Terminating Construction Contracts under the UAE's New Civil Code

The UAE's New Civil Code (Federal Decree-Law No. 25 of 2025) came into force on 1 June 2026, introducing meaningful changes to the muqawala regime governing construction contracts. Chief among them is Article 836, which establishes a statutory right of employer termination for convenience and codifies a principle that UAE courts had previously developed as a judicial exception. In our latest article, we set out the changes the New Civil Code brings to the rules on termination of muqawala contracts and consider the practical implications for parties to UAE construction contracts. 

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Federal Decree Law No. 25 of 2025, the new Civil Code, came into force on 1 June 2026, replacing Federal Law No. 5 of 1985, the Old Civil Code. The new Civil Code applies to contracts entered into on or after 1 June 2026. But contracts entered into before that date continue to be governed by the old Civil Code. Termination rights are among the most significant provisions in any construction contract. A new Civil Code addresses termination of Mukawala contracts, that is, contracts for works, including in the following circumstances. Termination for contractor default, withdrawal for cost overruns on unit price contracts, termination for convenience, and destruction of the works. In this article, we briefly elaborate on these grounds for termination and also highlight how they depart from the position under the old civil code. What remains the same? The grounds for extinction of the Mukawala are unaffected. Article 834, Old Article 892, extinguishes the contract upon completion of the agreed work, by mutual consent, or by court order. Article 835, Old Article 893, permits either party to seek rescision where a supervening impediment prevents performance. The provisions on the contractor's death and incapacity. Article 838, Old Article 896, and on circumstances preventing completion outside the contractor's control. Article 839, Old Article 894, are carried over to the new Civil Code without substantive change. Termination for contractor default. Position under the old Civil Code. Under the old Article 877, where the contractor was performing defectively or in breach of the contract, the employer could serve notice requiring rectification within a reasonable period. If that period expired without adequate remedy, the employer was required to petition the court to rescind the contract or to engage a replacement contractor at the breaching contractor's expense. In other words, the old civil code did not provide for unilateral employer termination for default. Position under the new Civil Code. Article 818 preserves the structure of the old Article 877, but strengthens the employer's position. Article 818, 2. Permits the employer to serve notice requiring rectification within a reasonable period, and, if that period expires without adequate remedy, the employer may, without reference to the court, rescind the contract or engage a replacement contractor to complete or correct the work at the first contractor's expense. Article 818. is new. It dispenses with a notice and rectification period, permitting the employer to seek immediate rescission where rectification of defective work is impossible or contrary to the contract terms. The contractor's delay in commencing or completing the work makes timely completion absolutely unlikely. The contractor's conduct indicates an intention not to perform. Or the contractor commits an act rendering performance impossible. The threshold of absolutely unlikely is a high bar, and its calibration by the courts remains to be seen. Employers should note that contemporaneous records and notices will be central to reliance on Article 818. The termination for default provision only addresses the employer's right to terminate due to contractor default. There is no equivalent provision entitling the contractor to terminate where the employer is in default. In such circumstances, the contractor would need to rely on the general bilateral contract provisions in the new Civil Code. Cost overruns on unit price contracts. Position under the old Civil Code. Under the old Article 886, 1. The contractor, in the context of a unit price contract, was required to notify the employer if the cost of executing the agreed design would exceed the estimate. Failure to do so forfeited the contractor's right to recover the excess. Where the excess was considerable, an objective threshold, the employer could withdraw from the contract and suspend execution. Position under the new civil code. Article 828, 1, of the new Civil Code carries over the contractor's notification obligation without substantive change. The key change lies in Article 828, 2, which replaces the objective considerable threshold with whether the excess is burdensome to the employer. Where the threshold is met, the employer may withdraw and suspend execution without delay, compensating the contractor for work completed at contract rates, or require the contractor to continue against an undertaking to pay the full increase. The shift from considerable to burdensome moves the test from an objective standard to arguably a more subjective one, but it remains to be seen how the burdensome threshold will be applied in practice. Termination for convenience. Position under the old civil code. The old civil code contained no express statutory right for the employer to terminate a Mukawala contract for convenience. The general rule was governed by the old Article 267, under which unilateral termination had no legal effect absent mutual consent, court order, or provision of law. Where the contract contained an express termination for convenience clause, that clause operated within the mutual consent gateway of the old Article 267 and was enforceable on its terms. Where the contract was silent, an employer wishing to terminate without contractor default was in a more difficult position and would require the agreement of the contractor to such a termination. The UAE courts addressed the difficulty by developing a Mukawala-specific exception to Article 267, drawn by analogy from Article 663 of the Egyptian Civil Code. In recognition of the long-term nature of construction works and the potential for circumstances to change between formation and completion, the employer was held entitled to terminate for convenience, subject to compensating the contractor for expenses incurred, the value of work executed, and the profit the contractor would have made had the work been completed. See Dubai Court of Cassation case number 223 of 2023 and Dubai Court of Cassation numbers 218-2005 and 248-2005. Position under the new civil code. In a departure from the old civil code, Article 836 codifies the employer's entitlement to terminate a Mukawala contract for its convenience. Article 836 permits the employer to withdraw from the contract and suspend performance at any time. Subject to compensating the contractor for costs incurred, work completed, and what the contractor would have earned had the work been completed, the court may reduce the compensation attributable to lost profit where reasonable, by deducting savings the contractor made as a result of the termination and earnings the contractor secured by deploying their time elsewhere. Article 836 codifies established judicial practice. Its compensation framework, costs, work executed, what the contractor would have earned had the work been completed, tracks what the courts had been ordering, and the judicial discretion to reduce the amount attributable to an earned profit on equitable grounds tracks the courts's existing approach to mitigation. The practical significance is threefold. 1. It removes the uncertainty of relying on a judicially created exception drawn from Egyptian law. Parties no longer need to argue the foundation of the right, only its application. 2. It elevates the compensation framework from judicial discretion to statutory entitlement, strengthening the contractor's position on quantum and narrowing the scope for argument over heads of loss. 3. It sets a statutory benchmark against which contractual termination for convenience clauses may be measured. Interaction with contractual clauses. Standard market practice on convenience termination typically limits the contractor's recovery to payment for works executed to date, subject to set off, and excludes what the contractor would have earned had the work been completed. Article 836 entitles the contractor to what it would have earned had the work been completed as a matter of statute, subject only to judicial reduction. However, this entitlement, including any loss of profit, can be contracted out of. Where the contract is silent and Article 836 applies, contractors will be in a stronger position than typical contractual language would afford them. Force majeure and risk of destruction. Position under the old civil code. The old civil code contained no equivalent provision dealing with the destruction of the works before completion. The position was governed by the contract, by general provisions on force majeure under old Article 273, and by the party's insurance arrangements. Position under the new civil code. Article 837 is new and addresses the destruction of the works before completion as follows. Where the works are destroyed by force major before handover, the contractor cannot claim payment or reimbursement of expenses, and the loss of materials lies with whichever party supplied them. Where the works are destroyed before handover, or the destruction is attributable to the contractor's fault, the employer is entitled to compensation. Whether works are destroyed after the contractor has handed them over to the employer, or the destruction is attributable to the employer's fault. The contractor is entitled to the contract price and damages as appropriate. The provision codifies a risk allocation framework for destruction scenarios that previously had to be addressed solely through contract. Conclusion. The new civil code introduces important developments for construction projects in the UAE. Articles 818 and 828 strengthen the employer's position by expanding termination rights in cases of contractor default and cost overruns. Article 836 places termination for convenience on a clear statutory footing and confirms that contractors may, in principle, recover what they would have earned had the work been completed following such termination. Article 837 introduces a new statutory framework dealing with destruction of the works before completion. Whilst many existing principles remain unchanged, these provisions are likely to influence both contract drafting and dispute strategy in the years ahead. Parties entering into construction contracts should therefore review their termination, suspension, compensation, and risk allocation provisions carefully to ensure they are aligned with the new statutory framework.