Leveraging Hardship Provisions under UAE Law to Protect Construction Margins

Executive Summary:

• Heightened regional geopolitical shifts and supply chain disruptions are placing commercial strain on construction contracts in the UAE.
• Rather than absorbing losses, contractors can proactively leverage the legal doctrine of "exceptional circumstances" (hardship) under UAE law to restructure commercially unviable obligations.
• Under the current Federal Law No. 5 of 1985, Article 249 allows contractors facing "grave loss" to seek judicial rebalancing of their contracts.
• The forthcoming Federal Decree-Law No. 25 of 2025 (the "New Law") significantly strengthens the contractor's hand, enhancing judicial powers to order full rescission of a contract if extreme hardship persists.

Strategic Context: Turning Disruption into Leverage

The current geopolitical climate in the broader region – characterized by shifting diplomatic dynamics, maritime access restrictions, and consequential supply chain bottlenecks – has impacted the predictability of international commerce. For UAE contractors, this external volatility manifests as sudden spikes in raw material costs, protracted delays, and restricted workforce mobility.

While these disruptions are challenging, they do not necessarily require contractors to perform at a crippling financial deficit. UAE contract law eschews the rigid absolutism found in some common law jurisdictions, offering distinct equitable mechanisms to correct severe contractual imbalances caused by external, public events. By properly deploying the doctrine of "exceptional circumstances", contractors can shift the conversation with employers from one of default to one of mandated equitable realignment.

1. The Current Legal Shield: Exceptional Circumstances vs. Force Majeure

When supply chains freeze and costs skyrocket, it is a common reflex to declare Force Majeure. However, under Article 273 of the current UAE Civil Code (Federal Law No. 5 of 1985), Force Majeure strictly requires that performance has become an absolute physical or legal impossibility. If a contractor can still procure materials at a 300% premium and deliver the project six months late, performance is not deemed impossible, and a straightforward Force Majeure claim will likely fail.

Instead, contractors should consider invoking the doctrine of Exceptional Circumstances (Hardship) under Article 249 of the 1985 UAE Civil Code. This doctrine applies precisely when performance is still possible, but the intervening geopolitical event has made the obligation so excessively onerous that it threatens the contractor with "grave loss".

To successfully leverage Article 249 in the current climate, a contractor must consider whether it satisfies various thresholds and tests.

1. Public and General: Does the event affect the wider market or society, not merely a specific commercial difficulty unique to the contractor?
2. Unforeseeable: Is an event one that a reasonable commercial entity could not have anticipated at the time of contract execution?
3. Oppressive: Does the effect of the event directly cause extreme financial hardship or "grave loss," substantially altering the economic balance of the contract?

The Remedy: Unlike Force Majeure, which automatically terminates the contract, Article 249 allows the court (or an arbitral tribunal) to intervene and reduce the oppressive obligation to a "reasonable level". This acts as a powerful negotiating tool, forcing employers to the table to agree on commercial variations rather than risk a judge rewriting their payment terms or schedule.

2. The Paradigm Shift: The 2025 Civil Code Enhancement

While Article 249 of the 1985 Law is an effective tool for rebalancing an agreement, the regulatory landscape is about to become considerably more robust. The introduction of the new UAE Civil Transactions Law (Federal Decree-Law No. 25 of 2025), coming into effect in June 2026, represents a significant evolution in risk allocation.

Under the equivalent hardship and unforeseen circumstances provisions of the New Law, the framework is expanding. Where the 1985 Law permitted adjusting or reducing the obligation to a reasonable level, the New Law explicitly empowers the courts to order the total rescission of the contract if the hardship cannot be mitigated equitably.

For contractors managing complex projects spanning the transition period between the two codes, this is a distinct advantage. The looming threat of a court electing to entirely unwind a contract – effectively providing the contractor with a "clean break" from a financially ruinous project – gives contractors substantial leverage to demand realistic cost and time adjustments from developers today. Furthermore, the New Law is anticipated to provide further, precise definitions regarding the foreseeability threshold and strict notice obligations.

3. Establishing the Burden of Proof Under Hardship

To utilize these provisions effectively in a negotiated settlement or formal dispute, contractors must systematically build their evidentiary case. Empty claims of "regional instability" will not suffice. The following table establishes the burden of proof required under UAE Law:

Moving Forward

Contractors are not expected to act as insurers against profound regional geopolitical shifts. By strategically deploying the UAE Civil Code's hardship mechanisms – particularly with the expanded rescission remedies imminent under the New Law – contractors can protect their balance sheets and force a logical, commercial restructuring of at-risk projects. Proactive claim structuring, meticulous record-keeping, and early legal positioning are paramount to converting this period of external volatility from a definitive loss into a manageable commercial variation.

We shall soon be issuing a series of briefings in relation to the New Law.

Currently, our firm is actively advising clients on issues relating to exceptional circumstances and hardship provisions under UAE law. Should you require assistance in assessing your contractual position or, please contact Humayun Ahmad at hm.ahmad@hadefpartners.com.

This article is intended for general informational purposes only and does not constitute legal advice. Readers should seek independent legal counsel in relation to their specific circumstances.