Examining the New UAE Civil Code—Part 4: Compensation and Damages

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.  Parts 1–3 of this series examined, respectively, the New Civil Code’s crisis‑relief mechanisms (force majeure and exceptional circumstances), principal provisions for work contracts (muqawala),and pillars of contract negotiation, formation and interpretation.

This Part 4 examines key features of the New Civil Code’s remedies regime.  For commercial parties—particularly those involved in complex construction, energy and infrastructure projects—the key theme is not a wholesale departure from familiar UAE law principles, but a sharper statutory framework for when courts and tribunals may substitute monetary compensation for performance, recalibrate agreed compensation, or police attempts to exclude liability for harmful acts.

The primacy of specific performance

As with the Old Civil Code, under the New Civil Code, specific performance remains the default remedy for breach of a contractual obligation.  Article 331(1) of the New Civil Code provides that, where a contract is breached, a creditor may seek an order compelling specific performance. 

However, specific performance remains only the default position—a court or tribunal may instead order compensation where specific performance is impossible or unlawful (Article 336 of the New Civil Code). Additionally, under the New Civil Code, proportionality is a relevant consideration in respect of any request for specific performance.  Article 331(2) introduces a proportionality-based discretion to limit the creditor to monetary compensation (Article 331(2) of the New Civil Code):

• where specific performance would be unduly onerous to the debtor relative to the benefit to the creditor; and
• provided that limiting the creditor to monetary compensation would not cause substantial prejudice to the creditor.

Why is this important?

The New Civil Code’s proportionality test will be familiar to many practitioners, albeit in a different context.  It reflects the proportionality ground of the abuse of rights doctrine in Article 106 of the Old and New Civil Codes, under which the exercise of a right may be unlawful where the anticipated interests are disproportionate to the harm inflicted on others (Article 106(2)(c) of the New Civil Code; see our examination of this doctrine in Part 1 of this series). It further reflects other proportionality considerations relevant to the assessment of damages as discussed below.

That theme is also visible in the New Civil Code’s contract interpretation and negotiation provisions, which emphasise justice, good faith, the factual circumstances of the contract and good-faith constraints on pre-contractual conduct (See, for example, Articles 120 and 121 of the New Civil Code, which we examined in Part 3 of this series). For example, a court or tribunal might prefer compensation where it would allow a creditor to purchase locally sourced substitute materials where the time and costs of supplying foreign-sourced materials would be excessively onerous and impractical to the debtor.

Accordingly, contracts should be drafted with these remedies in mind.  Where specific performance is genuinely essential—for example, in respect of intellectual property assignments, data migration obligations, transitional services, bespoke equipment fabrication or early works packages upon which downstream contractors depend—the parties should expressly articulate the critical nature of the obligation and why monetary compensation would be an inadequate substitute.

This drafting serves two purposes:

• first, it establishes the evidentiary foundation for demonstrating the “substantial prejudice” that would result from an award of damages in lieu of performance under Article 331(2); and
• second, it signals to a court or tribunal that the proportionality balance should favour enforcement in kind.

Where appropriate, parties may also consider agreed fallback monetary remedies calibrated to the true cost of non-performance, thereby reducing uncertainty around judicial substitution whilst preserving the primacy of performance.  Any such agreement will, however, remain subject to the New Civil Code’s controls on agreed compensation, which are examined further below.

Damages in lieu of specific performance

Under the New Civil Code, where a court or tribunal declines specific performance, or where specific performance is unavailable, contractual compensation is framed by three related provisions:

• Article 333 requires the court, when determining compensation in the context of specific performance or continued refusal to perform, to take into account the damage suffered by the creditor and the debtor’s obstinacy.
• Article 336 provides that compensation is due where specific performance becomes impossible, or where the debtor delays performance or performs partially or defectively, unless the debtor proves a foreign cause beyond its control.
• Article 339 provides that, if compensation is neither fixed by law nor by contract, the court will assess an amount equal to the actual damage suffered.

Why is this important?

These provisions refine, rather than revolutionise, the Old Civil Code’s position.  In particular, Article 339 adopts a position consistent with other compensation provisions by focusing assessment on the “actual damage suffered”. The Old Civil Code imposed a temporal limitation—damage was to be assessed at the time it was suffered (Article 389 of the Old Civil Code).

This temporal anchor could have caused recoverability issues in cases where damages were assessed by courts or tribunals months or years after the breach.  In practical terms, the New Civil Code’s formulation reflects existing practices:  it aligns damages assessment with economic reality at the point of adjudication, giving courts and tribunals latitude to capture costs and losses that materialise over extended periods.

Building and continuously updating the evidential spine of a damages claim will remain key under the New Civil Code’s damages provisions.  Contracting parties should track finance costs as they accrue, document replacement-procurement pricing at successive intervals, and log management time with sufficient granularity to support a claim that reflects actual harm over time rather than a snapshot frozen at breach. For debtors, mitigation steps and any creditor-contributed impediments—late approvals, access issues or specification changes—and their evolution over time should be documented. As always, notice not just of the breach, but also of the damage suffered, will be key, both contractually and under the New Civil Code (see Part 2 of our series, where we examined a new notice requirement under the New Civil Code’s muqawala provisions).

Agreed damages (liquidated damages)

Many commercial contracts in the UAE contain provisions for agreed compensation in the event of breach.  The most familiar form of such provisions are liquidated damages clauses, which are almost ubiquitous in construction and engineering contracts in the UAE.

Article 340 of the New Civil Code maintains UAE law’s recognition of contracting parties’ right to agree compensation for breach.  However, courts and tribunals are authorised to reduce agreed compensation in the following circumstances:

• the debtor proves the sum is excessive (Article 340(2) of the New Civil Code);
• the underlying obligation has been partially performed such that the agreed amount exceeds actual loss (Article 340(2) of the New Civil Code); or
• the creditor, by fault, contributed to or aggravated the harm (Article 340(3) of the New Civil Code).

Further, courts and tribunals may decline compensation entirely where the creditor’s fault significantly exceeds the debtor’s fault (Article 340(3) of the New Civil Code).  Additionally, agreed compensation can only be increased where the debtor commits fraud or gross fault (Article 340(4) of the New Civil Code).

Any contractual provision seeking to exclude Article 340 will be void (Article 340(5) of the New Civil Code).

Why is this important?

Article 340 replaces the Old Civil Code’s (Article 390(2) of the Old Civil Code) broad, general judicial discretion with a more structured adjustment framework.  Discretion under the Old Civil Code could be exercised to adjust agreed compensation up or down.  Under the New Civil Code, however, the discretion to adjust up has been circumscribed by a materially higher threshold than under the Old Civil Code.

Article 340 effectively introduces a proportionality test, engaging when the agreed compensation is excessive by reference to the actual loss.  This test reflects similar proportionality considerations elsewhere in the New Civil Code, as well as the broader objective of achieving fair and just outcomes.

The proportionality test further reflects the approach actually taken under the Old Civil Code. While courts and tribunals were “in all cases” authorised to adjust agreed compensation to equal the actual loss, they would typically consider exercising that power only where the agreed compensation was disproportionate to the actual loss.

Nevertheless, the codification of this approach in the New Civil Code will be welcomed: the express gateways in Article 340 provide greater certainty and less scope for anomalous outcomes. They should also prompt contracting parties to review their liquidated damages provisions to ensure that those gateways are not engaged.

For employers, it will be important as ever to ensure that liquidated damages calculations represent a genuine pre-estimate of losses likely to accrue from the relevant breach.  This is for two primary reasons:

• first, to ensure that agreed liquidated damages are not excessive. While this has always been important—even though the debtor bears the burden of demonstrating excessiveness—the express criteria for a reduction in agreed liquidated damages bring this into sharper focus. Liquidated damages rates should therefore not be cut and pasted from previous contracts or projects: the financing, management, lost revenue and other assumptions should be made and documented bespoke for each project; and
• second, because the scope for any increase above the agreed damages has been significantly circumscribed. The threshold is high and is unlikely to be met in a typical case of delay, for example. This puts even more onus on employers to ensure that their liquidated damages calculations are as accurate as possible: any underestimation will be at the employer’s cost in all but exceptional circumstances.

A less-welcome consequence is that the limited scope for upward adjustment may incentivise some employers to inflate agreed liquidated damages: if the more likely judicial intervention is a downward adjustment, a higher starting point may soften the effect of any reduction.

Contractors should therefore scrutinise and challenge liquidated damages calculations at the negotiation stage to satisfy themselves that they represent a genuine pre-estimate of loss.  The New Civil Code’s provisions requiring good faith in negotiations, and disclosure of essential and decisive information (see Part 3 of our series), are likely to give contractors a firmer basis to demand transparency in relation to liquidated damages calculations.  Otherwise, contractors’ document management and record-keeping will continue to be key in demonstrating employer contribution to delays and losses, which may justify a reduction under Article 340.

Compensation for harmful acts

The New Civil Code’s provisions regarding harmful acts (tort/delict) preserve and clarify core principles of UAE law. 

Fundamentally, a party causing harm to another remains liable to make good that harm (Article 246 of the New Civil Code).  The distinction between harm caused directly and harm caused by causation remains, with liability for harm caused by causation depending on fault-based criteria (Article 247 of the New Civil Code). Similarly, liability for moral damage (Infringement on another's freedom, honour, reputation, social standing or financial status constitutes moral harm) is maintained under the New Civil Code (Article 254(1) of the New Civil Code). 

The approach to the assessment of damages for harmful acts remains familiar: in all cases, compensation will be assessed by reference to the loss suffered and loss of profit, provided that this is a natural consequence of the harmful act (Article 255 of the New Civil Code).

Article 257 of the New Civil Code is particularly important.  While it reflects the existing position that liability for harmful acts cannot be limited or excluded, contracting parties may agree to increase such liability.  In other words, exemption and reduction are prohibited; aggravation is permissible.

Why is this important?

For commercial parties, the practical point is that liability drafting needs to distinguish carefully between contractual and non-contractual claims.

A contractual cap can still regulate contractual liability, but Article 257 makes any condition that exempts or mitigates liability arising from a harmful act void.

Attempts to apply one aggregate cap to “all liability however arising” should therefore be treated with caution in onshore UAE-law contracts.

That does not mean parties are unable to manage tort risk: they should define the scope of contractual duties, the information relied upon and the assumptions each party has independently verified.

In asset, project and advisory arrangements, reliance language, non-advisory statements and express allocation of responsibility can help reduce arguments that a separate non-contractual duty arose on the same facts.

Where parties intend a higher standard—such as an indemnity or broader heads of loss—they should say so expressly, because Article 257 permits aggravation of harmful-act liability.

Insurance should also be calibrated to non-contractual exposures, including negligent harmful acts and third-party claims, rather than only to the contractual liability cap.

What should you be doing?

From a practical perspective, commercial parties should now treat remedies drafting as a project-management and evidence-management exercise, not simply a boilerplate allocation of risk. Key steps include:

• identifying obligations for which specific performance is essential and recording why damages would not be an adequate substitute;
• building a record of actual loss from the outset, including finance costs, replacement procurement, management time, notices and mitigation steps;
• preparing project-specific liquidated damages calculations, and keeping the assumptions updated and available for negotiation and dispute purposes;
• documenting any employer- or creditor-caused delay, access issue or specification change that may support reduction or refusal of agreed compensation; and
• separating contractual caps and exclusions from tort exposure, , defining duty and reliance boundaries clearly, and ensuring insurance responds to realistic non-contractual losses.