War, Supply Disruption and Price Shocks: When Can UAE Construction Contracts Be Rebalanced?

Construction projects are particularly vulnerable to geopolitical instability, international conflicts and disruptions to global supply chains. War, trade restrictions, shipping interruptions and sudden increases in the cost of essential construction materials can significantly affect project budgets and completion schedules. For contractors operating in the UAE, such circumstances raise an important legal question: when does an unexpected increase in the cost of performing a construction contract justify an adjustment to the agreed contractual obligations?

The UAE Civil Transactions Law, introduced under Federal Decree by Law No. (25) of 2025 Promulgating the Civil Transactions Law and effective from 1 June 2026, provides a legal framework for addressing exceptional circumstances that fundamentally alter the contractual balance. In particular, Article 224 addresses unforeseen exceptional circumstances, while Article 829 introduces a specific mechanism for restoring contractual equilibrium in construction contracts. These provisions are particularly relevant where external events substantially increase the financial burden of completing a project.

Exceptional Circumstances Under Article 224

Article 224 of the Civil Transactions Law addresses situations in which exceptional and general circumstances arise that could not have been foreseen when the contract was concluded. Where such circumstances make the performance of a contractual obligation excessively onerous for the debtor and threaten serious loss, the court may, after balancing the interests of both parties, reduce the onerous obligation to a reasonable level or order the rescission of the contract. Any agreement seeking to exclude the application of this provision is void.

The provision recognises that contractual obligations may become disproportionately burdensome because of circumstances beyond the parties’ reasonable expectations. In construction projects, these circumstances may include armed conflicts, significant restrictions on international trade, disruption of major shipping routes, export prohibitions and extraordinary increases in the prices of essential materials.

Nevertheless, the mere occurrence of an external event or an increase in project expenditure does not automatically establish a right to contractual relief. The circumstances must be exceptional, general in nature and unforeseeable at the time of contracting. Furthermore, the resulting financial burden must be sufficiently serious to threaten substantial loss. Ordinary market fluctuations, foreseeable inflation, inadequate cost estimates or commercial miscalculations would not ordinarily satisfy this threshold.

The Distinction Between Hardship and Force Majeure

An important distinction must be drawn between hardship and force majeure. Although both doctrines concern events beyond the reasonable control of contracting parties, they address different degrees of contractual disruption.

Force majeure is addressed under Article 236 of the Civil Transactions Law. In bilateral contracts, where a force majeure event renders performance impossible, the corresponding obligations are extinguished and the contract is automatically rescinded. Where impossibility is partial, the affected obligation may be extinguished or either party may seek rescission of the contract. Where impossibility is temporary in a continuing contract, the parties may seek an appropriate modification or rescission, depending on the circumstances.

Hardship, on the other hand, concerns circumstances where performance remains possible but has become excessively onerous. For example, a contractor may still be capable of obtaining steel, cement or specialist equipment through alternative suppliers or shipping routes, but only at substantially higher prices and with considerable logistical difficulties. Such circumstances do not necessarily make performance impossible. They may, however, raise a legitimate question of hardship if the increased burden threatens serious financial loss and satisfies the statutory requirements.

Accordingly, contractors should not automatically classify increased procurement costs or supply chain disruptions as force majeure. The appropriate legal remedy depends on the actual effect of the event on the contractual obligation.

The Special Position of Construction Contracts Under Article 829

In addition to the general hardship provision, Article 829 introduces a specific mechanism concerning Muqawala contracts, including construction contracts. Under Article 829(1), where a Muqawala contract is based on an agreed design for lump-sum remuneration, the contractor is generally not entitled to an increase in the agreed price merely because the cost of materials, labour or other expenses has increased. Article 829(2) similarly regulates modifications or additions to the agreed design, subject to the specified exceptions relating to the employer’s fault or authorisation and agreement on additional remuneration.

However, Article 829(3) provides an important qualification. Where general exceptional circumstances that could not have been foreseen at the time of contracting disrupt the contractual equilibrium between the employer and contractor and undermine the financial basis upon which the contract price was determined, the court may order measures to restore that equilibrium. Such measures may include extending the execution period, increasing or reducing the agreed remuneration, or rescinding the contract.

This provision is particularly significant for long-term infrastructure and construction projects involving substantial procurement commitments and extended execution periods. It recognises that, in genuinely exceptional circumstances, maintaining the original contractual price and completion obligations may no longer reflect the financial basis upon which the parties entered into the agreement.

However, Article 829 does not create an automatic entitlement to additional payment. The contractor must demonstrate that the exceptional circumstances have fundamentally disrupted the contractual balance, rather than merely reduced the anticipated profit margin.

Notice, Mitigation and Evidence of Actual Impact

A party seeking relief must demonstrate the exceptional circumstances relied upon and their actual effect on contractual performance. Although Articles 224 and 829 do not prescribe a specific notice period or documentary checklist, compliance with applicable contractual notification requirements and the maintenance of contemporaneous evidence remain important when pursuing a claim.

Contractors should maintain contemporaneous records of supplier quotations, purchase orders, revised invoices, shipping notifications, insurance premiums and material price comparisons. Where delays are alleged, project programmes, delivery schedules, correspondence with suppliers and critical path analyses may be necessary to establish the extent to which the event affected completion.

Contractual notice requirements must also be observed. Construction agreements frequently prescribe specific periods and procedures for notifying the employer of events affecting time or cost. Failure to comply with these requirements may complicate a claim, even where the underlying circumstances are exceptional. Contractors should also demonstrate reasonable mitigation efforts, including exploring alternative suppliers, procurement routes and available materials, wherever commercially and practically feasible.

Reviewing Construction Contracts for Future Disruptions

The evolving statutory framework highlights the importance of carefully drafted risk allocation provisions. Long-term construction and infrastructure contracts should distinguish between force majeure events, exceptional hardship and ordinary price escalation. They should also address material price adjustment mechanisms, defined cost thresholds, notice periods, supporting documentation and the circumstances in which extensions of time or additional remuneration may be considered.

Parties should also examine the application of Article 829(3) to their contractual arrangements, particularly as it does not expressly contain the same prohibition against contracting out found in Article 224. Existing contracts require consideration of the applicable governing law and the transitional provisions under Article 4, which establishes the general rule against retrospective application of the new Law.

Ultimately, the UAE legal framework does not provide contractors with a general right to transfer every unexpected increase in project costs to employers. However, it recognises that genuinely exceptional circumstances may justify judicial intervention where the contractual equilibrium is disrupted and the financial basis of the construction contract is undermined. The distinction between commercial inconvenience and legally recognised hardship remains central to determining whether contractual obligations can be rebalanced.

For contractors, developers and project owners facing disputes over rising construction costs, supply chain disruptions or contractual obligations, AY Advocates provides legal advice and representation in construction and commercial disputes. Contact the firm to assess your contractual rights, available remedies and options for resolving disputes under UAE law.