Which contracts are affected
Federal Decree Law No. 25 of 2025 (the new Civil Code) entered into force from June 1, 2026. It repealed and replaced Federal Law No. (5) of 1985 (the old Civil Code).
It does not apply retroactively. Parties negotiating and entering into new contracts after June 1, 2026 will be governed by the new Civil Code in their negotiations, contract administration, and future disputes.
Practical takeaway
For contracts entered into prior to June 1, 2026, be aware of which Civil Code applies, including to any future amendments and future disputes.
Choice of law
The new Civil Code expressly states that contractual obligations (except as they relate to immovable property) shall be governed by the law of the country agreed upon by the parties. This updated wording improves parties’ ability to select the governing law to apply to their contracts.
Practical takeaway
While the new provision is a welcome development, the key question will be whether local courts will apply foreign law when it is chosen by the parties.
Pre-contractual negotiations
Perhaps the most significant development in the new Civil Code is the introduction of obligations on parties during the negotiation phase, prior to contract execution. These are set out in Articles 121 to 123.
In particular, the new Civil Code provides the following:
- Parties are expressly required to negotiate in accordance with the requirements of good faith. Negotiating in bad faith, including terminating negotiations in bad faith, shall result in liability to the other party.
- There is a mandatory duty of disclosure of information that is essential and decisive for the consent of the other party. A breach of this obligation can result in the annulment of the contract.
Practical takeaway
Parties must be aware that they will be subject to these obligations during negotiations, even if no contract is agreed. Disputes over contract performance and interpretation may now potentially include claims regarding conduct during the negotiations, likely increasing the importance of any documents exchanged or prepared during the tender phase. It will be important to see how courts interpret this obligation, including what is found to constitute bad faith.
Limitation periods
The provisions of the new Civil Code shall apply to all limitation periods that have not yet been completed.
Where time has started to run out on an existing limitation period, the following applies:
- The provisions of the old Civil Code shall apply to the existing commencement, suspension and interruptions to the period before the introduction of the new Civil Code.
- If the time remaining to bring an existing claim within the limitation period under the old Civil Code is shorter than the corresponding limitation period under the new Civil Code, then time shall lapse on expiry of the limitation period under the old Civil Code.
- If the time remaining to bring an existing claim within the limitation period under the old Civil Code is longer than the corresponding limitation period under the new Civil Code, then time shall lapse on expiry of the limitation period under the new Civil Code.
Practical takeaway
It is imperative to recalculate the limitation period for claims. Where the time periods differ, the new Civil Code will impact all limitation periods that have not yet run out.
Contracts for work (Muqawala)
The new Civil Code provides a number of updates and clarifications for the legislative framework for Muqawala contracts, whereby one party undertakes to manufacture a thing or perform works for consideration.
These changes include:
- a requirement on the contractor to complete work according to the recognized professional standards and within a reasonable period of time, if not otherwise agreed in the contract
- a requirement on the contractor to provide immediate notice of any defects in the materials provided by the employer or other factors that would hinder the execution of the work, failing which, the contractor would be liable for any consequences
- removal of the need to apply to a court for the cancellation of a contract or the appointment of a replacement contractor (at the contractor’s expense) in circumstances where the contractor is performing the work in violation of the contractual terms, provided that the employer has established the relevant facts
- the ability for an employer to seek immediate rescission of a contract if rectification of defects is impossible or if delays make it absolutely unlikely that the work will be completed within the agreed period or if the contractor’s conduct indicates an intent not to perform its obligations
- a “termination for convenience” framework in Article 836, whereby an employer may be released from a contract by compensating the contractor for all incurred expenses and expected profit if the work had been completed (subject to any reduction by a court, if deemed equitable due to savings or other work undertaken by the contractor).
Practical takeaway
The ability to terminate a contract for breach, without requiring a court order, is a welcome development, which reflects the approach parties take in their construction contracts.
Liquidated damages
Article 340 of the new Civil Code expands on the ability of a court to vary the contractually agreed liquidated damages, by expressly permitting a court to:
- reduce the agreed compensation if the debtor proves that the assessment was excessive or that the original obligation has been partially performed
- reduce or prohibit the agreed compensation if the creditor contributed to the occurrence or increased the damage suffered
- allow a creditor to claim above the agreed compensation if the debtor is proven to have committed fraud or gross fault.
The parties are not permitted to contract out of Article 340, which provides that any agreement contrary to it shall be void.
Practical takeaway
This is not a significant change from the old Civil Code, which allowed courts to revisit the amount of liquidated damages. However, it does limit the court’s ability to increase liquidated damages to only those instances where there has been fraud or gross fault.
Unforeseeable events and force majeure
Article 224 of the new Civil Code expands the existing position under Article 249 of the old Civil Code in relation to unforeseeable exceptional circumstances of a public nature.
The new Civil Code maintains the ability to reduce “oppressive” obligations but also allows the court to rescind the contract.
The provisions governing circumstances of force majeure, which render performance of a contract wholly or partially impossible, are maintained in the new Civil Code under Article 236.
Practical takeaway
In the context of the regional conflict, there are likely to be a significant number of claims alleging “oppressive” obligations, and it will be important to see whether local courts interpret oppressive obligations any differently than before, as well as how willing courts will be to rescind contracts.
Framework agreements
Article 138 of the new Civil Code introduces the concept of a “framework agreement,” whereby parties agree to a set of overarching terms to govern future contracts between them. Under the new Civil Code, once a framework agreement has been established, it will be deemed to form part of the future contracts between those parties unless agreed otherwise.
Practical takeaway
This provides more certainty to parties in the supply chain that operate with framework agreements and purchase orders. However, where the framework agreement is deemed to apply automatically, parties will need to be cautious and clear when they do not want those terms to apply to a particular arrangement.
