Terminating A UAE Construction Contract: How The New Civil Code Shapes Compensation and Contractual Risk

Ending a construction contract before completion can have significant financial and legal consequences, particularly when a contractor has already committed substantial time, resources and money to a project. The UAE’s new Civil Transactions Law expressly addresses an employer’s right to terminate a contract before the work is finished, setting out a framework for compensation that may extend beyond the value of work completed.

 

Federal Decree-Law No. 25 of 2025 promulgating the UAE Civil Transactions Law came into force on 1 June 2026, replacing Federal Law No. 5 of 1985. The new law regulates construction and works contracts, commonly known as muqawala contracts, under Articles 812 to 839. Among its notable provisions is Article 836, which specifically addresses an employer’s right to withdraw from a contract before completion and the resulting obligation to compensate the contractor.

 

The Statutory Right to Terminate for Convenience

 

Article 836(1) provides that an employer may withdraw from a muqawala contract at any time before completion, provided the contractor is compensated for expenses incurred, the value of work already performed and the profit that would have been earned had the contract been completed. The provision establishes a statutory basis for early termination even where the contractor has committed no breach of its contractual obligations.

 

The right may be relevant when an employer decides to abandon a project, revises its commercial priorities, encounters financial difficulties or changes the scope of the proposed development. Such decisions do not necessarily indicate any failure by the contractor, yet they may leave the employer liable for substantial sums. The financial consequences of withdrawal must therefore be considered alongside the commercial reasons for bringing the contract to an end.

 

Employers should not interpret termination for convenience as an unrestricted right to walk away without compensating the contractor. Although the employer may no longer wish to proceed with the project, Article 836 recognises the contractor’s financial exposure and provides for compensation intended to address the consequences of early termination. The precise amount, however, will depend on the circumstances and the evidence available to support the claim.

 

Assessing Compensation After Termination

 

Article 836 identifies three principal components of compensation: expenses incurred, the value of work completed and the profit that would have been earned on completion. Each element requires careful assessment against the contract, project accounts and supporting documents. A reliable valuation should distinguish between expenditure already incurred, work for which payment remains outstanding and the financial return that the contractor could reasonably have expected from the uncompleted portion of the project.

 

Recoverable expenses may include mobilisation costs, labour, procurement, subcontracting and materials acquired for the works. The parties should establish the value of work performed by reference to the contractual payment mechanism, interim certificates and amounts already paid. Materials ordered or purchased before termination may require separate consideration, particularly where orders cannot be cancelled, goods cannot be returned or the materials have little practical value outside the project. Outstanding commitments to suppliers and subcontractors may also affect the overall assessment.

 

The anticipated profit element can be more difficult to quantify. Under Article 836(2), the court may reduce compensation for lost profit where the circumstances make such a reduction just and equitable. In assessing the position, the court is to consider factors including expenditure avoided as a result of termination and income earned by using the contractor’s time and labour on other work.

 

A contractor should not assume, therefore, that its projected profit on the entire uncompleted portion of the contract will automatically be awarded. Equally, an employer cannot safely assume that paying for completed works and documented expenditure will necessarily discharge its obligations. The distinction between costs already incurred, expenditure avoided and profit lost will be important in determining the final amount.

 

Why Contractual Termination Clauses Matter

 

The statutory framework makes it important for employers and contractors to examine termination provisions before entering into construction agreements. Contractual terms may prescribe notice periods, procedures for valuing completed work, payment deadlines, the treatment of materials and equipment, and the consequences of termination for convenience. These provisions can help establish a practical process for winding down a project and identifying outstanding obligations.

 

However, the existence of a contractual termination clause does not, by itself, settle how the agreement interacts with Article 836. Parties should examine whether the agreed mechanism is consistent with the applicable statutory framework and how the contract addresses compensation following withdrawal. They should not assume that a clause automatically displaces the statutory regime or conclusively determines the extent of any entitlement.

 

Standard-form construction agreements, including FIDIC forms, commonly contain provisions dealing with termination for convenience. Those provisions may be amended substantially during negotiations, however, and the final signed agreement may differ from the published standard form. Employers and contractors should review the executed contract, including any amendments, schedules and supplementary conditions, rather than relying on standard wording that may have been deleted, restricted or replaced.

 

Documentation and Risk Management

 

When termination becomes a realistic possibility, accurate and contemporaneous records can make a material difference to the parties’ financial positions. Employers and contractors should maintain clear accounts of completed work, materials held on site, payments made, outstanding invoices and commitments to suppliers and subcontractors. A properly documented record of the project’s position at the termination date can help distinguish genuine liabilities from disputed or unsupported claims.

 

Contractors should record expenditure attributable to the project and identify costs avoided following termination. They should also retain evidence of resources subsequently deployed on other projects, where relevant to the assessment of lost profit. Employers, meanwhile, should document the reasons for termination, notices served under the contract, the valuation of completed work and the basis for any proposed deductions. These records can help establish whether the parties have complied with their contractual obligations and provide evidence if the compensation claimed is disputed.

 

A joint inspection and an agreed record of the project’s condition at the termination date may further reduce the scope for disagreement. Such an exercise can identify incomplete works, stored materials, equipment, outstanding payments and continuing liabilities. If the parties cannot agree on the financial consequences, contemporaneous records may become important evidence in subsequent litigation or arbitration. Waiting until a dispute has developed to reconstruct the project’s financial position can make it harder to establish the extent of expenditure, commitments and losses.

 

Conclusion

 

Article 836 provides a statutory framework for an employer’s withdrawal from a construction contract before completion, while making clear that the financial consequences may extend beyond payment for work already performed. The provision is particularly relevant where a project is abandoned for commercial reasons rather than because of a contractor’s default. The employer’s decision to stop the works does not, in itself, eliminate the contractor’s potential entitlement to compensation.

 

Before exercising a termination right, employers should assess the likely cost of withdrawal, while contractors should ensure that their expenditure, outstanding commitments and anticipated profits are supported by reliable evidence. Careful drafting, a review of the executed contract and accurate project records can help both sides manage the commercial and legal consequences of bringing a construction project to an early end.

 

The applicable law must also be established before any assessment of rights and liabilities begins. Although the new Civil Transactions Law generally took effect on 1 June 2026, contracts concluded before that date may remain subject to the previous law, depending on the applicable transitional provisions and the circumstances of the agreement. Identifying the governing legal framework is therefore an essential first step in determining the parties’ respective rights and obligations when a construction contract is terminated.