In the United Arab Emirates, the question is: what happens if a contract is breached, and what legal remedies are available? is common among businesses when commercial obligations are not met. When dealing with contractual disputes in the UAE, the legal framework must be considered, including the onshore civil law system and, where relevant, the rules of the DIFC Courts in Dubai. A specialised contract dispute lawyer in Dubai can provide guidance to contracting parties, service providers, suppliers and investors to help protect contractual rights and ensure effective contract enforcement in the UAE.
The primary set of laws that regulate onshore contracts is the UAE Civil Transactions Law (Federal Decree-Law No. 25 of 2025), which was issued on 17 September 2025 and became effective on 1 June 2026, replacing the Civil Code of 1985. This law is parallel to the Commercial Transactions Law under Federal Decree-Law No. 50 of 2022, which provides a structured legal basis to assess breach of contract, liability, compensation, specific performance, termination and other breach remedies in the UAE.
Pre-Contractual Obligations and the Statutory Duty of Good Faith
The new Civil Code creates a legal risk in the pre-contractual phase. Article 121 provides that negotiations, including the proposal, conduct and termination thereof, shall be conducted in good faith. Negotiations, however, do not require the parties to enter into the contract. A party that enters into or terminates negotiations in bad faith may be liable for the actual damages suffered by the other party. Except as otherwise agreed, expected profits or lost opportunities from a contract not entered into are excluded.
Article 122 also establishes a duty to disclose material and decisive information which may affect the other party’s consent or the terms of the contract. This duty may not be waived. Bad faith may be found in deliberate concealment, and the affected party may be able to seek dissolution of the contract.
Article 19 allows parties to decide which law will govern their contract. If the contract clearly states the governing law, that chosen law will apply to the parties’ contractual obligations, both in form and substance.
If the contract does not specify the governing law, the applicable law will be determined according to the rules in Article 19. Where both parties share a domicile, the law of that State applies; Where the parties have their domicile in different States, the law of the State where the main contractual obligation is performed shall apply, unless it appears from the circumstances that the parties intended another law to apply to the contract. But real estate contracts are governed by a different rule. Such contracts are governed by the law of the place where the property is situated.
Comparative Analysis: Transitioning from the Old to the New Civil Code
A major change in UAE contract law is the transition from the 1985 Civil Code to Federal Decree-Law No. 25 of 2025. The Civil Code of 2025 expressly recognises obligations in the pre-contractual phase, including the duty of good faith in negotiations and the duty to disclose material information. This provides businesses with a more explicit statutory guide as to the conduct of the parties prior to the signing of a contract, whilst at the same time maintaining the principle that negotiations do not bind the parties into contracting.
The 2025 Civil Code also refines the approach to remedies and contract performance. For pre-agreed damages, Article 390 of the 1985 Civil Code allowed the court broad discretion to adjust liquidated damages so that they matched the actual loss suffered. The Civil Code of 2025 provides for a more detailed framework in Article 340, which states that the court can reduce compensation if it is excessive, if part of the obligation has already been performed, or if the creditor contributed to the loss. The same applies where fraud or serious fault is established, and the creditor has the right to claim more than the sum agreed. For exceptional circumstances, Article 249 of the 1985 Civil Code permitted the court to reduce a burdensome obligation to a reasonable level. Article 224 of the 2025 Civil Code goes further by allowing the court either to reduce the burdensome obligation or to order cancellation of the contract, after balancing the interests of both parties.
The New Civil Code also introduces practical changes for specialised contracts, including Muqawala or work contracts. Under Article 818, if the contractor performs the work defectively or contrary to the contract, the employer may first notify the contractor to correct the defect within a reasonable period. If the contractor fails to do so, the employer may, after establishing the condition of the work, cancel the contract or appoint another contractor to complete or correct the work at the first contractor’s expense.
Primary Remedies for Breach: Specific Performance, Withholding, and Rescission
UAE law offers remedies for the non-fulfilment of contractual obligations, including specific performance, termination of the contract and compensation. If one party does not perform the obligation, the other party may, after having given notice, require the performance of the contract or require that the contract be terminated, with compensation where justified according to Article 234 of the 2025 Civil Code. Specific performance enables the claimant to require the defaulting party to perform the agreed obligation where this is still possible and appropriate. Article 102 of the Commercial Transactions Law specifies some remedies in contracts of sale in cases where the seller has failed to deliver the item bought. These remedies include delivery of the item, compensation where justified, treating the contract as ended, or the purchase of a similar item at the seller’s expense and claiming the difference in price. But whether execution in kind will be possible will generally depend on whether performance is still possible and appropriate under the circumstances.
In bilateral contracts, Article 222 allows a party to withhold its own performance if the other party fails to perform its corresponding obligation when both obligations are due. Where the contract is cancelled or treated as invalid, Articles 192 and 237 provide that the parties should, as far as possible, be restored to the position they were in before the contract. If restoration is not possible, the court may award compensation.
Liquidated Damages and Pre-Agreed Compensation under Article 340
According to Article 340 of the Civil Code of 2025, the parties may agree in advance on the amount of compensation in the contract or in an additional agreement. In practice, a claimant will usually have to prove breach, actual loss and a causal connection between the breach and the loss. If the agreed sum is excessive, or if the obligation has been partially performed, or if the creditor has contributed to the loss, the court may reduce the amount. If fraud or serious fault is proved, however, the creditor can claim more than the agreed amount.
Exceptional Circumstances, Hardship, and Force Majeure
Article 224 of the 2025 Civil Code deals with exceptional circumstances or hardship. If unforeseen general circumstances arise after the contract is signed and make performance excessively burdensome for the debtor, to the extent that it threatens serious loss, the court may reduce the obligation to a reasonable level or order cancellation of the contract. This expands the earlier position, which mainly allowed the court to reduce the burdensome obligation. Article 224 is mandatory, meaning any agreement that excludes or limits this relief is invalid.
Article 236 deals with the situation of force majeure, when performance becomes impossible. If a force majeure makes performance impossible in a bilateral contract, both parties are discharged, and the contract automatically terminates. If performance is only partially impossible, either party may treat the affected part of the obligation as ended or seek to have the contract cancelled by the court. With continuous contracts, if the impossibility is temporary, either party can request the court to partially terminate the obligation, modify the contract or cancel it.
Forum Selection, Limitation Periods, and Jurisdictional Dynamics
In UAE contract disputes, the first step is to identify the correct dispute forum. This will usually depend on the contract terms, the parties involved, and the agreed jurisdiction or arbitration clause. Parties may resolve their dispute before the onshore UAE courts, such as the Dubai Courts. Separately, the dispute may fall before the DIFC Courts where jurisdiction exists, or before an arbitral tribunal where the parties have agreed to arbitration.
The dispute may be submitted to arbitration in accordance with the provisions of the UAE Arbitration Law if the contract contains a valid arbitration clause. Where such a situation arises, the parties should consider the language of the arbitration clause, the seat of the arbitration, the governing rules and the means of enforcement of the final award.
In commercial claims, limitation periods must be carefully observed. Under Article 92 of the Commercial Transactions Law, actions relating to commercial obligations between merchants shall not be heard after the lapse of five years from the date the obligation became due, unless the law provides for a shorter period. This makes it mandatory for parties to review the contract, limitation period and dispute forum at an early stage before taking legal action.
Conclusion
In Dubai, contract disputes need to be reviewed very carefully in relation to the contract, the governing law of the contract, the breach and the remedies available. The Civil Code of 2025 has clarified the rules concerning good faith, pre-contractual disclosure, agreed compensation, hardship, force majeure and contract performance. Such developments make it important for businesses to approach contractual relationships with proper documentation, clear dispute resolution clauses and timely legal action where obligations are not fulfilled.
For companies, suppliers, investors and service providers, effective contract enforcement in the UAE is not just about proving breach, but about choosing the right forum, observing limitation periods, and considering whether specific performance, compensation, withholding of performance or cancellation is the most appropriate remedy. With UAE contract law evolving, getting early advice from a Dubai contract dispute lawyer can help parties safeguard their commercial interests and resolve disputes in a structured and practical way.
