Security of payment: UAE

What legislation or regulations govern security of payment in construction contracts?

Security of payment in UAE construction contracts are governed by:

1. Federal Law No. 5 of 1985 (UAE Civil Code) (particularly Articles 872–896 on Muqawala (construction contracts)). Payment security in Muqawala contracts is governed by strict privity of contract. Subcontractors cannot claim payment directly from employers unless a direct contract or valid assignment exists.
2. Federal Law No. 50 of 2022 (Commercial Transactions Law). This law enhances payment security by requiring adequate loan security, treating guarantees as joint and several, and allowing banks to reject payments under court attachment orders.
3. DIFC and ADGM Laws. Generally, these laws provide a common law-based environment which supports prompt payment mechanisms, interim remedies, and recognition of retention and lien rights (subject to contract terms).
4. Dubai Law No. 7 of 2025 (Concerning the Regulation of Contracting Activities in the Emirate of Dubai). This law protects payment security by mandating contractor registration, enforcing financial capacity limits, prohibiting unauthorised subcontracting, and introducing penalties for non-compliance.

 

What framework is put in place to protect monies intended for progress payments?

Under UAE law, there is no express statutory framework catering for the protection of monies intended for progress payments, such as ring-fenced accounts, as in some other jurisdictions. Nor is there a general practice to do so, though there is no prohibition on the same.

Instead, the usual safeguard is the requirement under UAE law that both parties perform in accordance with their contractual obligations (ie, to make payment of amounts when they become due, owing and payable). Such a regime is therefore viewed as employer-friendly to the extent that monies intended for progress payments were not available, a contractor's remedy lies under breach of contract, which may not always be satisfactory if such monies are unavailable to satisfy the debt.

Are project bank accounts required?

No, project bank accounts are not mandatory under UAE law.

Payments are typically made directly from employer to contractor based on progress payment certificates.

There is no statutory requirement for segregated accounts, but there are no prohibitions to such accounts, though they are rarely seen in the UAE.

Are retention monies quarantined?

Generally, retention monies are not quarantined and UAE law does not mandate this. However, contracts often specify the terms for holding and releasing of retention monies.

Common practice is for 10% retention, with 5% being released at handover and 5% after the defects liability period. VAT is generally also applicable on retention payments.

Are retention monies regimes prohibited?

No, retention monies regimes are not prohibited in the UAE.

 

Can a contractor or subcontractor impose a lien or other form of security over the works or other assets of the developer?

Yes, contractors and subcontractors can impose liens under UAE law. A lien allows unpaid parties to file a legal claim against property. It requires a valid written contract and formal notice to the property owner.

To enforce a lien, a contractor or subcontractor would need to make the relevant filings with authorities and potentially force a sale of the property.

This is governed by Federal Law No. 6 of 2018 and the relevant emirate level procedures.

 

What impact has the legislation or regulation had on the construction sector and insolvencies?

Delayed payments and cash flow issues are major contributors to contractor insolvency.

The new bankruptcy law (Federal Decree Law No. 51 of 2023) introduces preventative settlement, restructuring, and bankruptcy procedures. It also established a Bankruptcy Court and extended the insolvency assessment window from 30 to 60 days. These reforms are aimed to protect contractors and encourage restructuring over liquidation.

 

What, if any, reforms are being considered?

We are not presently aware of any reforms being considered in respect of security payments and safeguarding the same to stave off the negative effects.