Introduction
The construction sector in the United Arab Emirates frequently gives rise to disputes between project owners, contractors, and consultants, particularly concerning delays, defective works, and payment obligations. A recent judgment issued by the Abu Dhabi Court of Cassation in Case No. 221 of 2026 (Commercial – Abu Dhabi Court of Cassation) on 06 April 2026 provides critical judicial guidance on the legal consequences of contract termination, contractor entitlements, and the evidentiary value of expert reports. This article analyses the key legal principles arising from the judgment and their implications under UAE law, particularly in the context of construction contracts.
Background of the Dispute (Case No. 221 of 2026)
The case concerned a contractual relationship between a project owner and a contractor engaged to construct a residential villa under the supervision of a project consultant. The contractor had completed approximately 30% of the works before disputes arose due to alleged technical deficiencies identified by the consultant. Despite the contractor claiming to have rectified the defects, the owner refused to accept the works, resulting in the suspension of the project.
The contractor subsequently initiated legal proceedings seeking:
- Payment for completed works
- Compensation for damages and loss of profit
- Recognition of contractual rights arising from the project suspension
Key Legal Issues Before the Court
The dispute raised several important legal questions:
- Whether a contractor is entitled to payment for completed works after contract termination
- The role and evidentiary weight of expert reports in construction disputes
- The treatment of retention sums and performance guarantees upon termination
- The determination and quantification of damages
- Whether alleged defects justify non-payment or suspension of works
Legal Principle 1: Right to Payment Despite Termination
One of the most significant principles reaffirmed by the Court is that a construction contract is a continuous contract, and termination does not negate the contractor’s right to payment for works already performed.
The Court clearly held that:
Payment for completed works constitutes execution of contractual obligations and is not affected by subsequent termination.
Legal Implication
This principle aligns with the UAE Civil Code (Federal Law No. 5 of 1985), particularly:
- Article 872 et seq – governing contractor obligations
- General contractual principles – requiring compensation for performed obligations
Accordingly, even if a contract is terminated or rescinded, the contractor remains entitled to the value of works executed up to the date of termination.
Legal Principle 2: Authority of Expert Reports
The Court emphasized that expert reports play a central role in construction disputes, particularly in determining:
- Percentage of work completed
- Value of executed works
- Defects and corresponding deductions
- Financial settlement between parties
The Court further held that:
The trial court has full discretion to rely on expert reports where it is satisfied as to their accuracy and reasoning.
Application in the Case
The expert adopted two valuation methodologies:
- Based on the agreed bill of quantities
- Based on percentages approved by the project’s financing bank
The Court accepted the second method, resulting in a valuation of approximately 27.53% completion, forming the basis of the final award.
Legal Implication
This confirms that:
- Courts are not bound to address every objection raised against expert findings
- Expert reports, once accepted, become the primary evidentiary foundation for judgment
- Parties must carefully engage with expert proceedings, as later challenges are limited
Legal Principle 3: Release of Retention and Performance Guarantees
A critical aspect of the judgment relates to retention amounts and performance guarantees, which are standard in construction contracts.
The Court held that:
Upon termination and settlement of accounts, there is no legal basis to retain performance guarantees or contractual retentions.
Outcome in the Case
The Court ordered the release of:
- Performance guarantee (AED 200,000)
- Retention amounts (AED 39,480)
These amounts were added to the contractor’s entitlement.
Legal Implication
This establishes that:
- Retention serves as security for performance—not a penalty
- Once obligations are assessed and settled, retention must be released
- Employers cannot unjustifiably withhold such amounts post-termination
Legal Principle 4: Damages and Judicial Discretion
The Court reaffirmed that assessment of damages falls within the discretionary authority of the trial court, provided that:
- Damage is proven
- Causation is established
- The reasoning is supported by evidence
In this case, the Court found that:
- The owner unjustifiably suspended the works
- The contractor suffered financial harm due to delayed payments
- A causal link existed between the owner’s actions and the contractor’s losses
Legal Implication
Under UAE law:
- Compensation includes both actual loss and loss of profit
- Courts are not bound by fixed formulas
- Judicial discretion plays a significant role in quantifying damages
Legal Principle 5: Impact of Defects on Payment
The project owner argued that defects in execution justified withholding payment and claiming damages.
However, the Court clarified that:
Defects must be quantified and deducted, not used to entirely deny payment.
Such deductions fall within the expert’s mandate.
Application in the Case
- Defects and violations were assessed and deducted (AED 14,300)
- The contractor was still entitled to the net balance
Legal Implication
This reinforces that:
- Defective work does not automatically extinguish payment rights
- The correct legal approach is adjustment, not denial
- Employers must act proportionately and in good faith
Final Judgment and Outcome
The Abu Dhabi Court of Cassation ultimately:
- Rejected the appeal filed by the project owner
- Upheld the appellate judgment awarding approximately AED 420,285.30 to the contractor
- Confirmed the release of retained amounts and performance guarantee
- Imposed legal costs on the appellant
Key Takeaways for Construction Stakeholders
For Contractors
- Maintain proper documentation of work progress
- Engage proactively in expert proceedings
- Assert entitlement to payment even after termination
For Project Owners
- Avoid unjustified suspension of works
- Ensure defects are properly documented and quantified
- Understand that retention and guarantees cannot be indefinitely withheld
Conclusion
The Abu Dhabi Court of Cassation’s decision reinforces fundamental principles of UAE construction law—particularly the protection of contractors’ financial rights, the binding nature of expert findings, and the structured approach to damages and contract termination.
This case serves as a strong judicial precedent confirming that termination of a contract does not negate accrued rights, and that equitable financial settlement remains the cornerstone of construction dispute resolution in the UAE.
Frequently Asked Questions (FAQ)
1. Does contract termination end a contractor’s right to payment in the UAE?
No. A construction contract is considered continuous. A contractor is entitled to payment for all works executed up to the date of termination.
2. How is the value of completed work determined in a dispute?
Courts rely heavily on independent expert reports. These experts calculate the percentage of completion and the value of work based on agreed bills of quantities or bank-approved percentages.
3. When should retention sums be released to the contractor?
Upon termination and final settlement of accounts, retention amounts and performance guarantees must be released as they serve as security for performance, not a penalty.
4. Can an owner refuse to pay a contractor if defects are found?
No. Defects must be quantified and deducted from the total amount due. An owner cannot use defects as a reason to withhold the entire payment for completed works.
5. Does compensation for termination include loss of profit?
Yes. Under UAE law, if damage and causation are proven, compensation can include both the actual financial loss and the loss of profit suffered by the contractor.
If you require further clarification or legal assistance concerning the matters discussed in this article, please do not hesitate to contact Khairallah Advocates & Legal Consultants LLC. Our lawyers would be happy to assist you.
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