For businesses operating in the UAE, understanding UAE contract law and the rules governing contract termination in the UAE is essential. Federal Decree-Law No. 25 of 2025 (the new Civil Code) recognises several circumstances in which commercial contracts in the UAE may be terminated:
1. Mutual Agreement (Article 233)
Parties remain free to terminate a contract by mutual agreement. Importantly, Article 233 now expressly permits the parties to mutually rescind only part of a contract, providing greater flexibility where only certain contractual obligations need to be brought to an end.
2. Judicial Rescission for Breach (Article 234)
Where one party fails to perform its contractual obligations, the other party may seek rescission through the courts.
Article 234 now expressly sets out the court’s powers, including the ability to:
- order specific performance instead of rescission;
- grant the defaulting party a grace period to remedy the breach;
- refuse rescission where the breach has been remedied before judgment; and
- decline to rescind the contract where the breach is considered minor.
While these principles had previously been recognised by the courts, they are now expressly incorporated into the legislation, providing greater transparency regarding the court’s approach.
3. Automatic Rescission (Article 235)
A contract may be automatically rescinded where the parties have included an express contractual provision providing for termination upon the occurrence of a specified event or default. This allows parties to define clear contractual exit mechanisms without requiring court intervention.
4. Force Majeure (Article 236)
Article 236 provides significantly greater clarity on the consequences of force majeure by distinguishing between different levels of impossibility:
- Total impossibility: the contract is automatically rescinded.
- Partial impossibility: either party may seek discharge or rescission in respect of the affected obligations.
- Temporary impossibility: either party may request that the contract be modified or rescinded depending on the circumstances.
This structured approach provides clearer guidance than the previous legislation and assists parties in assessing their rights when unforeseen events prevent contractual performance.
5. Termination by Operation of Law (Article 232)
A contract may also be terminated where a specific statutory provision expressly provides for such an outcome. This recognises that certain contracts are subject to specialised legislation that create their own termination regime.
A New Right of Retention
Another notable development is Article 238, which introduces an express right of retention.
Where a contract is rescinded, a party may retain what it has received until the other party:
- returns what it has received under the contract; or
- provides adequate security for that return.
This statutory right strengthens the position of parties seeking reciprocal restitution following termination.
Greater Certainty for Contracting Parties
Although the new Civil Code does not fundamentally alter the principles governing contractual termination, it significantly improves legal certainty by codifying established judicial practice. The express recognition of partial mutual rescission, clearer judicial powers in rescission claims, a more detailed force majeure regime, and the introduction of an express right of retention all contribute to a more predictable legal framework.
For businesses, investors, and individuals entering into commercial contracts in the UAE, these developments reinforce the importance of carefully drafted termination clauses, contract drafting and review, and a clear understanding of the remedies available should a contractual relationship break down.
As the new Civil Code continues to be interpreted by the courts, these provisions are expected to provide greater consistency in contractual commercial disputes and increased confidence for parties conducting business in the UAE. Businesses entering into or exiting commercial contracts in the UAE should ensure that their agreements are properly drafted and reviewed to minimise risk and protect their commercial interests.
Disclaimer: This blog provides general information as of June 2026 and does not constitute legal advice. For bespoke legal advice and assistance, please consult with a qualified commercial lawyers in Dubai.
