Payment Disputes in UAE Construction Projects

The UAE has no statutory adjudication regime, but it does have suspension rights, precautionary attachment, and payment order mechanisms that most contractors underuse

Late payment and non-payment are the most common triggers for construction disputes in the UAE. A contractor that has completed work, submitted a payment application, received certification from the engineer, and still does not receive payment faces a cash flow crisis that compounds with every week of delay. Subcontractors and suppliers downstream face the same pressure, often with fewer contractual protections and smaller reserves.

The UAE does not have a construction-specific payment statute comparable to the UK's Housing Grants, Construction and Regeneration Act 1996. There is no statutory adjudication, no automatic right to refer payment disputes to a rapid determination process, and no prohibition on "pay-when-paid" clauses. Contractors must rely on a combination of Civil Code provisions, contractual rights under FIDIC or bespoke contracts, and court remedies that are effective but require early action and careful documentation.

• Article 247 of the Civil Code gives the contractor a statutory right to suspend for non-payment. The contractor can refuse to continue performing its obligations if the employer has failed to perform its mutual obligation to pay. This right exists even if the contract does not include a suspension clause. The right is subject to proportionality and good faith under Article 246, meaning the contractor should issue a written notice before suspending and should consider whether the employer has a legitimate justification for withholding payment.
• Precautionary attachment is the most effective interim remedy. Under Article 247 of Federal Decree-Law No. 42 of 2022 (the Civil Procedure Law), a contractor can apply to the summary judge for an order provisionally attaching the employer's assets (bank accounts, real property, vehicles) to secure a monetary claim. The application can be made ex parte and before formal proceedings are commenced. If the attachment is granted, the contractor must file the substantive claim within eight days or the order lapses.
• An order for payment can bypass standard litigation. Where the debt is undisputed, clearly documented, and evidenced by a commercial instrument (such as a certified IPC or an accepted invoice), the contractor can seek a summary payment order from the court. This mechanism is faster and cheaper than a full trial, though courts grant it only in clear-cut cases.
• Set-off by the employer is the most common defence to a payment claim. The employer asserts a counterclaim for defects, delay liquidated damages, or back-charges, and withholds the corresponding amount from the contractor's certified payment. Under UAE law, set-off is permitted where the counterclaim is connected to the same contract and the amount is liquid and ascertainable. The dispute arises when the employer's counterclaim is not quantified, not certified, or not connected to the specific payment application against which it is being set off.
• The new Civil Code (effective 1 June 2026) introduces express notice obligations. Article 816(3) of Federal Decree-Law No. 25 of 2025 requires contractors to notify the employer immediately of events that may impede proper execution. Failure to give notice may result in the contractor bearing the consequences of the event. This provision is relevant to payment disputes because a contractor that does not formally notify the employer of non-payment before suspending work risks being treated as the party in default.

Who this applies to

This article is for contractors, subcontractors, project owners, and their legal and commercial teams on UAE construction projects. It applies to FIDIC-based contracts, bespoke contracts, and government procurement contracts. It is also relevant to construction lawyers in Dubai advising on interim payment disputes, suspension strategy, and enforcement of payment claims.

For contractors dealing with a specific unpaid interim payment certificate, our article on unpaid IPCs in UAE construction projects covers the claim pathway in detail. For contractors considering termination as a last resort, see our article on how to terminate a construction contract in the UAE.

The payment cycle: how money is supposed to flow

A typical UAE construction payment cycle runs as follows:

Step 1: Payment application. The contractor submits a monthly payment application to the engineer (or the employer's representative), supported by progress reports, measurement records, material delivery receipts, and any variation or claim documentation. FIDIC 1999 Red Book (Sub-Clause 14.3) requires the contractor to submit a statement at the end of each month showing the amounts to which the contractor considers itself entitled.

Step 2: Certification. The engineer reviews the application and issues an Interim Payment Certificate (IPC) within 28 days (FIDIC 1999 Red Book, Sub-Clause 14.6). The IPC certifies the amount the engineer considers due to the contractor. The engineer may adjust the amount by deducting retention (typically 10%, with 5% released at taking-over and 5% after the defects notification period), applying set-off for liquidated damages already accrued, and deducting any amounts previously overpaid.

Step 3: Payment. The employer must pay the certified amount within 56 days of receiving the contractor's statement (FIDIC 1999 Red Book, Sub-Clause 14.7). Many bespoke UAE contracts shorten or extend this period. Late payment entitles the contractor to financing charges at a rate specified in the contract or, absent contractual provision, at the rate fixed by the Central Bank.

Step 4: Dispute (if payment is not made). If the employer does not pay the certified amount, the contractor has options ranging from suspension to termination to court or arbitral proceedings.

Worked example: the cost of a 90-day payment delay. A contractor on a AED 200 million project submits a monthly payment application of AED 8 million. The engineer certifies AED 7.2 million (after 10% retention). The employer does not pay. The contractor's direct monthly costs (labour, materials, plant hire, subcontractor payments) continue at approximately AED 6 million per month. After 90 days of non-payment, the contractor has funded AED 18 million in costs from its own reserves. If the contractor's cost of capital is 8% per annum, the financing cost of carrying AED 18 million for three months is approximately AED 360,000. The contractor has also lost the opportunity to deploy that capital on other projects. The 90-day delay on a single IPC can erode the contractor's margin on the entire project.

Suspension for non-payment

The statutory right under Article 247

Article 247 of the Civil Code (Federal Law No. 5 of 1985, and its equivalent in the new Civil Code effective 1 June 2026) provides:

"In contracts binding upon both parties, if the mutual obligations are due for performance, each of the parties may refuse to perform his obligation if the other contracting party does not perform his."

This gives the contractor a legal right to suspend work if the employer fails to pay amounts that are due. The right exists independently of the contract. A contract that does not include a suspension clause does not deprive the contractor of the right under Article 247.

Practical requirements for a lawful suspension

A contractor exercising Article 247 should follow these steps to reduce the risk of the suspension being treated as wrongful:

1. Document the employer's default. Assemble a clear record showing that a payment application was submitted, an IPC was issued (or should have been issued), the payment deadline passed, and no payment was received. If the engineer has failed to certify, document that too.
2. Issue a written notice. Send a formal notice to the employer identifying the unpaid amount, the contractual payment deadline that was missed, and the contractor's intention to suspend work if payment is not received within a specified period (14 to 21 days is reasonable). The notice should reference Article 247 of the Civil Code and any contractual suspension rights.
3. Consider proportionality. Under Article 246, contracts must be performed in accordance with good faith. A suspension that is disproportionate to the default may be challenged by the employer. A contractor that suspends an entire AED 200 million project over a disputed AED 50,000 deduction is more vulnerable than a contractor that suspends after three consecutive IPCs totalling AED 21 million remain unpaid.
4. Do not treat suspension as termination. Suspension under Article 247 is not termination. The contract remains in force. If the employer pays, the contractor must resume. If the contractor wants to terminate, it needs either a contractual right, mutual consent, or a court order under Article 892.

FIDIC suspension rights

Under FIDIC 1999 Red Book Sub-Clause 16.1, if the employer fails to pay the contractor within the time stated in Sub-Clause 14.7, the contractor may, after giving 21 days' notice to the employer, suspend work (or reduce the rate of work) unless and until the contractor has received the payment, plus financing charges. Sub-Clause 16.1 also entitles the contractor to an extension of time and payment of the cost of suspension (plus reasonable profit under the 1999 version).

The FIDIC right and the Article 247 right can be exercised in parallel. The FIDIC right has the advantage of an express entitlement to time extension and cost recovery. The Article 247 right has the advantage of existing even where the FIDIC right has been amended or deleted.

Set-off disputes: the employer's principal defence

How set-off works in UAE construction

When a contractor submits a payment application and the engineer certifies an amount, the employer may assert a right to set off counterclaims against the certified amount. Common employer set-off claims include:

• Delay liquidated damages. The employer asserts that the contractor has exceeded the completion date and deducts LDs from the payment. Under most FIDIC and bespoke contracts, LDs are calculated as a daily or weekly rate applied to the period of contractor-caused delay. Market practice in the UAE caps LDs at 10% of the contract price, though this is negotiable.
• Defects rectification costs. The employer has identified defective work, issued a notice requiring rectification, and the contractor has failed to remedy within the specified period. The employer engages another contractor to rectify and deducts the cost from the next payment.
• Back-charges. The employer has incurred costs that the contract allocates to the contractor (for example, additional supervision costs, utility costs, or waste removal) and deducts them from the payment.
• Advance payment recovery. The employer made an advance payment at the start of the project and recovers a proportion from each interim payment.

When set-off is valid and when it is disputed

Under UAE law, set-off (muqasa) is permitted where both debts are of the same kind (usually money), both are due and payable, and both are liquid and ascertainable (Article 362 of the Civil Code). In practice, the disputes arise when:

• The employer's counterclaim is not yet quantified. For example, the employer asserts that it will claim delay LDs, but the extension of time assessment has not been completed. Deducting an estimated amount from a certified IPC is a common source of conflict.
• The counterclaim is disputed. The contractor contests that any LDs are due because it has submitted an extension of time claim that the engineer has not yet determined. The employer deducts anyway.
• The counterclaim relates to a different contract or project. Cross-project set-off is contentious. UAE courts require a connection between the debt and the counterclaim for set-off to apply.

Worked example: set-off for unquantified LDs. An employer withholds AED 3 million from a certified IPC of AED 7 million, asserting delay LDs at AED 100,000 per day for 30 days. The contractor has submitted an EOT claim for 45 days that the engineer has not yet determined. The contractor argues that the LDs are not liquidated because the entitlement to an EOT has not been resolved. The employer argues that the contract entitles it to deduct LDs from the date of the contractual completion deadline, regardless of any pending EOT claim. This dispute typically requires expert determination or arbitration to resolve. In the meantime, the contractor receives AED 4 million instead of AED 7 million and must fund the AED 3 million shortfall from its own resources.

The employer's set-off must follow the contractual procedure

Under FIDIC, the employer's right to set off or withhold is typically subject to notice requirements. Sub-Clause 2.5 of the FIDIC 1999 Red Book requires the employer to give notice specifying the amount and the basis of the claim before making any deduction. An employer that withholds payment without following the contractual notice procedure may find the withholding treated as a breach of contract, entitling the contractor to suspend under Article 247 or Sub-Clause 16.1.

Contractors that receive a payment below the certified amount should immediately issue a written objection identifying the discrepancy, requesting the employer to explain the basis and amount of any deduction, and reserving the right to claim financing charges, suspension costs, and damages.

Precautionary attachment: securing assets before or during proceedings

How precautionary attachment works

Under Article 247 of the Civil Procedure Law (Federal Decree-Law No. 42 of 2022), a creditor can apply to the summary judge for an order provisionally attaching the debtor's assets. The order prevents the debtor from transferring, selling, or encumbering the attached assets pending resolution of the substantive dispute.

Who can apply. A contractor with a certified but unpaid IPC, an accepted but unpaid invoice, or a court judgment or arbitral award (even one that is not yet final or enforceable) can apply.

What can be attached. Bank accounts, real property, vehicles, and other identifiable assets belonging to the employer. In construction disputes, the most common targets are the employer's project bank account and any real property registered in the employer's name at the Dubai Land Department or the equivalent authority in other emirates.

The eight-day rule. If the precautionary attachment is granted before substantive proceedings are commenced, the contractor must file the substantive claim (court action or arbitration) within eight days. If it fails to do so, the attachment order lapses automatically. This is a hard deadline that catches unprepared contractors.

Costs. Court filing fees for a precautionary attachment application are calculated as a percentage of the claim value, subject to statutory caps. For a claim of AED 10 million, the filing fee is in the range of AED 30,000 to AED 40,000. Legal fees for the application itself typically range from AED 15,000 to AED 50,000 depending on complexity and urgency.

Effectiveness. Precautionary attachment is the single most effective tool for a contractor facing non-payment from an employer that has assets in the UAE. The freezing of bank accounts and real property creates immediate pressure to resolve the payment dispute. Many construction payment disputes in the UAE settle within weeks of a successful attachment order.

Precautionary attachment based on arbitral awards

The Abu Dhabi Court of Cassation confirmed that a precautionary attachment order can be obtained on the basis of an arbitral award, even before the award has been ratified by the UAE courts. The court held that Articles 254(2) and 258 of the Civil Procedure Law require the summary judge to issue a precautionary attachment where the creditor holds a ruling for a specified amount, whether or not the ruling is yet enforceable. This is a significant advantage for contractors whose contracts contain arbitration clauses: the contractor can secure a favourable award and obtain an attachment over the employer's assets simultaneously, before the employer has an opportunity to dissipate.

Pay-when-paid and pay-if-paid clauses

The UAE has no legislation prohibiting pay-when-paid or pay-if-paid clauses. These clauses are a common feature of subcontract payment terms in the UAE.

A pay-when-paid clause makes the subcontractor's entitlement to payment conditional on the main contractor receiving payment from the employer. A pay-if-paid clause goes further: the subcontractor is only entitled to payment if the main contractor is actually paid by the employer, and if the employer never pays, the subcontractor has no claim.

UAE courts have generally upheld pay-when-paid clauses as valid contractual terms, provided they are clearly drafted. The subcontractor's position is weaker than in jurisdictions (such as the UK) where such clauses are prohibited. Subcontractors entering UAE construction projects should negotiate payment terms that include independent payment deadlines rather than relying solely on flow-down from the main contract.

Retention: when is the contractor entitled to release?

Standard UAE practice is 10% retention on each interim payment: 5% released at the taking-over certificate (or practical completion), and 5% released at the end of the defects notification period (typically 12 months after taking-over). On a AED 100 million contract, total retention is AED 10 million, with AED 5 million held for the full defects period.

Disputes over retention release are common. Employers resist releasing the second half of retention if they assert that defects remain unrectified. Contractors argue that the defects are minor and do not justify withholding AED 5 million. Under FIDIC, the engineer's assessment is determinative, but in bespoke contracts, the employer may have broader discretion.

A contractor whose retention is not released after the defects period has expired should treat it as a payment claim and pursue it through the same remedies: written demand, suspension (if the contractor is still on site for other purposes), precautionary attachment, and court or arbitration proceedings.

The new Civil Code: what changes on 1 June 2026

Federal Decree-Law No. 25 of 2025 introduces several provisions relevant to contractor payment security:

Express notice obligation (Article 816(3)). The contractor must notify the employer immediately of events that may impede proper execution. For payment disputes, this means the contractor should issue a formal notice of non-payment as soon as the payment deadline is missed, not weeks later when cash flow has become critical. Failure to give notice may result in the contractor bearing the consequences of the event, which could include losing the right to claim suspension costs or financing charges.

Hardship exception for lump-sum contracts. Where exceptional circumstances substantially upset the contractual balance, the dispute resolution forum can adjust the completion period, increase or decrease remuneration, or terminate the contract. A contractor facing severe cash flow pressure due to prolonged non-payment on a lump-sum contract may be able to invoke this provision, though the threshold for "exceptional circumstances" is high.

Termination for convenience. The new code introduces a statutory right for employers to withdraw from a muqawala contract before completion, with compensation to the contractor for expenses, completed work, and lost profit. This codifies existing court practice but gives contractors a clearer basis for claiming lost profit if the employer terminates mid-project.

Defective work remedies during execution. The employer can issue a formal warning with a correction period and, if the contractor fails to remedy, appoint another contractor at the defaulting contractor's expense without prior court approval. Contractors should expect employers to use this provision as leverage in payment disputes by asserting defects as a justification for withholding.

What contractors should do before and during a payment dispute

• Issue payment applications on time and in the correct format. A late or incomplete payment application gives the engineer a reason to delay certification and the employer a reason to delay payment. Every application should include measured quantities, supporting calculations, variation documentation, and any claim for additional time or money.
• Document every notice. From the moment a payment application is submitted, maintain a chronological record of every notice, certification, objection, and payment. In UAE court and arbitration proceedings, the party with the cleaner document trail prevails.
• Send a formal non-payment notice before suspending. Reference Article 247 of the Civil Code and the applicable contractual clause. Give the employer a specified period (14-21 days) to pay before suspension takes effect. Keep the notice factual and proportionate.
• Apply for precautionary attachment early. Do not wait until formal proceedings are well advanced. A precautionary attachment over the employer's bank accounts or real property creates immediate settlement pressure. Prepare the supporting documentation (certified IPC, contract, non-payment correspondence) in advance so the application can be filed quickly.
• Challenge employer set-off claims in writing. If the employer deducts an amount from a certified payment, issue a written objection within days identifying the discrepancy, the certified amount, and the contractor's position on the employer's counterclaim. Do not allow unquantified or unsubstantiated deductions to pass unchallenged.
• Budget for the dispute. Court filing fees on a AED 10 million claim are AED 30,000-40,000. Arbitration filing and administrative fees (DIAC or ICC) range from AED 50,000 to AED 200,000 depending on the claim value. Legal fees for a payment dispute through to hearing can range from AED 100,000 to AED 500,000. Expert witness fees for quantum assessment add AED 50,000 to AED 150,000. These costs should be weighed against the value of the claim and the probability of recovery.

For guidance on recovery of unpaid invoices through UAE court procedures, see our article on recovering unpaid contractor invoices. For employers considering calls on performance bonds as leverage in payment disputes, our article on bank guarantees in UAE commercial contracts covers the legal framework for demand, restraint, and wrongful call claims.

How should UAE contractors protect their payment position in 2026?

The UAE construction payment environment rewards preparedness and punishes passivity. A contractor that submits applications on time, documents non-payment immediately, sends formal notices, and applies for precautionary attachment within weeks of a missed payment will recover faster and at lower cost than a contractor that tolerates months of delay before seeking legal advice.

The absence of a statutory adjudication regime means that contractors cannot rely on a fast-track government mechanism to resolve payment disputes in 28 days as they might in the UK or Australia. The remedies that exist (Article 247 suspension, precautionary attachment, payment orders, arbitration) are effective, but they require early action, clean documentation, and a clear-eyed assessment of the employer's assets and willingness to pay.

For contractors managing payment risk on UAE construction projects, our construction law team advises on payment application strategy, suspension and termination, precautionary attachment, set-off disputes, and enforcement of arbitral awards and court judgments.

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