Insights
Feb 16, 2026
Understanding Delay, Liquidated Damages, and Termination Risks in UAE Construction Projects
Explore how the New Civil Code, government procurement laws, and court rulings impact contractors, subcontractors, and project owners in the UAE.
In the UAE construction and real estate sector, delays can have significant financial and legal consequences. From homeowners awaiting villas to businesses opening retail outlets, understanding delay penalties (liquidated damages), termination risks, and the evolving legal framework is essential.
With the New Civil Code (Federal Decree-Law No. 25 of 2025) coming into effect in June 2026, and stricter procurement laws governing government projects, contractors, subcontractors, and employers must navigate a more rigorous system that balances contractual freedom with judicial oversight.
Termination for Delay in UAE Projects
When a contractor fails to perform contractual obligations or delays project completion, the consequences are currently governed by the Old Civil Code (Federal Law No. 5 of 1985) but will transition to the New Civil Code in 2026
Article 232: Contracts cannot be revoked or rescinded except by mutual consent, court judgment, or operation of law.
Article 234: The non-defaulting party must serve formal notice before petitioning the court for specific performance or rescission.
Article 235: Parties may agree that contracts are rescinded automatically upon failure to perform, but formal notice is still required unless explicitly waived.
This system ensures that termination is controlled and only applies where there is material breach or failure to perform
Liquidated Damages and Compensation
Liquidated damages are sums agreed in advance to compensate for breaches, most commonly project delays. These serve two main purposes:
Incentivise timely completion of contractual obligations.
Compensate the employer for losses due to delayed performance.
Under the New Civil Code:
Article 336: Non-performance attributable to the contractor triggers liability for compensation.
Article 337: Compensation is payable only after formal notice, unless otherwise agreed.
Article 340: Courts can reduce or deny liquidated damages if the amount is exaggerated, part of the obligation is performed, or the creditor contributed to the loss. Conversely, compensation can exceed the agreed sum in cases of fraud or serious fault.
A 1994 Dubai Court of Cassation ruling confirmed courts' authority to adjust pre-agreed penalties to reflect actual loss, while the Federal Supreme Court has reinforced that delay fines in construction contracts constitute financial penalties but remain legally controlled.
Subcontractor Liability
Subcontractors cannot avoid delay penalties simply because the main contractor faces no corresponding damages. Their obligations under the subcontract are independent, and losses must be assessed separately.
However, the main contractor may not be liable for delays caused by employer-appointed subcontractors, provided evidence shows the delay was beyond the contractor's control.
Administrative and Government Projects
Administrative contracts, governed by the Federal Procurement Law (Federal Decree-Law No. 11 of 2023) and Dubai Procurement Law (Dubai Law No. 12 of 2020), are treated differently:
Delay damages are financial penalties, not purely compensatory.
Damage is presumed upon delay, so the government does not need to prove actual loss.
Authorities may terminate projects or re-tender at the contractor's expense.
Standard fines are capped at 10 per cent of project value, but additional costs (like extended consultancy fees) can be recovered.
Force majeure exemptions must be applied for promptly — within 15 days in Abu Dhabi and 30 days in Dubai.
This reflects a strict but balanced framework where parties are incentivised to perform, but courts ensure fair compensation.
Key Takeaways for Contractors and Employers
Review all contracts for liquidated damages clauses and termination provisions.
Keep detailed records of project progress to defend against or claim damages.
Ensure subcontractor obligations are clear and independent.
Monitor government procurement contracts carefully, as delay penalties and termination powers are more stringent.
Prepare for the New Civil Code coming into effect in June 2026.
FAQs
Q1: What are liquidated damages in UAE construction contracts?
A: Liquidated damages are pre-agreed sums payable for contract breaches, commonly for project delays, intended to compensate the employer and incentivise timely completion.
Q2: Can a subcontractor avoid delay penalties if the main contractor was not penalised?
A: No. Subcontractor obligations are independent, and losses are assessed separately. However, delays caused by employer-appointed subcontractors may relieve the main contractor of liability if properly documented.
Q3: How will the New Civil Code affect delay damages?
A: It will reinforce judicial oversight, allowing courts to reduce or increase compensation based on actual loss and circumstances, while keeping pre-agreed clauses enforceable.
Q4: Are government contracts treated differently?
A: Yes. Under UAE procurement laws, delays automatically trigger penalties, and authorities can terminate or re-tender projects. Compensation is generally capped at 10 per cent, but additional costs may still be recoverable.
Q5: What is the importance of serving formal notice?
A: Both the Old and New Civil Codes require formal notice before claiming compensation or termination, unless the contract specifies otherwise. It is a critical step to enforce your rights legally.