The UAE’s forthcoming Civil Transactions Law reform, effective 1 June 2026, marks one of the most significant contractual liability shifts in decades. Among its most consequential provisions for the construction and infrastructure sector is Article 340, which fundamentally reclaims how agreed compensation, particularly delay damages, is assessed, challenged, and enforced.
Under the current Civil Transactions Law of 1985, Article 390 permitted parties to agree compensation in advance but granted courts broad discretion to vary that amount upon application by either party. While courts routinely exercised this power where compensation appeared disproportionate to actual loss, the law provided limited statutory guidance on when and how that discretion should be carried out.
Article 340 replaces this general discretion with explicit statutory criteria. Instead of broad, open-ended power, courts now operate within a defined analytical framework.
The Five Pillars of Article 340
Article 340 establishes five key rules governing agreed compensation:
- Parties may agree with compensation in advance through the contract or subsequent agreement.
- Courts may reduce agreed compensation if it is proven exaggerated or if the obligation was partially fulfilled.
- Courts may reduce or eliminate compensation where the creditor contributed to the loss.
- Creditors may claim compensation exceeding the agreed amount if fraud or gross fault is established.
- Any agreement contradicting these provisions is void.
Collectively, these provisions codify principles that previously existed in jurisprudence but were not systematically articulated in legislation.
Three Express Grounds to Challenge Delay Damages
For contractors and project participants, Article 340 effectively provides three statutory routes to contest delay damages:
- Exaggeration. Where agreed damages exceed demonstrable loss, courts now have explicit authority to adjust them. The burden rests on the debtor to prove disproportion.
- Partial Performance. If substantial portions of contractual obligations were fulfilled, compensation may be reduced to reflect actual performance value.
- Creditor Contribution. If the employer or beneficiary contributed to delay or loss, whether through late approvals, design changes, or site access issues, damages may be reduced or eliminated.
A New Risk to Be Aware Of
Article 340 does not solely empower contractors. It also arms employers with a powerful countermeasure.
Where the debtor commits fraud or gross fault, the creditor may claim damages exceeding the agreed amount. This is a notable departure from the traditional understanding of liquidated damages as a liability ceiling.
Practically, this means delay damages clauses no longer function as absolute caps where serious misconduct is proven. The clause becomes a starting point, not a limit.
Contract Drafting Implications
The practical effect of Article 340 will be felt first in contract negotiation rather than in courtrooms.
Parties should now:
- reassess standard delay damages percentages,
- document assumptions used to calculate them,
- maintain contemporaneous evidence of loss calculations,
- allocate responsibility for delay causes with greater precision, and
- ensure records and notices are rigorously maintained.
Poor documentation will weaken reliance on agreed compensation. Conversely, well-supported calculations may strengthen enforceability.
Strategic Impact on Disputes
From a disputes standpoint, Article 340 reshapes advocacy strategy.
Future delay damages disputes will likely focus on evidentiary proof of actual loss, expert analysis of proportionality, causation mapping between parties’ conduct, and forensic delay analysis demonstrating contributory fault.
This elevates the importance of quantum experts, delay analysts, and technical records. Arguments will increasingly revolve around statutory thresholds rather than purely contractual interpretation.
Conclusion
Article 340 represents more than legislative refinement. It signals a policy shift toward proportionality, fairness, and evidentiary accountability in contractual compensation.
For industry stakeholders, the message is clear: agreed compensation clauses remain valid but they must now withstand structured legal scrutiny.
Those who adapt their contracts, records, and dispute strategies accordingly will be best positioned in the new legal landscape.
For practical guidance on managing decennial exposure, limitation risk, and recovery strategy under the 2026 Civil Code, please contact Merline Dsouza at merline@alsuwaidi.ae.