matter.

Consequently, contracting parties must carefully negotiate their agreements and clearly allocate risk. Additionally, while the New Civil Code will not directly apply to contracts executed before June 1, 2026, it may still influence future case decisions.