Suspension and Termination Under the Civil Law, Part 2

By Alex Brightman, K&L Gates, Doha and Donal Scott, K&L Gates, Dubai

In a previous blog post, we looked at suspension and termination of a construction contract under a Civil Code system.  We focused, in particular, on the FIDIC form of contract and looked at how that would be treated under the Qatar Civil Code.

In this article, we will continue that review, but look at how suspension and termination would operate under the UAE Civil Code.

UAE Civil Code
The general termination provisions of the UAE Civil Code are found in Articles 267–273. Article 267 states that binding contracts may only be varied or rescinded by mutual consent, an order of court or by operation of a provision of the law. In addition, there are also special rules which only apply toMuqawala contracts. A Muqawala contract, which is the equivalent of a construction contract, is defined in Article 872 as “a contract whereby one of the parties thereto undertakes to make a thing or to perform work in consideration which the other party undertakes to provide.”  Article 892 specifies three methods for the termination of a Muqawala contract:

1. Following completion of the agreed works or services;
2. By mutual consent; and
3. By court order.

The first of these options would apply in any event as contractual obligations come to a natural end when they have been fully performed. It is generally accepted that contractual provisions covering termination rights amount to mutual consent within Articles 267 and 892. Even where there is no consent to terminate and in the absence of a court order, Article 247 permits a party to lawfully refuse to comply with its obligations under a contract in situations where the other party has neglected to perform its contractual obligations. For example, if a contractor does not receive the agreed remuneration under a construction contract, it is not obliged to continue carrying out unpaid construction work. However, this does not mean the contract is terminated. Should the employer resume making payments, the contractor will be obliged to fulfil its contractual obligations to perform the works. In order to avoid the contract being resumed in such a manner, the contractor could apply to the court for an order declaring the contract terminated.

In order to reduce formalities in the termination process, it is advisable to insert wording to the effect that any termination of the contract is deemed to be exercised within the meaning of mutual consent as contemplated by Articles 267 and 892 of the UAE Civil Code. This will ensure that the mutual decision to terminate the contract has legal force and alleviates the need to obtain a court order. It goes without saying that prior to terminating the contract, the terminating party should ensure that it has the legal right to do so and that it complies with any contractually agreed procedures (such as notice requirements). It is common in construction contracts to see termination clauses which provide for minimal procedural and notice requirements. Such an arrangement is referred to as “termination for convenience”. Unlike the law in Egypt, Kuwait and Qatar, UAE law does not expressly recognise the validity of termination for convenience clauses. However, it is still common to see such clauses used in practice and we have not seen precedent from the UAE courts to suggest they are inconsistent with UAE law.

Article 273 states that if a force majeure event renders performance of the contract impossible, the contract will be automatically cancelled. Article 893 provides that, if “any cause” arises that prevents the performance or completion of a Muqawala contract, either of the parties under the contract may require it to be cancelled or terminated. This Article likely applies to unforeseen force majeure events in the same manner as Article 273. It gives parties the option to terminate the contract in such an event. This can be contrasted which Article 273, which provides that the contract is automatically terminated.

Furthermore, Article 894 provides that if a contractor performs work and then becomes incapable of completing it for a cause in which he played no part, it shall be entitled to “the value of the work which he has completed and the expenses he has incurred in the performance thereof up to the amount of the benefit the employer has derived therefrom”. This provision is similar to the equivalent wording in the Qatar Civil Code and the parties should agree on the level of compensation in advance due to the inherent difficulties in objectively measuring the benefit obtained by the employer.

Finally, although the UAE Civil Code does not mention suspension expressly, as noted above, Article 247 ensures that a party need not continue performing its contractual obligation where the other party is in beach. It provides the following:

“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 that which he is obliged to do”.

A party seeking to rely on Article 247 in the absence of a contractual right to suspend work should proceed with caution. A party should not suddenly suspend its contractual performance without prior notice to the other party. It is advisable to begin by writing to the other party and requesting that it comply with its obligations. The letter should specify a deadline for this performance, after which the aggrieved party will suspend its work. As is the case with equivalent rights under Article 191 of the Qatar Civil Code, suspension is a difficult right to enforce in practice as it is likely to require a seriousbreach by the other party before it can be relied upon. As stated in my analysis of suspension and termination under the Qatar Civil Code (part 1), there is an inherent danger in treating the contract as at an end when, for example, payment has not been made as the other party could treat this as an attempt to terminate the contract and this could expose the terminating party to a damages claim. Accordingly, before exercising the right to suspend work for non-payment, a contractor should take into account and address any issues that the employer may have raised as justifications for non-payment. This is primarily to show that the suspension of work is proportionate to the default in question and that the contractor has acted in good faith. The latter consideration is particularly pertinent given that the court will generally interpret Article 247 of the UAE Civil Code in the context of the parties’ mutual obligations of good faith implied under Article 246.