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Contract Disputes and Delays in Delivery in the UAE
If a contractor delays handing over a project, fails to complete the works, or performs them defectively, the law in the United Arab Emirates grants the employer clear rights. These begin with serving notice on the contractor and allowing a reasonable period to remedy the breach, and extend to rescinding the construction contract or engaging another contractor to finish the work at the defaulting contractor’s expense, together with claiming compensation and enforcing any agreed delay penalty (liquidated damages). Construction disputes are among the most common cases in the UAE, and typically revolve around delay, payments, variations, defects, termination, and arbitration. In this guide from AWADH ALMHEIRI LAW FIRM AND LEGAL CONSULTATIONS we explain the law’s position on each situation and what you should do to protect your rights.
Construction Contract Disputes and Delivery Delays in the UAE: Your Legal Rights and Remedies
The Legal Framework Governing Construction Contracts After the Civil Code Reform
A construction contract (muqawala) in the UAE is governed by the Civil Transactions Law. Since 1 June 2026, the new Civil Transactions Law issued by Federal Decree-Law No. 25 of 2025 has entered into force, replacing the former Civil Code, Federal Law No. 5 of 1985. The new law defines muqawala as a contract whereby one party undertakes to make a thing or perform work in return for consideration undertaken by the other party.
An important transitional point should be noted: the provisions of the 1985 law continue to apply to contracts concluded before 1 June 2026, whereas contracts concluded after that date are governed by the new law. Accordingly, determining which law applies to your dispute starts from the very date the construction contract was concluded.
Contractor’s Delay in Delivery and the Delay Penalty (Liquidated Damages)
The new Civil Transactions Law obliges the contractor to complete the work in accordance with the terms of the contract and within the agreed period; where no period is agreed, completion must occur within the reasonable time required by the nature of the work. A contractor’s delay beyond the deadline therefore constitutes a breach that engages liability.
Where the parties have agreed in advance on a delay penalty for each day of delay — known as “liquidated damages” or agreed compensation — that agreement is valid and binding. However, the law grants the court the power to reduce this penalty if the contractor proves the estimate was exaggerated or that the obligation was partly performed; the employer may also claim more than the agreed penalty if it proves the delay resulted from fraud or gross fault. Where no compensation is fixed in the contract, the court assesses it at an amount equal to the actual damage sustained.
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The Contractor Did Not Finish the Work or Abandoned the Project: What Can the Employer Do?
If, during execution, it appears that the contractor is performing the work defectively or contrary to the terms of the contract, the law provides a graduated path: the employer first serves a notice (i’dhar) requiring compliance with the terms and correction of the non-conforming works within a reasonable period it specifies. If that period lapses without correction, the employer may — after proving the situation — rescind the contract or engage another contractor to complete and correct the work at the first contractor’s expense.
The new law even permits requesting immediate rescission without the need to set a deadline in more serious cases: where the defect in the method of execution is irreparable, where the contractor has delayed the start or completion to a degree that leaves no hope of finishing the work within the agreed period, where the contractor has taken a course indicating an intention not to perform, or has done something that renders performance impossible. This is precisely what applies, in practice, to anyone searching for a solution after “the contractor took the payment and did not finish the work.”
Rescission of the Construction Contract and Its Effect on Amounts Due
A muqawala contract terminates upon completion of the agreed work, or by rescission whether by agreement or by court order. The new law grants the employer the right to withdraw from the contract and suspend performance at any time before completion, provided it compensates the contractor for all expenses incurred, the work carried out, and the profit the contractor would have earned had the work been completed. The court may reduce the lost-profit compensation where the circumstances make that just, and must in particular deduct what the contractor saved, or earned by using its time on other work.
Contractor’s Payment Entitlements and Unpaid Instalments
Conversely, the law protects the contractor’s entitlements. As a rule, the employer must pay the consideration upon taking delivery of the work unless otherwise agreed. In contracts priced on a unit basis, the employer must pay the contractor a share of the consideration corresponding to the work completed, after inspection and acceptance. The contractor may also retain (exercise a lien over) the item in which its work has left an effect until it recovers the sum due — a safeguard against non-payment of the contractor’s dues or delayed instalments.
Construction Defects, Poor Workmanship, and Decennial (Ten-Year) Liability
Where the subject of the contract is the erection of buildings or other fixed installations designed by an engineer and executed by the contractor under the engineer’s supervision, both are jointly liable for ten years for any total or partial collapse, and for any defect that threatens the building’s stability and safety. The guarantee period runs from the date the employer takes delivery. This liability is a matter of public order: any clause intended to exempt the engineer or contractor from it, or to limit it, is void.
A limitation period applies to this guarantee: a claim under the decennial guarantee is not heard after three years from the occurrence of the collapse or the discovery of the defect. Among the innovations of the new law, the decennial liability rules do not extend to any right of recourse the contractor may have against its subcontractors — which makes careful contractual regulation of that relationship essential.
Additional Works, Design Changes, and Exceptional Circumstances
In a lump-sum contract concluded on the basis of an agreed design for a fixed price, the contractor may not claim any increase in the price even if the prices of materials or the wages of workers rise. Nor is the contractor entitled to an increase for a variation or addition to the design unless it is due to the employer’s fault, or was made with the employer’s authorisation and an agreement on the increase. It is therefore advisable to document every variation order in writing before it is carried out.
The new law, however, introduced a remedy for the disruption of contractual balance: where the balance between the parties’ obligations collapses because of general exceptional circumstances that could not have been foreseen at the time of contracting, undermining the financial basis on which the contract rested, the court may restore the contractual balance — including by extending the period of performance, increasing or reducing the price, or ordering rescission of the contract.
Resolving the Dispute: Litigation, Arbitration, and FIDIC Contracts
Construction disputes are resolved either before the competent courts, or through arbitration where the contract contains an arbitration clause. Many major projects in the UAE adopt FIDIC forms, which contain precise mechanisms and time bars for notices and claims. These provisions should be reviewed carefully, because failure to submit notices within their time limits may forfeit the right to claim. Choosing the most suitable route — litigation or arbitration — directly affects the speed and cost of the dispute and the enforceability of the award.
Practical Tips to Protect Your Rights Before a Dispute
A Written, Detailed Contract Set out the scope of work, completion period, payment schedule, delay penalty, and guarantees in writing; a clear contract wins half the battle in any dispute. | A Documented Notice Before rescinding or claiming, serve a formal notice proving the breach or delay and granting a cure period — it is a precondition for many rights. |
Link Payments to Progress Tie the release of instalments to completed, inspected milestones, and avoid large unsecured advance payments. | Document Works and Defects Keep drawings, handover minutes, and photos of work stages for at least ten years — they are the basis for proving or resisting defects. |
Legal References
Provisions of the muqawala contract: Articles 812 to 839. Completion within the agreed period, notice, rescission, and engaging another contractor at the contractor’s expense, and delay: Article 818. The contractor’s duty to notify of anything impeding proper performance: Article 816. Lump-sum contracts, variations, and exceptional circumstances (extension of time and adjustment of price): Article 829. The employer’s withdrawal from the contract and compensation: Article 836. Decennial liability: Article 821; nullity of any exemption clause: Article 823; three-year limitation on the guarantee claim: Article 824. Liquidated damages (agreed compensation) and the court’s power to adjust it: Article 340; assessment of compensation where unfixed: Article 339.
Provisions of the muqawala contract: Articles 872 to 896. Liquidated damages: Article 390. Decennial liability: Articles 880 to 883.
Dubai Law No. 7 of 2025 on the regulation of contracting activities, in respect of projects within the Emirate of Dubai.
Frequently Asked Questions
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