Liquidated Damages in UAE Construction Contracts: The Impact of the 2025 Civil Code Provisions

Introduction

Liquidated damages (or “LDs”) provisions are included in nearly every construction contract entered in the UAE, and more often than not delay LDs are imposed at a daily rate that is capped at 10% of the Contract Price. 

LDs provisions have been agreed and applied in the context of Federal Law No. 5 of 1985 (the “UAE Civil Code 1985”), which explicitly permits agreements with respect to LDs but reserves judicial authority to modify LDs to be equal to the harm actually suffered. 

Federal Decree-Law No. 25 of 2025, effective from 1 June 2026 (the “UAE Civil Code 2025”) repeals and replaces the UAE Civil Code 1985. The new LDs provision contains substantially different wording – and employers and contractors will wonder if there is likely to be a change to application of LDs provisions in practice.

Our initial view is that Article 340 is likely to result in adjustments to LDs being made more frequently, as the bases for doing so have been spelled out in greater detail. 

UAE Civil Code 1985 – Article 390

The first part of Article 390 in the UAE Civil Code 1985 confirms a special application of the general rule of freedom to contract, explicitly allowing parties to agree the amount of compensation in advance: 

“The contracting parties may fix the amount of compensation in advance by making a provision therefor in the contract or in a subsequent agreement, subject to the provisions of law.”

In UAE construction contracts, this is most frequently accomplished by agreeing the liquidated damages provisions in the FIDIC suites of contracts – including with respect to delay and, in EPC contracts, performance guarantees. 

The second part of Article 390 reserves judicial authority to adjust the pre-agreed compensation to be equal to actual loss:

“The judge may in all cases, upon the application of either of the parties, vary such agreement so as to make the compensation equal to the loss, and any agreement to the contrary shall be void.” 

On its face, the judicial authority to adjust compensation is unfettered – except such adjustment must be on the request of the parties only and must result in the compensation equalling the loss. In theory, therefore, upon application, any discrepancy between the pre-agreed compensation and actual loss could be addressed by judicial intervention – and the adjustment may decrease or increase the contractual LDs. 

Based on our experience, however, it is extremely rare that LDs provisions are adjusted, whether in court or arbitration. This is most likely for two reasons: 

• fundamental belief in freedom of contract and the sanctity of the parties’ agreement; and
• difficulty in proving discrepancy between the contractual LDs and the actual loss suffered. 

As a result, LDs are likely to be adjusted only in cases where there is the risk of gross windfall – to one party or the other. 

UAE Civil Code 2025 – Article 340

Article 340 of the UAE Civil Code 2025 is significantly more detailed and prescriptive than the 1985 provision. 

The first part is identical in substance to the 1985 provision confirming that parties may agree the amount of compensation in advance: 

“The contracting parties may pre-determine the amount of compensation by stipulating it in the contract or in a subsequent agreement, subject to the provisions of the law.”

The second part provides two specific circumstances under which the LDs may be reduced: 

“The court may reduce the amount of the agreed compensation [Liquidated Damages] if the debtor proves that the assessment was excessive or that the original obligation has been partially performed.”

The first circumstance is likely to be interpreted in the same way as Article 390, i.e. a reduction may be available where the debtor proves that the agreed compensation outweighs the harm suffered. We expect that the same impediment to relief will arise, i.e. the difficulty of proof.

With respect to reduction for partial performance, we expect that contractors will argue that LDs should be reduced where sections of a project have been completed – even if the contractual LDs provision does not take into account sectional completion. It would be up to employers then to defend the applicability of full LDs by proving that they did not enjoy beneficial use notwithstanding sectional completion. 

The third section provides another set of circumstances under which the LDs may be reduced: 

“The court may reduce the amount of the agreed compensation if the creditor contributed by their own fault to the occurrence of or increase in the damage, or may refrain from awarding compensation if the creditor’s fault predominates over the debtor’s fault.” 

In effect, this provision applies the general principle that one cannot benefit from one’s own breach to LDs. Parties to construction contracts may find this is particularly relevant where there are allegations of concurrent delay – or rights to extension of time that would otherwise arise but for failure to give timely notice or otherwise fulfil conditions precedent. 

The fourth section specifies when damages in excess of LDs may be claimed:

“The creditor may claim an amount exceeding the agreed compensation if they prove that the debtor has committed fraud or gross fault.”

Taking these together, the Article expressly grants the court/tribunal the authority to reduce the agreed liquidated damages in the circumstances set out above. However, it does not expressly grant the court/tribunal the authority to increase the agreed liquidated damages. In cases involving fraud or gross misconduct, the text merely confers upon the creditor the right to claim compensation exceeding the agreed amount, without providing a corresponding right for the court to increase the compensation of its own motion or imposing an obligation upon the court/tribunal to grant such a claim.

Therefore, the wording of the Article distinguishes between the authority to reduce agreed liquidated damages, which authority is expressly conferred by the legislature, and the creditor's right to seek additional compensation in cases of fraud or gross misconduct, which is a right vested in the creditor rather than in the court. Whether such a claim is accepted and awarded remains subject to the court's assessment in light of the facts and evidence presented in each case.

It is notable that there no longer appears to be an option to argue for increased LDs simply because the actual harm exceeds the pre-agreed amount of compensation.

We expect that an increase to LDs will rarely be applied given the high burden of proving fraud or gross fault under UAE law.

The article concludes by confirming that it remains a mandatory statutory provision, that the parties cannot avoid by contract: 

“Any agreement contrary to the provisions in this Article shall be void.”

Conclusion

Article 340 is one of the most notable and important changes to the UAE Civil Code. 

We encourage parties to UAE construction contracts to revisit their construction templates to consider revisions in light of the new provisions. 

We will be monitoring its implementation and look forward to advising our clients on how this critical provision is applied in practice over the years and decades to come.