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By Ahmed Yehia Hamdalla — Partner, SAT & Co. Advocates and Legal Consultants, Dubai
A supplier signs a twelve-month agreement to deliver steel at a fixed price and watches the market rise thirty per cent in four months. A contractor wins a lump-sum contract and then sees a new levy, a shipping disruption and a labor shortage arrive in the same quarter. A freight forwarder commits to a rate and the route it planned to use is closed. Each of them asks the same question: the contract has become far more expensive to perform, so can we raise the price, suspend, or walk away? UAE law gives three very different answers depending on which of three situations the party is actually in, and most disputes in this area are lost because the party chose the wrong door. This article sets out the three situations, explains how the new Civil Transactions Law, promulgated by Federal Decree-Law No. 25 of 2025 and in force since 1 June 2026, treats each of them, and shows why the drafting of the contract, the giving of notice and the proof of causation usually decide the outcome before any legal principle is reached.
1. Three situations that look alike and are treated differently
The first situation is the ordinary increase in the cost of performance. Prices of materials, freight, labor, energy and money move all the time, and a party that agreed a fixed price agreed to bear that movement. The law offers no relief: the contract is the law of the parties, and a bargain that has become unprofitable is still a bargain. The second situation is exceptional hardship. An event that is general, exceptional and unforeseeable occurs after the contract is made and, without making performance impossible, makes it so onerous that it threatens the debtor with an exorbitant loss. Here the law allows a court to intervene and restore a measure of balance. The third situation is impossibility, the domain of force majeure. An event outside the parties' control makes performance impossible, not merely more expensive, and the obligation is extinguished. The rules, the remedies and the evidence differ in each case, and the first task of any party facing a cost shock is to identify honestly which situation it is in.
2. Ordinary cost increases: the risk you priced
Commercial contracts are instruments for allocating risk, and the risk that inputs will become more expensive is the most ordinary risk of all. A supplier who fixes a price for a year is selling price certainty to its customer and is paid for doing so; a contractor who tenders a lump sum is warranting that it has priced the job. UAE courts have consistently treated fluctuations in the price of materials, currency movements, changes in interest rates and the normal cycles of the market as foreseeable events that fall within the risk assumed by the party who agreed the price. A rise of fifteen or twenty per cent in the cost of an input, however painful, is commerce, not catastrophe. The only relief available in this situation is the relief the parties wrote into the contract: an escalation clause, an index-linked price, a fuel or freight surcharge, a currency adjustment mechanism or a renegotiation clause. A party that did not negotiate such a clause has, in the eyes of the law, agreed to bear the risk, and a unilateral demand for a higher price is simply a proposal to amend the contract that the other side is free to refuse.
3. Exceptional hardship: the court restores the balance
The doctrine of exceptional circumstances, which UAE lawyers have known for decades from Article 249 of the 1985 Civil Transactions Law, survives in the new law and has been strengthened. Under Article 224 of Federal Decree-Law No. 25 of 2025, where exceptional and general events that could not have been foreseen at the time of contracting occur after the contract is concluded, and performance of the contractual obligation, although not impossible, becomes so onerous that it threatens the debtor with an exorbitant loss, the court may, according to the circumstances and after balancing the interests of both parties, reduce the onerous obligation to a reasonable extent where justice so requires. The new law adds a remedy that the old law did not provide: the court may also rescind the contract where reduction is not an adequate answer. Any agreement that excludes the operation of this provision is void.
Each element of the test carries weight, and the courts apply them strictly. The event must be exceptional, meaning outside the ordinary course of things, and general, meaning that it affects a class of people or the market as a whole rather than the debtor alone; a debtor's own financial difficulties, the insolvency of its supplier or the loss of its key personnel are personal misfortunes, not general events. The event must have been unforeseeable when the contract was made, which is why the same event can be exceptional for a contract signed before it and an assumed risk for a contract signed after it began. Performance must remain possible, because if it has become impossible the case belongs to force majeure. And the burden must go beyond ordinary loss to an exorbitant loss that threatens the debtor: reduced profit or a disappointing margin will not do. When those elements are established, the court's task is to restore reasonable balance, not to rewrite the deal in the debtor's favor, and the creditor's interests weigh in the balance as much as the debtor's.
Two practical consequences follow. Hardship is not a right that a party exercises by itself. A supplier cannot lawfully raise its price, suspend deliveries or refuse performance on the ground that circumstances have changed; it must continue to perform, or negotiate an amendment, and apply to the court or the arbitral tribunal for relief. A party that stops performing on its own assessment of hardship is in breach, and the breach will usually cost more than the hardship. Secondly, because the provision is mandatory, a clause providing that the price is fixed "under all circumstances" or that the contractor "waives any claim for exceptional circumstances" will not be enforced; but the same mandatory character means that the court, not the contract, decides what relief is reasonable, and a party that wants predictability should provide its own hardship mechanism, with defined triggers and a defined adjustment, which the courts will apply in the first instance.
4. Force majeure: when performance becomes impossible
Force majeure operates in a different register. Article 236 of the new law carries forward the rule that UAE practitioners knew as Article 273 of the 1985 law: in a bilateral contract, where a force majeure event renders performance of an obligation impossible, that obligation is extinguished, the corresponding obligation lapses and the contract is rescinded by operation of law. Where the impossibility is partial, only the corresponding part of the obligation lapses; where it is temporary, in a continuing contract, the obligation is suspended; and in both cases the creditor may elect to rescind the contract provided the debtor is aware of it. The general rule on liability completes the picture: a party is not liable for damage that results from a foreign cause, such as force majeure, an unexpected event, the act of a third party or the act of the injured party, unless the law or the agreement provides otherwise.
The critical word is impossibility. Force majeure excuses a party from an obligation it cannot perform; it does not excuse a party from an obligation it can perform only at a loss. Increased cost, however severe, is never impossibility, and the UAE courts have repeatedly refused force majeure defenses built on expense, delay in obtaining materials or the loss of a profitable route where an alternative, even a much more expensive one, existed. The event must also be external to the party invoking it, unforeseeable at the time of contracting and irresistible in its effects. Because the statutory rule is a default rule, the contract may modify it in either direction: a well-drafted force majeure clause can extend relief to events that fall short of impossibility, such as government restrictions that make performance impractical, or it can narrow it by allocating specified risks to one party; and a party that has expressly assumed a risk cannot later plead it as force majeure.
5. Supply, construction and shipping: how the rules bite in practice
In supply contracts the dividing line is usually clear. A price increase of raw materials is the supplier's risk unless the contract says otherwise; an export ban imposed by the country of origin, a sanctions designation of the sole manufacturer or the destruction of the only production facility may amount to impossibility or, where substitutes exist at ruinous cost, to hardship. The supplier's protection lies in escalation clauses, index-linking, minimum-order flexibility and a hardship clause that obliges the parties to renegotiate when a defined threshold is crossed.
In construction the new law has made its most significant change. Under the 1985 law a contractor working under a lump-sum contract was bound by the agreed price and could not claim an increase merely because materials or labor had become more expensive, and relief was confined to the general hardship provision. Article 829(3) of the new law now expressly permits the court, where unforeseeable general exceptional circumstances disrupt the financial basis of a lump-sum construction contract, to extend the time for performance, to increase or reduce the price, or to rescind the contract. This aligns the statutory position with the reality of long projects exposed to pandemics, supply shocks and regulatory change, and it means that employers can no longer assume that a fixed price transfers every risk to the contractor. The contractual machinery of the FIDIC forms and their local variants, with their notice periods, claim procedures and change-in-law clauses, will remain the first battleground, but the statutory power now stands behind it.
In shipping and logistics the analysis turns on the difference between a closed route and an expensive one. The closure of a port or waterway to all traffic may render a specific carriage impossible; the diversion of a voyage around a longer route, with higher fuel and insurance costs, is a cost increase that falls where the contract places it, which is why charterparties, freight contracts and forwarding terms deal expressly with war-risk surcharges, deviation, bunker adjustment and the allocation of the cost of rerouting. A forwarder who agreed a fixed rate without such protection is in the same position as the fixed-price supplier.
6. Drafting, notice and proof: where the claim is won or lost
Whatever the legal category, the outcome in practice depends on three things. The first is the contract. A hardship clause should define the trigger, whether by reference to a percentage increase in a specified index or to categories of event, impose a duty to renegotiate in good faith within a fixed period, prescribe the adjustment if renegotiation fails and, if the parties wish, provide for termination. A force majeure clause should list the events, state whether it extends to events that make performance impractical rather than impossible, set the notice period and its consequences, require mitigation, provide for suspension and extension of time, and fix the point at which either party may terminate. Clauses of this kind will be applied by the courts before the statutory provisions and, within the limits set by the mandatory character of Article 224, will govern the relationship.
The second is notice. Most sophisticated contracts make timely written notice a condition of relief, and the UAE courts enforce such conditions. A contractor that discovers a qualifying event and notifies the employer six months later, after the claim has crystallised, will usually find that the contractual door is closed, whatever the merits. Notice should be given promptly, in the form the contract requires, should identify the event, its effect on performance and the relief sought, and should reserve the party's rights; and the party should continue to perform, or to perform to the extent possible, while the notice is dealt with.
The third is proof. The party invoking hardship or force majeure bears the burden of proving the event, its exceptional and unforeseeable character, the causal link between the event and the impossibility or the exorbitant loss, and its own efforts to mitigate. That proof is built from contemporaneous documents: the market indices at the date of contracting and at the date of the claim, supplier correspondence, evidence of attempts to source alternatives, cost records, government decisions and expert analysis. A claim that rests on a general assertion that "costs have gone up because of the crisis" will fail; a claim that shows, item by item, how an identified event converted a priced risk into an unforeseeable and exorbitant loss has a realistic prospect of relief.
7. A short decision test
The party facing a cost shock should ask three questions in order. Has performance become impossible, in whole or in part, because of an external and irresistible event? If so, the case is one of force majeure, the obligation is extinguished to that extent, and the immediate task is to give notice and document the impossibility. If performance remains possible, was the increase caused by an exceptional and general event that could not have been foreseen when the contract was made, and does it threaten an exorbitant loss rather than a reduced margin? If so, the case is one of hardship, the party must continue to perform while it negotiates and, failing agreement, applies to the court or tribunal for adjustment. If neither question can be answered affirmatively, the increase is an ordinary commercial risk; the party should look to the escalation and renegotiation mechanisms in its contract and, if there are none, decide commercially whether to perform at a loss or to negotiate a variation, knowing that the law will not intervene.
Conclusion
The new Civil Transactions Law has not abolished the principle that contracts bind. It has confirmed that ordinary cost increases are borne by the party that priced them, sharpened the court's power to restore balance when a truly exceptional event disrupts the bargain, extended that power expressly to lump-sum construction contracts, and preserved force majeure for the narrow case of impossibility. For businesses in supply, construction and logistics the practical lesson is unchanged and more urgent: write the adjustment mechanism into the contract, give notice the day the event occurs, and keep the evidence, because the difference between an expensive contract and a relievable one is proved, not asserted.
Sources: Federal Decree-Law No. 25 of 2025 promulgating the Civil Transactions Law (in force 1 June 2026), in particular the provisions on exceptional circumstances (Article 224), force majeure and impossibility (Article 236) and lump-sum construction contracts (Article 829); Federal Law No. 5 of 1985 (the previous Civil Transactions Law), Articles 249, 273 and 287. Article numbers of the 2025 law are given as reported in published commentaries on the new law and should be checked against the Official Gazette text before being cited in proceedings.
This article is general commentary and not legal advice on any specific contract.