Building in the Gulf: What the New Civil Codes Mean for Construction Contracts

The price is fixed. The programme is agreed. Everyone knows what happens if the works are late. Then construction starts – and the comfortable certainties of the signing ceremony begin to disappear.

That is precisely when the UAE’s new Civil Transactions Law and Saudi Arabia’s recent civil-law codification become important.

The changes can broadly be described as clearer employer powers and more explicit financial remedies for contractors.  Employers have a clearer statutory basis for intervening when performance deteriorates and, in the UAE, for bringing a project to an end even without contractor default.  Contractors, meanwhile, have express statutory routes to seek exceptional price relief, challenge agreed damages and recover compensation where an employer elects to discontinue the works.

These are not, however, automatic entitlements.  Each remedy is subject to conditions, and some reflect principles that existed before.  The significance of the reforms lies as much in making the applicable rules clearer and more accessible as in changing their substance.

Three situations illustrate how the new framework may operate in practice: when the price stops working; when performance deteriorates; and when the employer decides to cancel the project.

The comparison is particularly relevant to international projects.  Italian law, familiar to many leading contractors active in the Gulf, provides useful civil-law reference points, while English law – frequently selected for major international construction contracts – demonstrates how the same factual situation can lead to a materially different legal analysis.

1. When the price stops working

Consider an international contractor that has agreed to construct a plant in the Gulf for a lump-sum price.  An exceptional external event disrupts the supply chain and causes costs to increase dramatically.  The assumptions on which the contractor priced the works no longer hold.

The starting point remains important: a bad estimate is generally the contractor’s problem.  A lump-sum contract does not cease to be a lump-sum contract merely because materials, labour or other inputs become more expensive.

Exceptional circumstances, however, may produce a different result.

UAE: a construction-specific hardship remedy

Under the former UAE Civil Transactions Law, Article 887 protected the lump-sum nature of a muqawala contract, while Article 249 provided a general remedy where exceptional and unforeseeable circumstances rendered contractual performance excessively onerous.

The new UAE Civil Transactions Law, enacted by Federal Decree-Law No. 25 of 2025 and effective from 1 June 2026, goes further by placing a specific hardship mechanism within the construction provisions themselves.

Article 829(3) applies where general exceptional circumstances, which could not have been foreseen when the contract was concluded, disrupt the contractual equilibrium and undermine the basis on which the financial assessment of the muqawala was made.

Where that threshold is satisfied, the court has a broad range of possible remedies.  It may restore the contractual equilibrium by extending time, increasing or reducing the contractor’s remuneration, or ultimately rescinding the contract.

The significance of the provision should not be overstated.  It is not a statutory price-escalation clause and does not allow contractors to transfer ordinary commercial risk to employers.  The contractor must establish an exceptional and unforeseeable general circumstance and demonstrate how that event undermined the financial basis on which the contract was priced.

Saudi Arabia: the lump sum remains the starting point

Article 471 of the Saudi Civil Transactions Law adopts a similar distinction.

Ordinary increases in the price of materials, labour or other expenses do not entitle a contractor to increase an agreed lump-sum fee.  However, where general exceptional circumstances that could not have been anticipated disrupt the balance of the parties’ contractual obligations and invalidate the basis on which the price was estimated, the court may restore the contractual balance.

The available remedies include extending the period for performance, increasing or reducing the fee, or terminating the contract.

The comparative position

Italian practitioners will recognise aspects of this approach from Article 1664 of the Italian Civil Code.  The comparison is useful, but it should not be taken too far.  Under Article 1664, unforeseeable changes in material or labour costs must produce a variation exceeding one tenth of the total agreed price, and revision is limited to the excess above that threshold.  That threshold should not be imported into the UAE and Saudi provisions, which establish their own tests.

English law starts from a materially different position.  There is no equivalent general judicial power to reprice a contract merely because performance has become substantially more expensive.  The contractual price-adjustment mechanism, if any, therefore assumes particular importance.  Frustration has a much higher threshold: it requires a radical change in the nature of the contractual obligation and, if established, discharges rather than reprices the contract.

The practical lesson is straightforward.  A contractor contemplating a hardship claim under UAE or Saudi law should preserve the evidence showing how the original price was built up and how the exceptional event affected those assumptions.  Contemporaneous quotations, procurement assumptions, programmes and cost records may become critical evidence.

Equally, a request for renegotiation should not be confused with an entitlement to suspend performance.  Saudi Article 97, for example, expressly prevents a party from simply refusing performance merely because renegotiation has been requested.

2. When performance deteriorates

The same project is now behind programme.  Welds repeatedly fail inspection.  The employer threatens to appoint another contractor to complete the works and charge the resulting costs to the original contractor.

Two separate questions arise: can the employer intervene, and what financial consequences follow?

UAE: stronger and clearer intervention powers

Article 818 of the new UAE Civil Transactions Law represents an important development.

Where the contractor performs defectively or contrary to the contract, the employer may give notice requiring compliance and rectification within a reasonable period.  If the contractor fails to rectify within that period, the employer may, after establishing the relevant facts, seek rescission or appoint another contractor to complete or correct the works at the original contractor’s expense.

The procedural change is significant.  Article 877 of the former UAE Civil Transactions Law expressly referred to obtaining judicial permission before another contractor could be engaged at the defaulting contractor’s expense.  Article 818(2) does not repeat that requirement.

That does not give employers an unrestricted right to replace contractors whenever difficulties arise.  The statutory procedure remains important: notice must be given, a reasonable opportunity to remedy the breach must ordinarily be provided, and the relevant facts must be established.

Article 818(3) also identifies circumstances in which immediate rescission may be requested without granting a cure period, including where rectification is impossible, where delay makes timely completion effectively impossible, where the contractor demonstrates an intention not to perform, or where the contractor itself renders performance impossible.

Again, the wording matters.  A statutory right to request rescission should not automatically be treated as a unilateral contractual right to terminate by letter.

Saudi Arabia: similar principle, different procedure

Article 466 of the Saudi Civil Transactions Law also adopts a notice-and-cure mechanism.  If the contractor fails to correct the breach within the reasonable period specified by the employer, the employer may seek termination or arrange for completion or correction at the contractor’s expense.

There is, however, an important procedural difference.

Article 466 cross-refers to Article 167, under which substitute performance at the debtor’s expense ordinarily requires court permission.  An exception applies in urgent circumstances.

This illustrates why apparently similar provisions in neighbouring Gulf jurisdictions should not be assumed to operate identically.

It is equally important to consider how these statutory provisions are likely to be interpreted and applied by the courts.  Codification does not operate in isolation from the legal tradition within which the courts function. This is particularly relevant in Saudi Arabia, where the interpretation and application of the recently enacted Civil Transactions Law remain closely connected to Sharia principles. Those principles place significant emphasis on justice, fairness and the prevention of unjust outcomes. Accordingly, the wording of a statutory provision is not necessarily the end of the analysis under Saudi law: its application must also be considered within the broader Sharia framework.

Delay damages: agreed does not always mean untouchable

The financial side of deteriorating performance often emerges through liquidated or agreed damages for delay.

Under Article 340 of the new UAE Civil Transactions Law, parties may agree compensation in advance, but the amount remains subject to judicial control.  The court may reduce the agreed compensation where the debtor proves that it is excessive or that the underlying obligation has been partially performed. The award may also be reduced, or potentially refused, where the creditor’s own fault contributed materially to the damage.

Conversely, the creditor may recover more than the agreed amount where fraud or gross fault is established. These rules are mandatory.

Saudi Article 179 adopts a related, but not identical, framework.  Of particular significance, agreed compensation is not payable if the debtor establishes that the creditor suffered no harm.  It may also be reduced if excessive or where the original obligation was partially performed and may be increased where fraud or gross negligence caused loss exceeding the agreed amount.  These rules are also mandatory.

The contrast with English law is again significant.  A valid English liquidated-damages clause is not simply adjusted by a court to match the loss ultimately proved.  The penalty doctrine instead asks, broadly, whether the secondary obligation imposes a detriment out of all proportion to the innocent party’s legitimate interest in enforcing the primary obligation.

For project teams, the message is that the contractual daily rate is not the end of the analysis.  Employer-caused delay, partial performance, actual harm and the circumstances producing the delay may all become relevant depending on the governing law.

3. When the employer cancels

The third scenario is fundamentally different.

The contractor is performing properly.  There is no serious delay and no defective work. The employer’s investment committee has simply changed its plans and no longer wants the project.

Can the employer walk away?

UAE: an express statutory right to withdraw

Article 836 of the new UAE Civil Transactions Law provides a clear answer.

Before completion, an employer may withdraw from the muqawala and suspend its execution, provided that the contractor is compensated for the expenses incurred, the work completed and the profit that would have been earned had the works been completed.

The court may reduce the compensation attributable to lost profit where circumstances make that equitable.  In particular, savings resulting from the cancellation and amounts earned through redeployment of the contractor’s resources to other work must be deducted.

The provision should be read alongside any agreed termination-for-convenience clause.  Parties should define the right to withdraw and the resulting payments expressly, while checking the enforceability of any exclusion or restriction of statutory compensation.

This is an important clarification.  The construction provisions of the former UAE Civil Transactions Law did not contain an equivalent express general right, although termination for convenience was not wholly unknown in UAE jurisprudence.

The new law therefore gives the concept a clear legislative home.

For contractors, however, the provision should not be misunderstood as an entitlement to receive the entire unpaid balance of the contract.  Lost profit is not the same thing as unpaid contract price.  Avoided expenditure, savings and the ability to redeploy resources may materially reduce the recoverable amount.

There is a close comparative reference point in Article 1671 of the Italian Civil Code, which permits the employer to withdraw while indemnifying the contractor for expenses, work performed and lost profit.

Saudi Arabia takes a different approach

Saudi Article 476 should not be treated as an equivalent general termination-for-convenience provision.

It permits either party to demand termination where an exigent matter affects that party’s obligation in performing the contract, subject to compensating the other party for the resulting harm.

The existence of an exigent matter affecting performance is important.  Article 476 does not simply give an employer a general statutory right to abandon a project because its commercial priorities have changed.

Any separate contractual termination right must therefore be analysed on its own terms.

English law: the contract is critical

Under English law, the starting point is the contract itself.  Does it contain a termination-for-convenience clause? Who can exercise it? What notice is required? What compensation follows?

The recent decision in Svella Connect Limited v Virgin Media Limited [2026] EWHC 2223 (TCC) again illustrates the importance of the parties’ actual bargain.  The court rejected the pleaded implied good-faith terms in detailed framework and settlement agreements, taking account of express provisions on work allocation and termination.  Its relevance is the need to respect the agreed contractual structure; it does not establish a general right to cancel construction works without compensation.

Without a contractual or other lawful route to exit, an employer that cancels a project may itself be in breach.

This makes termination economics an issue for the drafting stage, rather than something to consider only when the project is already in difficulty.  Committed procurement costs, demobilisation expenses, savings, redeployment and margin on the unperformed works should all be considered when negotiating the exit provisions.

What do the reforms mean for employers and contractors?

Do the changes favour contractors or employers?

There is no single answer.

Employer powers are clearer and, in certain respects under the new UAE law, stronger.  At the same time, contractor remedies are expressed more clearly, particularly in relation to exceptional disruption of the contractual equilibrium and the financial consequences of an employer’s decision to discontinue a project.

But clearer remedies do not mean easier recovery.  Facts, procedure and contractual drafting remain decisive.

For parties involved in Gulf construction projects, six practical habits follow:

• Know the legal starting point.  Record the governing law, applicable transitional provisions, dispute forum and likely place of enforcement.  Public contracts and other special regimes may require separate analysis.
• Read the financial provisions together.  Price adjustment, notices, extensions of time, delay damages, liability limitations and termination payments should not be reviewed in isolation.  Parties should also identify which statutory provisions are mandatory.
• Preserve the original pricing assumptions.  Keep quotations, estimates, procurement assumptions and the baseline programme.  If exceptional circumstances arise, distinguish their consequences from ordinary cost overruns.
• Treat notices as live project deadlines.  Maintain a notice register with clear responsibility for issuing and responding to notices.  Cure notices, defects and proposed remedial measures should be documented contemporaneously.
• Review contractual exposure during the project.  Regular commercial and legal reviews should consider extensions of time, employer-caused delay, evidence of loss and potential exposure to agreed damages.
• Prepare for termination before termination happens.  Maintain records of completed work, committed costs, demobilisation expenditure, expected net profit, avoided costs and possible redeployment.

One final distinction should also be kept in mind.  Governing law, arbitral seat and place of enforcement are separate questions.  Choosing London as the seat of arbitration does not, by itself, make English substantive law applicable.  Equally, an English governing-law clause does not necessarily exclude relevant mandatory rules or public-policy considerations at the place of performance or enforcement.  In Saudi Arabia, Sharia considerations remain particularly relevant at the enforcement stage.

From statutory rules to project habits

A civil code cannot prevent a construction project from getting into difficulty.

What the recent Gulf codifications can do is make some of the legal consequences more predictable.  The UAE reforms provide employers with clearer tools to respond to failing performance and an express mechanism for withdrawing from a project, while giving contractors clearer statutory bases for hardship relief and compensation.  Saudi Arabia’s codification provides a more systematic framework for many of the same recurring construction issues, but often strikes a different balance.

For international employers and contractors, the most important point is therefore not simply to know that the law has changed.  It is to translate those changes into contract drafting, project administration, evidence preservation and commercial decision-making.

That is what determines whether the statutory remedy remains an interesting provision in a civil code; or becomes an effective remedy when the project starts to go wrong.

This article reflects the position as at 30 September 2026 and addresses selected aspects of the UAE and Saudi civil laws relevant to construction contracts.  It does not address all applicable special regimes, transitional provisions or contractual variations and does not constitute legal advice.  References to UAE law concern federal onshore law and not the separate DIFC or ADGM legal regimes.

 

	Hasan ElShafiey Partner [email protected]
	Rodrigo Carè  Senior Counsel [email protected]