In-House Brief: Set-Off, Security and Uncertified Work (Self-Execution Part I)
Professor Indrawansa Samaratunga
Steven Hunt of C&IDS
Cash flow is the first casualty of a construction dispute. The Engineer certifies a sum for work done, and the Employer pays less, deducting delay damages or the cost of putting right defects. Or the Engineer certifies nothing at all. Each side then asks the same question: was that allowed? Under UAE law, the answer depends on whether the deduction was a sum actually due, and whether the contract procedure was followed.
This paper explains when a paying party may deduct what it says it is owed from a certified sum, and what a Contractor can do when the Engineer does not certify its work. We test each point against the standard FIDIC Red Book, 1999 edition. Most contracts amend it, so always check the actual contract first. The same principles apply between a main contractor and its subcontractors.¹
The Short Answer
Deduction | Allowed without a court order? | Condition |
Delay damages | Yes | Notice of the claim, then agreement of the parties or the Engineer’s determination. Any open extension of time claim should be determined first. The court may still reduce the amount. |
Defects, completion and other costs | Only once agreed or determined | A claim the Contractor disputes, and that has not been agreed or determined, is not a sum due. |
A claim made without the contract procedure | No | The Employer is in breach of its duty to pay, and owes financing charges. |
Money the Employer does not hold | No | A payment order, a judgment or an arbitration award is needed. |
A call on the Performance Security | Yes, for sums agreed or determined | The sum must remain unpaid 42 days after the agreement or determination, or the Employer must be entitled to terminate. |
How FIDIC Payment Works
The Contractor submits a monthly statement. The Engineer issues an Interim Payment Certificate within 28 days, and the Employer pays the certified sum within 56 days of the Engineer receiving the statement.² A certificate is not a final valuation. The Engineer can correct it in a later certificate, and it does not mean the Engineer accepts the work.³ But once issued, it fixes what the Employer must pay on that date.
The key provision is Sub-Clause 2.5. The Employer must give notice of any claim against the Contractor, with particulars, and the Engineer must then consult both parties to try to reach agreement, failing which it must make a fair determination of the amount. That amount may be deducted in a Payment Certificate. The clause then says the Employer may set off or deduct from a certified sum “only” in accordance with this procedure.⁴ A deduction made without following it is simply a failure to pay.
What The Law Says About Set-Off
UAE law recognises three kinds of set-off.⁵ The first happens automatically, by law, where two debts meet. The second is agreed between the parties. The third is ordered by the court.
Automatic set-off needs two debts that are of the same kind, equally due, and “of equal strength or weakness”.⁶ A certified sum is a fixed debt that has fallen due. A claim for damages that the Contractor disputes, and that has not yet been agreed or determined, is weaker: it is not yet established, and its amount is not fixed. The two are not of equal strength, so the law does not set one off against the other automatically.
Agreed set-off fills the gap where the conditions for automatic set-off are not met.⁷ In a FIDIC contract, Sub-Clause 2.5 is that agreement. It allows deductions, but only once the claim has been notified and the amount agreed by the parties or determined by the Engineer. Anything beyond that needs the court, which can order set-off when a claim or counterclaim is brought before it.⁸
Deducting Delay Damages
Delay damages are the easiest deduction to justify. Where the Contractor fails to complete on time, it must pay delay damages at the rate in the contract, up to the stated maximum, subject to notice under Sub-Clause 2.5.⁹ Once the amount has been agreed or determined, the Employer may deduct it. Before deducting, the Employer should check the Time for Completion and any extension of time the Contractor has claimed, because an extension removes the delay damages for that period.¹⁰
An open extension of time claim needs particular care. Delay damages run from the Time for Completion as extended, and the Engineer must make a fair determination taking account of all relevant circumstances.¹¹ It cannot fairly determine the delay damages without first determining whether the Time for Completion should be extended. The two should therefore be determined together. Until the extension claim is determined, the Employer may safely deduct only for delay beyond the longest extension the Contractor has claimed, because that part is not in dispute. The Engineer may also make an interim determination of the extension.
The position is weaker still once the Engineer’s time to respond has passed. The Engineer must respond within 42 days of receiving the Contractor’s fully detailed claim.¹² The 1999 form says nothing about what happens if it does not, and the Contractor’s route is to refer the matter to the Dispute Adjudication Board, or to whatever dispute procedure the contract provides.¹³ But the Employer cannot take advantage of the Engineer’s delay. The Engineer is deemed to act for the Employer, so its failure to determine the claim is, in effect, the Employer’s own failure.¹⁴ Separately, if the delay was caused by events for which the Employer is responsible, the court may reduce the delay damages, or award none where the Employer’s fault predominates.¹⁵
The amount can still be challenged in court. Under the 2025 Code, the court may reduce agreed damages only if the Contractor proves that they are excessive, that the work was partly performed, or that the Employer’s own fault contributed to the loss. It may increase them only where the Contractor acted fraudulently or with gross fault.¹⁶ Under the 1985 Code, either party could ask the court to adjust agreed damages so that they equalled the actual loss, and any agreement to the contrary was void.¹⁷ The Ministry of Justice’s commentary on Article 390 explains this as the Sharia requirement that compensation should equal the loss suffered.¹⁸ The 2025 Code changes the position. The agreed sum now stands unless the Contractor proves one of the stated grounds, and the Employer can recover more only for fraud or gross fault. The Sharia principle does not override this, because the court applies Sharia only where the Code is silent.¹⁹ Either way, the Employer should record how the rate was calculated, and keep evidence of its actual loss.
Deducting Other Damages
Claims for defects, completion costs and other losses are harder. A claim the Contractor disputes is not a sum due. It cannot be deducted until it has been notified and either agreed by the parties or determined by the Engineer.²⁰ Once the Engineer determines the claim, both parties must give effect to the determination unless and until it is revised by agreement, by the Dispute Adjudication Board or in arbitration.²¹ So a determined sum may be deducted even while the Contractor challenges it. The Engineer’s determination is a contractual step, not a court order, and the Employer will have to repay the deduction if it is later overturned.
Some contracts widen the Employer’s right to deduct to any sum “due or claimed”. That shifts the cash-flow risk to the Contractor, who must then prove its entitlement to recover money already withheld. A Contractor should resist this wording, or limit it to sums agreed or determined under Sub-Clause 3.5. An Employer should know that, without it, a claim that has not been agreed or determined cannot be deducted.
Money The Employer Does Not Hold
Set-off works only where the party owed money also holds money. Where it does not, for example where the Employer’s damages exceed what it still owes, there is nothing to deduct from. The same applies to a Contractor with an unpaid certificate. The party owed money must go to court or to arbitration, unless it holds security.²²
The Employer’s main security is the Performance Security. The standard form allows the Employer to call on it only for sums it is entitled to under the contract, and only in four cases: i) the Contractor fails to extend the guarantee before it expires; ii) the Contractor fails to pay a sum agreed or determined within 42 days of the agreement or determination; iii) the Contractor fails to put right a default within 42 days of notice; and iv) the Employer is entitled to terminate. If the Employer calls without entitlement, it must compensate the Contractor.²³ So delay damages or other damages that have been agreed or determined, and that remain unpaid, can be recovered from the guarantee. A claim that has not been agreed or determined cannot.
The bank will usually pay within days. It may not refuse payment because of a dispute between the Employer and the Contractor.²⁴ The Contractor’s protection is to apply urgently to the court to attach the guarantee amount before it is paid, showing serious and confirmed grounds. Onshore courts have accepted grounds such as substantial completion, clear evidence that the Employer owes the Contractor significant sums, and clear evidence that the Employer is not entitled to call under the contract. There is no binding precedent, so the outcome is at the court’s discretion.²⁵
When The Engineer Does Not Certify
An Engineer who does not certify is not the end of the matter. FIDIC limits the grounds on which a certificate may be withheld. The Engineer may withhold only where the total is below the stated minimum, or for work or obligations that do not comply with the contract, and then only the value of those items. It may not withhold the certificate for any other reason.²⁶
If the Engineer fails to certify, or the Employer fails to pay, the Contractor has four remedies under the contract: i) financing charges on the late payment;²⁷ ii) after 21 days’ notice, the right to suspend or slow down the work;²⁸ iii) the right to terminate if no certificate is issued within 56 days of the Engineer receiving its statement, or if it is not paid within 42 days of the payment date;²⁹ and iv) a claim for the value of the uncertified work, which must be notified within 28 days of the Contractor becoming aware of it.³⁰
Where a certificate has been issued but not paid, the Contractor can also go to court. The quickest route is a payment order. It is available for a debt that is fixed in amount, due, and proved in writing, after a written demand giving the debtor at least five days to pay. The judge decides on the papers, without a hearing.³¹ Courts have granted payment orders on the strength of Engineers’ certificates.³²
The right to be paid does not depend on the certificate. It comes from the work done. Both Codes require the Employer to pay for the work, and for a contract in parts or at unit rates, to pay in proportion to the work completed.³³ A court or tribunal can value the work without a certificate.³⁴ So the Contractor’s best protection is its records: measurements, daily records, photographs and correspondence that prove what was done.
Which Code Applies
The 2025 Code does not generally apply to contracts made before it came into force. The prevailing view is that contracts made before 1 June 2026 stay under the 1985 Code.³⁵ The rules on set-off are the same under both Codes. The one difference is delay damages: under the 1985 Code, either party may ask the court to adjust them to the actual loss, while the 2025 Code allows a reduction only on the specific grounds set out above.
Conclusion
Under a FIDIC contract, a certified sum must be paid. The Employer may deduct from it only what the contract procedure allows: notice of the claim, and agreement of the parties or the Engineer’s determination. Delay damages are the easiest deduction, though the court may still reduce them. A claim the Contractor disputes, and that has not been agreed or determined, cannot be deducted. And a Contractor whose work is not certified still has a right to be paid for it, with remedies under the contract and in court. In every case, the party with the better records usually wins.
This is the first of three papers on self-execution: when a party to a construction contract may enforce its rights itself, and when it needs the court. Part II will deal with termination, and Part III with the use and sale of the Contractor’s Plant, Materials and Contractor’s Equipment.
The companion “Practice Note: Set-Off, Security and Uncertified Work” sets out the practical steps for Employers and Contractors before contract, during the works and when a claim arises. It is available to Steven’s LinkedIn connections. If you are already connected with him, you will find it posted on his profile. If you are not, send him a connection request through his LinkedIn profile and you will secure access to the Note.
C&IDS places fractional in-house construction counsel with contractors, developers and consultants across the GCC, Africa and the UK. If you would like to discuss how a placed counsel could support your team, please get in touch at admin@candids.legal.
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This In-House Brief is published for general information purposes only and does not constitute legal advice. Translations of legislation are for convenience; the authoritative Arabic text should be consulted.
Notes
Both Codes permit subcontracting and keep the main contractor liable to the Employer for the subcontractor: Federal Law No. 5 of 1985 on the Civil Transactions Law UAE Ministry of Justice (the 1985 Code), arts 890–891; Federal Decree-Law No. 25 of 2025 Promulgating the Civil Transactions Law UAE Ministry of Justice (the 2025 Code), arts 832–833.
FIDIC, Conditions of Contract for Construction (1st edn, 1999) (the Red Book), sub-cls 14.3, 14.6 and 14.7(b).
Red Book (n 2), sub-cl 14.6.
Red Book (n 2), sub-cls 2.5 and 3.5.
2025 Code (n 1), art 319; 1985 Code (n 1), art 369.
2025 Code (n 1), art 320; 1985 Code (n 1), art 370.
2025 Code (n 1), art 322; 1985 Code (n 1), art 371.
2025 Code (n 1), arts 323–324; 1985 Code (n 1), art 372.
Red Book (n 2), sub-cl 8.7.
Red Book (n 2), sub-cls 8.4 and 8.7.
Red Book (n 2), sub-cls 3.5, 8.4 and 8.7.
Red Book (n 2), sub-cl 20.1.
Red Book (n 2), sub-cl 20.4. Under the 2017 edition, a claim the Engineer fails to determine within the time limit is deemed rejected: FIDIC, Conditions of Contract for Construction (2nd edn, 2017), sub-cl 3.7.3.
Red Book (n 2), sub-cl 3.1.
2025 Code (n 1), art 340(3).
2025 Code (n 1), art 340.
1985 Code (n 1), art 390; UAE Construction Contracts: Key Changes and Dispute Risks under the 2026 Civil Transactions Law Awatif Mohammad Shoqi Advocates & Legal Consultancy, Legal 500 (June 2026).
Ministry of Justice, Explanatory Memorandum to the Civil Transactions Law (Federal Law No. 5 of 1985), commentary on art 390: the judge reduces or increases the agreed amount on a party’s application, “since the rule under Islamic jurisprudence is that compensation should equal the damage actually sustained”, citing Ali Al-Khafif, Al-Daman, vol 1, 56–57. An English translation of the Commentary is in James Whelan, UAE Civil Code and Ministry of Justice Commentary 2010 (Thomson Reuters, 2011), 2-057.
2025 Code (n 1), arts 1(2) and 340(2)–(4).
Red Book (n 2), sub-cls 2.5 and 3.5; 2025 Code (n 1), art 320.
Red Book (n 2), sub-cls 3.5 and 20.4.
Federal Decree-Law No. 42 of 2022 Promulgating the Civil Procedure Law, as amended (the Civil Procedure Law), arts 206–207 and 212.
Red Book (n 2), sub-cl 4.2.
Federal Decree-Law No. 50 of 2022 Promulgating the Commercial Transactions Law, art 417(1).
Commercial Transactions Law (n 24), art 417(2); Contractors’ Interim Remedies Concerning On-Demand Guarantees in the UAE Al Tamimi & Co, Law Update Issue 369 (June/July 2024).
Red Book (n 2), sub-cl 14.6.
Red Book (n 2), sub-cl 14.8.
Red Book (n 2), sub-cl 16.1.
Red Book (n 2), sub-cl 16.2(b) and (c).
Red Book (n 2), sub-cl 20.1.
Civil Procedure Law (n 22), arts 143–150; How to Recover Unpaid Contractor Invoices in the UAE Kayrouz & Associates (24 February 2026).
Kayrouz (n 31).
2025 Code (n 1), arts 826–827; 1985 Code (n 1), art 885.
Kayrouz (n 31).
2025 Code (n 1), art 4(1); Does the New Civil Code have Retrospective Effect? An Analysis of Articles 4, 6 and 7 Afridi & Angell (1 June 2026).
