Examining the New UAE Civil Code—Part 2: Muqawala Contracts

On 1 June 2026, the New UAE Civil Code (Federal Decree Law No. 25/2025) entered into force, repealing the Old UAE Civil Code (Federal Law No. 5/1985).

The New Civil Code contains a number of important changes to the law governing civil matters in the UAE, including several that affect commercial relationships.  These include the New Civil Code's provisions relating to muqawala contracts, which will be of most significance to commercial parties in the construction and engineering sectors.¹  These provisions both codify long‑standing practices and introduce innovations that will impact how projects are procured, delivered and disputed.

This article examines the New Civil Code’s muqawala provisions of primary significance to commercial parties in the construction and engineering sectors.  As with Part 1 in this series, our analysis focuses on what is new, what matters, and what parties should do now to preserve their positions and reduce risk.²

Definition and scope of muqawala under the New Civil Code

Under the New Civil Code, the definition and scope of muqawala contracts remains unchanged.³  Further, the New Civil Code’s muqawala provisions are mostly non-mandatory, default rules that apply in the absence of party agreement. 

Given the comprehensive nature of most construction and engineering contracts, the muqawala provisions could, at first glance, appear to have limited significance.  However, the muqawala provisions remain important—not just because some of them are mandatory but also because they provide a legal baseline for drafting choices, as well as default rights and obligations where gaps remain.

In the current climate of significant disruption to the pipeline of multi‑package megaprojects, the New Civil Code’s muqawala provisions create potential opportunities and pitfalls for employers, contractors and the supply chain.

Termination for defective work and non-performance

Under the New Civil Code, contractors remain obliged to complete the works in accordance with the contract.  That obligation now expressly includes the requirement to do so within the contractually agreed period.⁴

Where a contractor’s work is defective, or not in accordance with the contract, the employer has two potential pathways to terminate the contract:

• First, Article 818(2) entitles the employer to serve notice requiring compliance and correction within a reasonable period. If that period expires without rectification, the employer may, “after establishing the facts”, rescind the contract or have another contractor complete or correct the works at the first contractor’s expense.
• Second, Article 818(3) permits the employer to request immediate rescission where:
  • rectification is impossible or inconsistent with the contract;
  • the contractor’s delay makes timely completion “absolutely unlikely”;
  • the contractor indicates an intention not to perform; or
  • the contractor commits an act rendering performance impossible.

Notably, the employer’s right to terminate under Article 818(2) does not require court or tribunal permission (which was a feature of the termination provisions of the Old Civil Code).  It is effectively a three-step process: formal notice, a remedy period, followed by termination in the absence of any remedy.  This new potential termination right is likely to be welcomed by employers, who may find its apparent simplicity attractive.

However, the condition that the employer may engage step-three and terminate only “after establishing the facts” raises significant ambiguity about the circumstances in which an employer may exercise this right.  In practice, an employer seeking to terminate under Article 818(2) will likely “establish the facts” by building its case as it would when exercising a contractual right to terminate for defective work or performance. 

The right to request immediate termination under Article 818(3) will also be a welcome development for employers.  This will particularly be so where any remedy period would be futile and simply exacerbate the employer’s losses—such as where the contractor is significantly delayed or has abandoned the works.

It should be noted that Article 818(3) gives an employer the right only to request termination.  While Article 818(3) does not expressly say so, it is to be inferred that the request must be made to a court or tribunal.  Accordingly, what may seem to be an immediate right to terminate in certain factual situations, is in fact a right subject to court or tribunal oversight (and, therefore, subject to the evidentiary and procedural hurdles inherent in judicial and arbitral processes).

At first glance, Articles 818(2) and (3) give employers simple and expeditious routes to terminate for defective works and non-performance.  However, Articles 818(2) and (3) place a burden on employers to prove their case for termination—they do not confer rights that can be exercised opportunistically or for convenience (as to which see below).  Further, those rights must be exercised in accordance with the requirements of good faith and not abusively.⁵

In practice, termination under Articles 818(2) and (3) is likely to be an option of last resort for many employers and a significant source of disputes.

The employer’s right to terminate for convenience

Codifying a previously judicially recognised right (at least in the Dubai courts), the New Civil Code now provides employers a new right to terminate for convenience. 

Article 836(1) provides that the employer may be “released from the contract and suspend its execution at any time before its completion”—in other words, an employer has a right to terminate for convenience.  However, the employer must compensate the contractor for all expenses incurred, the work completed, and “the profit [the contractor] would have earned if the work had been completed”. Article 836(2) allows courts and tribunals to reduce compensation for lost profit “if the circumstances render such reduction equitable”, particularly by deducting savings made by the contractor as a result of the termination and any gains from redeploying time to other work.

While the FIDIC standard form contracts contain termination for convenience provisions, most FIDIC contracts in the UAE are heavily amended and often delete or unduly circumscribe those provisions.  The recognition and certainty provided by this statutory right to terminate for convenience will largely be welcomed by both employers and contractors—both in terms of recognition of this right and each party’s entitlements.

That said, Article 836’s default application will be an important consideration in contract drafting and negotiations.  Where parties wish to exclude the employer’s right to terminate for convenience, they must not stop short of omitting this right when drafting their contracts—they should instead exclude this right expressly. 

Further, Article 836 says nothing about the return of performance bonds, parent company guarantees, retention money, or any other form of performance security, which are typically dealt with expressly in contractual termination for convenience provisions.  Again, parties wishing to rely upon Article 836 will need to turn their minds to this apparent gap when drafting their contracts or at the time of termination.

Decennial liability clarified—subcontractors excluded

Decennial liability is, as the name suggests, a ten-year liability imposed upon contractors, engineers and architects—it is a strict, mandatory liability that cannot be contractually excluded or limited.⁶

Where the work concerns buildings or other fixed installations designed by an engineer or architect, and executed under the engineer’s or architect’s supervision, the engineer or architect and the contractor are jointly liable for ten years for any total or partial collapse and for defects that threaten the structural integrity and safety of the construction.⁷  The ten‑year period runs from the date of delivery,⁸ and claims must be brought within three years of collapse or discovery of the defect.⁹ The New Civil Code’s decennial liability provisions largely reflect the regime under the Old Civil Code.¹⁰

However, the New Civil Code now expressly provides that decennial liability does not apply “to any right of recourse the contractor may have against subcontractors”.¹¹ The New Civil Code is therefore clear that decennial liability runs between the employer on the one hand and the engineer/architect/contractor on the other, not down the contractual chain.

The practical implication is that the main contractor’s recourse against subcontractors is purely contractual.¹²  This exclusion—which was understood but not expressed in the Old Civil Code—puts a new emphasis on contract drafting and negotiation. 

While most construction contracts (and subcontracts) will contain detailed defect rectification and liability provisions, they may not always address the structural and safety issues addressed by the decennial liability regime.  Many such issues will manifest long after the works have been completed, final accounts have been agreed, performance certificates have been issued and performance securities have been returned.  Moreover, issues falling within the ten-year decennial liability regime may only manifest after the statutory limitation period has expired (generally five years for commercial contracts).¹³

Contractually preserving a main contractor’s recourse in relation to latent structural and safety issues is likely to take on importance.  That is likely to involve extended indemnity, warranty and insurance obligations being imposed on subcontractors, and an increased cost and administrative burden throughout the supply chain.

The contractor’s notice obligations

The New Civil Code imposes a new notice obligation on contractors that may have potentially significant and unintended consequences.

Article 816 of the New Civil Code deals with the contractor’s obligations in respect of employer-issued materials.  Contractors thus have an obligation to preserve employer‑supplied materials, to observe technical standards when using them and to compensate the employer where they become unusable due to the contractor’s negligence.  If defects arise in employer‑supplied materials during execution, the contractor must immediately notify the employer.

Notably, Article 816 contains an obligation that goes far beyond notifying defects in employer-supplied materials.  Article 816(3) requires that if “other factors” emerge that would hinder proper execution of the works, the contractor must immediately notify the employer.  Failure to give such notice makes the contractor liable for all resulting consequences.

Both notice requirements are entirely new features of the New Civil Code.  The requirement to give notice of defects in employer-supplied materials is a natural addition to the pre-existing duties of care and technical compliance requirements.  The requirement to give notice of “other factors” that would hinder proper execution of the works does not fit neatly within Article 816 and may potentially catch many contractors off-guard.

Even as a default provision of UAE law, this requirement also has a potentially wide-ranging effect.  The likely consequence of the catch-all phrase “other factors” is that this requirement will apply to all construction contracts—which, although comprehensive, rarely provide for all “other factors” that might hinder a contractor’s performance.

The consequence of non-compliance with this requirement is potentially just as broad.  The imposition of liability for “all consequences” resulting from a failure to notify could, arguably, extend beyond the direct consequences of the failure to notify and encompass both the contractor’s and the employer’s losses resulting from the hindrance.

This requirement is also likely to add an extra administrative burden due to uncertainties around compliance.  First, what constitutes “immediate” notice in a complex project environment is unclear.  Second, the form and content of the required notice is also unclear.  These uncertainties will only be resolved once Article 816(3) receives judicial treatment.  However, their resolution is likely to be fact‑sensitive and to depend on the contractor’s and employer’s knowledge, the nature, severity and duration of the hindrance, and the existing contractual notice regime (if any).

In any event, contractors should begin:

• to familiarise themselves with this statutory notice requirement; and
• to think proactively about the “other factors”, not dealt with in their contracts, to which this requirement may apply; and
• to think proactively about how they intend to satisfy this requirement.

What Should You Be Doing?

The implementation of the New Civil Code’s muqawala provisions should prompt parties to construction and engineering contracts to take stock of their current contracting and administration arrangements.  For the provisions examined above, contracting parties should at a minimum:

• review standard forms and decide expressly which default muqawala provisions to adopt, refine or exclude;
• review existing notice protocols to ensure project teams understand additional statutory requirements and have appropriate procedures in place;
• address termination for convenience to exclude or modify this right, or to address performance securities and retention money; and
• review existing subcontracting arrangements to address latent structural and safety defects, including extended indemnity, warranty and insurance obligations.

Importantly, contracts subject to the New Civil Code’s muqawala provisions do not exist in a vacuum.  These contracts will also be subject to the New Civil Code’s provisions relating to contract formation and interpretation, as well as other key provisions in the New Civil Code (particularly those which are mandatory).  Any review of existing contracting arrangements should not, therefore, stop at the New Civil Code’s muqawala provisions.

Keep an eye out for Part 3 of our series, where we will be looking at the New Civil Code's provisions relating to contract formation and interpretation affecting all commercial contracts.