Price Escalation in UAE Construction: How the New Civil Code Changes the Position

Article 2 of 3 in a series by Beale & Co on price escalation, exceptional circumstances and construction contracts in the GCC.

The New UAE Civil Code, Federal Decree Law No. 25 of 2025, came into effect on 1 June 2026. It introduces significant changes to the legal framework governing exceptional circumstances. For contractors facing severe material and labour price escalation on UAE projects, these changes are directly relevant.

In the first article in this series, we explained the doctrine of exceptional circumstances and the common legal threshold across the GCC. In this article, we look at how the New UAE Civil Code has developed the position, both through a broader general remedy and through a new construction-specific provision.

The previous position: Article 249

Under the previous UAE Civil Code (Federal Law No. 5 of 1985), Article 249 provided the general mechanism for judicial intervention. Where exceptional circumstances of a public nature arose which could not have been foreseen, and performance became oppressive so as to threaten the obligor with grave loss, the court could reduce the oppressive obligation to a reasonable level. Any agreement to the contrary was void.

Article 249 was a mandatory provision. Parties could not contract out of the court’s power to intervene. However, the remedy was limited to reducing the obligation: it did not expressly empower the court to rescind the contract.

The New Civil Code: Article 224, a broader general remedy

Article 224 of the New UAE Civil Code retains the core elements of Article 249 but introduces an important expansion. Where exceptional, general circumstances arise that could not have been foreseen, and performance becomes onerous for the debtor so as to threaten serious loss, the court may reduce the onerous obligation to a reasonable limit or rule for the rescission of the contract. Any agreement to the contrary is void.

The express reference to rescission is significant. It broadens the range of remedies available to the court. Under Article 249, the court’s power was framed around reducing the oppressive obligation. Under Article 224, the court may now also bring the contract to an end. For contractors facing truly unsustainable obligations, this could be an important development.

Article 829(3): a new construction-specific provision

Perhaps the most significant change for the construction industry is Article 829(3), a new provision specifically addressing muqawala (construction) contracts.

Article 829(3) provides that where the contractual equilibrium between the employer and contractor is disrupted due to general exceptional circumstances that could not have been foreseen at the time of contracting, and those circumstances undermine the basis on which the financial assessment of the contract was founded, the court may order the restoration of contractual equilibrium. The court’s powers include extending the execution period, increasing or reducing the remuneration, or ordering rescission.

This is a notable development. Under the previous Civil Code, contractors seeking relief from exceptional circumstances, including severe price escalation, had to rely on the general provision in Article 249, which was not tailored to construction. Article 829(3) now provides a specific mechanism focused on whether the exceptional circumstances have undermined the financial basis on which the contract was priced, a test that speaks directly to the reality of construction contracts, where detailed pricing assumptions for materials, labour, plant and subcontractors are fundamental to the lump sum or contract price.

What does this mean in practice?

For contractors, Article 829(3) means the analysis is no longer limited to whether performance has become generically “onerous.” The question is whether the exceptional circumstances, such as a sustained and unforeseen escalation in material or labour costs, have disrupted the contractual equilibrium and undermined the financial basis of the contract. This is a more targeted and, potentially, a more accessible test for construction projects where the financial impact of price escalation can be clearly quantified against original tender assumptions.

However, the evidential burden remains high. A contractor seeking relief on the basis of price escalation should be prepared to demonstrate precisely how rises in material prices, labour costs or other inputs affected the financial assumptions underpinning the contract price. This is likely to require original tender build-ups, detailed cost comparisons, supplier and subcontractor quotations, procurement records and documentation of mitigation efforts such as value engineering or alternative sourcing.

Parties should also note that while Article 224 and Article 829(3) are both mandatory, and agreements to the contrary are void, they are not a substitute for clear contractual provisions addressing risk allocation, cost escalation and programme relief. Well-drafted contracts remain the first line of protection.

In the final article in this series, we examine the position in Saudi Arabia and Kuwait, including Saudi Arabia’s distinctive renegotiation requirement.

Beale & Co’s construction team regularly advises employers and contractors on hardship, force majeure and contractual risk allocation across the GCC. For further information, please contact Claire Miller or Ilham Adan.