The new UAE Civil Transactions Law: what does it mean for the construction sector?

UAE Federal Decree Law No. 25 of 2025 in October of last year heralded a new Civil Transactions Law (the "2026 CTL"), which will come into effect in the UAE on 1 June 2026, replacing the existing 1985 law. While the 2026 CTL contains a number of changes of general application, this blog post highlights those of particular significance to muqawala (service or construction) contracts. 

In most respects, the 2026 CTL will only apply to contracts entered from 1 June 2026. However, there is an exception under Article 6: from 1 June 2026, any limitation periods that have not yet expired under pre-existing contracts will be subject to the limitation periods in the 2026 CTL.

In this blog post, we identify the key changes for the construction sector under the 2026 CTL and explain the impact they are likely to have on contractors and employers in the UAE.

What is changing?

Liquidated Damages

Article 390 of the 1985 CTL allowed contracting parties to agree liquidated damages provisions and afforded broad discretion to judges to vary the measure of liquidated damages to ensure that any compensation is equal to loss. The equivalent provision under the 2026 CTL is Article 340, which also expressly allows for liquidated damages to be agreed, but does not contain the same general discretion of the court to vary the liquidated damages provision so that the damages match the employer’s actual loss. 

Rather, Article 340 provides prescriptive circumstances for when the damages can be reduced or increased.  Those are as follows:

• Reduction: Under Article 340(2), the court retains the power to reduce the agreed level of compensation where the debtor can demonstrate either that the agreed assessment was exaggerated, or that the underlying obligation has been partially performed.
• Reduction: Article 340(3) introduces a new ground for reduction of agreed compensation. Where the employer’s own fault contributed to the occurrence of the harm or aggravated it, the court may reduce the compensation accordingly. 
• Elimination: Going further, where the employer’s fault is found to have wholly “absorbed” that of the contractor, Article 340(3) provides that the court may rule that no compensation is due at all. 
• Increase: Article 340(4) provides a counterbalancing mechanism in favour of the employer: where the employer can prove that the contractor committed fraud or gross fault, the employer may claim compensation in excess of the agreed amount.

Article 340(3) may be of particular interest in cases where there are competing employer and contractor delay events: while liability is often apportioned in such instances, contractors may now consider that the law provides a clearer route to disregarding liquidated damages entirely if a contractor-risk event can be said to have been “wholly absorbed” by an employer-risk event. Ultimately, this is likely still to depend on factual issues of causation and expert opinion as to the principal driver of the delay, but practitioners will be watching closely to see how readily judges and arbitrators exercise these new tools. 

Price increases for lump sum contracts

Article 887(1) of the 1985 CTL is clear that there can be no increase to the price of a lump sum contract save for where such increase is provided for by the contract or is the result of a clear variation or addition by the employer. While Article 249 of the 1985 CTL provided discretion for courts to "reduce oppressive obligation[s] to a reasonable level" in the event of "exceptional circumstances of a public nature which could not have been foreseen", it has not previously been clear whether such provision could apply as an exception to the general principle under Article 887(1) in respect of lump sum contracts.

Under Article 829 of the 2026 CTL, while a lump sum price still cannot be increased simply because the price of materials, workers wages, or other expenses increase, it is now clear that the hardship provisions of article 249 (found in article 224 in the new law) will apply in respect of lump sum construction contracts in circumstances where the "contractual equilibrium between the obligations of the [parties] breaks down by reason of exceptional general circumstances that could not reasonably have been anticipated at the time of contracting and financial basis on which the Contract Agreements was founded thereby collapses …". In such circumstances the court will now have the express discretion to: (i) extend the time for performance; (ii) increase or decrease the contract price; or (iii) order the rescission of the contract. 

The key question – and one which is often debated in the context of the current Article 249 – is what is meant by circumstances of a “general” (عامة) nature. Historically, this has been interpreted to mean that the court can only adjust the contract where the circumstances affect the wider industry, not where they are specific and affect only the project in question.

Employer termination for convenience 

Article 894 of the 1985 CTL explains that if a contractor commences work and then becomes incapable of performing it for "a cause in which he played no part", the contractor will be entitled to the value of the work completed and the expenses incurred in the performance thereof up to the amount of the employer's benefit from the work completed. 

Article 836 of the new law similarly provides that a contractor must be compensated for expenses and work completed if the employer withdraws from the contract.  However, the list of remedies is now extended to include compensation for "what he could have earned had he completed the work". This could pave the way for arguments that, in circumstances where the employer has terminated for convenience, the contractor ought to be paid their lost profit margin for the completed project, irrespective of the overall percentage of project completion in practice. 

However, this provision is not mandatory and will only apply where the contract is silent. Most construction contracts, and certainly those based on industry standard forms such as FIDIC, contain their own stipulations as to payments on termination, and therefore this Article is only likely to apply in instances of unclear drafting or the omission of the applicable termination provisions.

Limitation period for latent defects

Article 555 of the 1985 CTL provides a six-month limitation period for any claim relating to a latent defect, save for where the seller has agreed to a longer period of liability or where the defect was fraudulently concealed by the seller. However, Article 510 of the 2026 CTL expands the default limitation period to one year after the day following delivery of the thing sold (the date of completion). 

Notably, the new Article 510 does not apply where the contract provides for a longer period of liability (for instance, parties to construction contracts routinely agree a 12- or 24-month period for notice of defects) or where the defect was fraudulently concealed. In cases where the contract provides a shorter period or is silent, this change increases the burden on contractors. Conversely, for employers, the change is likely to be positive news, allowing a greater period of time after handover during which any latent defects may be identified as to the contractor’s account. 

As explained above, limitation periods represent an exception to the general principle of non-retroactivity within the 2026 CTL, and any limitation period that commenced prior to 1 June 2026 will become subject to the new limitation period set out in the 2026 CTL. Parties should therefore be aware that latent defect limitation periods that are set to expire shortly after 1 June 2026 may receive a ‘second wind’ if there is no alternative agreement or if the alternative agreement falls below the new statutory minimum of one year. 

Notice provisions

The 1985 CTL does not make any provision for the giving of notices in the specific context of a construction project. However, Article 816(3) of the new law now requires contractors (where the contract does not provide otherwise) to "immediately notify" the employer if defects occur or appear in any materials provided by the employer during performance of the work or if other factors arise that would impede performance of the work in suitable conditions. 

Article 816(3) goes on to say that if the contractor fails to give notice, they will be liable for all consequences arising from their negligence. While this provision will only apply if the contract is silent (and most contracts do contain notice provisions), it is (where applicable) likely to be seen as change in favour of employers, with a greater burden on contractors to ensure that timely and sufficiently detailed notice is given of any issues that might impede performance.  

Remedies for defective work

Article 877 of the 1985 CTL permits an employer to apply to the court for permission to terminate a contract or engage an alternative contractor to complete the work at the original contractor’s expense if the work is defective and the original contractor refuses to carry out defect rectification works within a reasonable time. 

Article 818 of the 2026 CTL simplifies this procedure and allows an employer to rescind the contract or pass the work on to a new contractor at the original contractor’s expense without first needing to apply to the court. 

How can the industry prepare for the change?

The provisions of the 1985 CTL will continue to apply to any contracts dated earlier than 1 June 2026 (other than in respect of minimum limitation periods). However, any companies expecting to enter new construction contracts from 1 June 2026 should take note. In most cases, the changes will only apply where the contract is silent, but all parties should be aware of the clearer indication of the UAE courts' capacity to step in and alter the agreement of the parties both in relation to liquidated damages and also in “exceptional circumstances”. 

Parties should also ensure that they are aware of the revised notice period for latent defects and, for contractors, that notices are promptly given to the employer to minimise liability arising out of defective employer supplied equipment or impacts on progress of the works arising due to causes outside the contractor's control. 

Our team of highly experienced construction lawyers have collectively spent decades in the Middle East and are experienced in advising on the whole lifecycle of a project, from initial project conception through to project decommissioning and all stages in between. Please get in touch if you have any questions about how the 2026 CTL may impact your business in the region.