A common scenario: the Employer is not happy with the Contractor's performance, whether because of failure to perform the works in the manner provided for in the Contract or because of some other breach of the Contract. The Employer picks up the Contract, which - in the UAE - is usually some modified FIDIC standard form, in search of the termination provision. Most such termination provisions require the Employer to send the Contractor a notice to correct the failure or the breach within a specified period. If the Contractor fails to correct the breach, then the Employer becomes entitled to terminate the Contract. The Employer, feeling confident of its legal position, sends the termination notice. The Employer is satisfied that it has correctly terminated the contract.
However, this is not precisely correct. Termination of contracts in the UAE, generally, can be done through one of the following methods:
- the parties' mutual agreement;
- a court judgment or decision; or
- by law.
This is in accordance with Article 267 of the UAE Civil Transactions Law (the Code) which reads:
If the contract is valid and binding, it shall not be permissible for either of the contracting parties to withdraw, change or terminate the contract save by mutual consent, an order of the court, or under a provision of the law.
Termination by mutual agreement may occur before or after entering into the contract. However, as in practice, when parties are at the termination stage, this is also a part of a bigger dispute, which makes it difficult to agree on anything, let alone agree on mutual termination of their contract.
Termination provisions establishing the right of one party or the other to terminate the contract are usually insufficient for the termination to occur. These provisions usually state something along these lines:
If the Contractor fails to carry out any obligation under the Contract, the Employer may by notice require the Contractor to make good the failure and to remedy it within a specified period of time. If the Contractor fails to comply with this notice, the Employer shall be entitled to terminate the Contract.
Similarly worded provisions establish a right to terminate, but do not allow for automatic termination of the Contract by the Employer. For a termination provision to establish mutual consent to terminate, and to avoid recourse to the UAE courts, the termination provision must state unequivocally that the termination occurs automatically by the Employer's notice and that there will be no need for a court order or a further notice. This is explicitly provided for in Article 271 of the Code:
It is permissible to agree that a contract shall be deemed terminated automatically without the need for judicial order upon non-performance of the obligations arising thereunder and such agreement shall not negate the need for a notice, unless it is also explicitly agreed between the contracting parties that there is no need for such notice.
Construction contracts are no different, even in situations where the Contractor is in clear default of its obligations. Terminating a construction contract follows these same general principles for terminating other contracts. The Code mandates that the Employer requests the termination of the construction contract from the courts. Terminating construction contracts for the Contractor's default is no different and follows this same general rule. Article 877 of the Code, in this respect, states:
The contractor must carry out the work in accordance with the conditions of the contract. If it appears that he is carrying out what he contracted to do in a manner that is defective or contrary to the conditions [of the contract], the employer may demand that the contract be terminated immediately in the event that it is impossible to make good the work, but if it is possible to make good then the employer may require the contractor to abide by the conditions of the contract and to rectify the work within a reasonable period, and if the period expires without the rectification having been done the employer may apply to the judge to terminate the contract or to give him leave to engage another contractor to complete the work at the expense of the first contractor.
This provision, although it differentiates between the possibility of rectifying the breach and the impossibility of rectification, still requires in either situation that the Employer resorts to the court to obtain a decision terminating the construction contract.
Recourse to courts to obtain a decision to terminate the contract is time-consuming and costly for both the Employer and the Contractor. All parties are better off having a quicker resolution to their contractual dispute. The ability to terminate automatically is not simply of theoretical importance; without the ability to have the contract terminated, the Employer faces practical difficulty in appointing another contractor to rectify or complete the works.
To save Employers and Contractors from this, it is up to the contract drafters to ensure that the wording of termination provisions contains the simple statement that termination is automatic and that there is no need for a court decision.
Heba Osman is a partner with Ahmed Ibrahim in association with Fenwick Elliott
International Quarterly is produced quartely by Fenwick Elliott LLP, the leading specialist construction law firm in the UK, working with clients in the building, engineering and energy sectors throughout the world.
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