Rewriting the foundations: Key changes under UAE Federal Decree Law No. 25 of 2025
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On 1 June 2026, the United Arab Emirates' new civil code (Federal Decree Law No. 25 of 2025) (the "New Civil Code") came into force, replacing Federal Law No. 5 of 1985 (the "Old Civil Code"). The new legislation reflects the evolution of the legal, commercial and regulatory landscape over the past four decades, including in respect of construction or muqawala projects.
The New Civil Code brings the UAE's civil law framework into closer alignment with recent legislative developments across the region, whilst reinforcing the UAE's position as a sophisticated and attractive jurisdiction for dispute resolution and commercial activity. The legislation introduces a number of desirable reforms, including in relation to contractual interpretation, pre-contractual negotiations, framework agreements and other foundational principles.
This article examines some of the principal amendments introduced in the New Civil Code and highlights the key reforms expected to impact contractual relationships and dispute resolution in the UAE.
Pre-contractual negotiations: the duty to act in good faith and disclose
Under the Old Civil Code a duty of good faith arose primarily at the contract performance stage, requiring parties to perform their obligations in accordance with a manner consistent with the requirements of good faith.
The New Civil Code now codifies a series of duties that parties are to comply with during all stages of pre-contractual negotiations. Importantly, Article 121 of the New Civil Code requires that pre-contractual negotiations, including their conduct and termination, be in accordance with the requirements of good faith, with any failure to do so giving rise to liability for compensation for actual loss suffered.
Notably, Article 121 states that a deliberate failure to provide a material statement affecting the validity of the contract is an example of bad faith. Whilst express guidance on the definition of good faith more generally would have allowed for increased certainty in the negotiation and performance of contractual relations, the inclusion of what constitutes bad faith is a welcome addition in the New Civil Code insofar as it outlines to parties the type of conduct that will be deemed a breach of the duty of good faith.
With respect to disclosure practices during pre-contractual negotiations, Article 122 of the New Civil Code now imposes a strict obligation on parties to disclose information that is material and decisive to the consent of the other party. In addition, the law specifies that such information is deemed material and decisive if it has a direct and necessary connection to the content of the contract or the status of the parties.
The expansion of these obligations is important: by establishing defined expectations for pre-contractual negotiations and demarcating the parties' duties in respect thereof, parties are encouraged to treat negotiations at the pre-contractual stage seriously and transparently, which can increase business certainty and continuity whilst also reducing the scope for disputes.
Choice of governing law: the parties' choice reigns supreme
Both the Old Civil Code and the New Civil Code recognise the parties' freedom to designate the governing law of their contracts, with the law stepping in only where no such choice has been made. The waterfall structure is retained in the New Civil Code: absent a choice of law, the law of the parties' common domicile applies.
The key change introduced by Article 19 of the New Civil Code concerns the secondary fallback where parties are domiciled in different states and have not agreed on a governing law. Under the Old Civil Code, the law of the place of conclusion of the contract applied in such circumstances. The New Civil Code replaces this with the law of the place where the principal obligation of the contract is to be performed.
Framework agreements: a new breed
The Old Civil Code did not contain express provisions that formally recognized and regulated the operation of framework agreements. This has now changed with the New Civil Code.
Under Article 138 of the New Civil Code, parties can define essential terms pursuant to which their future contracts will be governed and unless otherwise agreed (expressly or impliedly), the framework agreement is taken to be part of those future contracts. By predefining key provisions that regulate the parties' relationship, the recognition of the framework agreement is anticipated to streamline parties' subsequent agreements whilst also reducing the time and cost of negotiation. Parties should, however, be careful to ensure that the provisions of their subsequent agreements do not conflict with those of the framework agreement to avoid the type of uncertainty that can escalate into lengthy and costly disputes.
Muqawala contracts: a tighter regime
Whilst the Old Civil Code includes provisions relating to muqawala contracts, or contracts for works, the New Civil Code updates the provisions, and enhances the governing framework for performance, risk allocation and termination.
Most notable of these changes:
1. Notice: Article 816(3) of the New Civil Code requires contractors to give immediate notice to the employer of defects in any employer-supplied materials or other factors that may impede the contractor's ability to perform the works. Where the contractor fails to do so, it will be liable for all consequences arising from that negligence.
2. Remedying defective work: Article 818(2) of the New Civil Code formally codifies what is a standard provision of construction contracts: an employer can require its contractor to remedy defective works within a reasonable period, failing which the employer may rescind the contract or otherwise engage a replacement contractor to remedy the works at the original contractor's expense.
The right of an employer to put a contractor on notice to remedy defective work and, upon failure to comply, to rescind the contract or engage a replacement contractor at the original contractor's expense is not new: an equivalent right existed under Article 877 of the Old Civil Code. However, Article 818 of the New Civil Code introduces three notable changes: (i) the employer may now exercise these remedies directly, without the need to obtain a court order; (ii) the grounds for immediate rescission have been substantially expanded beyond the Old Civil Code's single ground of impossibility of remedy. The new grounds for rescission include where correcting the defects would be contrary to contractual terms, where the contractor's conduct indicates an intention not to perform, and where delays make timely completion absolutely unlikely; and (iii) the employer must formally "establish the situation" before exercising its remedies upon expiry of the notice period.
3. Decennial liability: Articles 821 to 824 of the New Civil Code expand the provisions for strict decennial liability. These provisions now make express reference to engineers and contractors being jointly and severally liable for any total or partial collapse of a structure for a ten-year period (rather than merely jointly liable as stated in the Old Civil Code). Importantly subcontractors are excluded from the scope of decennial liability.
4. Termination: Article 836 of the New Civil Code introduces a new express statutory right for an employer to terminate a construction contract for convenience prior to completion of the works, provided that the contractor is compensated for all expenses incurred, work completed and what it could have earned had it completed the work. Compensation is, however, subject to equitable reduction depending on the circumstances.
5. Unforeseen circumstances in lump sum contracts: Article 829(3) of the New Civil Code introduces a new express provision specific to lump-sum construction contracts providing that the court may extend the time for performance, adjust the contract price or rescind the contract altogether where exceptional circumstances that could not reasonably have been anticipated at the time of contracting arise and the financial basis on which the agreement was founded thereby collapses. In contrast to the provision on hardship discussed below, however, Article 829(3) is drafted in non-mandatory terms.
Taken together, the changes to the muqawala provisions under the New Civil Code provide a more structured, transparent and legally certain framework for the performance of construction and engineering contracts in the UAE. Parties in the construction industry – whether employers, contractors or subcontractors – should carefully review their standard form agreements and consider how these new provisions interact with their existing and future contractual arrangements.
Liquidated or pre-agreed damages
The Old Civil Code made provision for a court to adjust a liquidated damages clause to reflect the actual prejudice sustained: however, it did not expressly specify the circumstances in which this power can and should be exercised.
Article 340 of the New Civil Code now provides further clarity developed by jurisprudence on the Old Civil Code. The New Civil Code contains express provisions that a court may reduce liquidated damages where: (i) the debtor proves the assessment was exaggerated or that obligation has been partially performed; (ii) the creditor, by their own fault, contributed to or aggravated the harm. Article 340(4) also makes express provision for a creditor to claim amounts exceeding the agreed compensation if they prove that the debtor committed fraud or gross fault.
Parties should therefore exercise care on two fronts: avoiding exaggerated liquidated damages amounts that invite judicial reduction; and ensuring that their own conduct does not give rise to a contributory fault argument that could reduce or defeat an otherwise valid claim.
Hardship of performance
Under the Old Civil Code, a court was empowered to reduce an onerous obligation where exceptional circumstances arise, but only to a reasonable limit and only where justice required.
Article 224 of the New Civil Code now goes further. First, courts are not only empowered to reduce the obligation but have the discretion to order rescission of the contract in its entirety. Second, the qualifying condition that "justice so requires" has been removed, broadening judicial discretion. Third, and perhaps most importantly, the provision is stated to be mandatory: any agreement purporting to exclude or limit the court's power under Article 224 is null and void, meaning parties cannot contract out of this regime.
Conclusion
The introduction of the New Civil Code is regarded as a positive development and demonstrates the UAE's ongoing commitment to maintaining a modernised, comprehensive and cohesive legal framework that regulates civil transactions. While it remains to be seen how the new provisions will be interpreted and applied by the UAE Courts in practice, the reforms are expected to enhance contractual certainty going forward.
Parties are encouraged to familiarise themselves with its provisions, especially in respect of pre-contractual negotiation conduct, disclosure protocols and any default statutory rights and remedies.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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