2015/7/20 WhatHappensWhenItAllGoesWrong?

TerminatingAConstructionContractFromAUAELawPerspectiveRealEstateandConstructionUnit

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United Arab Emirates: What Happens When It All Goes

Wrong? Terminating A Construction Contract From A UAE
Law Perspective
LastUpdated:23June2015
ArticlebyEuanLloyd
AlTamimi&Company

TerminationisadrasticstepanditisanoptionwhichshouldneverbetakenlightlyIndeed,regardlessofhowclearlya
terminationclausehasbeendraftedandhowdirectlyaparticulareventiscoveredbyacontractualgroundfortermination,
terminationisseldomaseamlessprocesswithoutdifficulty.

IftheEmployeristheterminatingparty,therewillalmostinevitablybeadelayinengagingareplacementcontractorwhilethe
difficultquestionofaddressingtheinterfacebetweentheworksperformedbytheterminatedcontractorandthereplacement
contractorneedstobedealtwith.

Alternatively,anyterminationbytheContractorislikelytoemanatefromthenonpaymentofsumsduetotheContractor.Even
iftheEmployerhasthemeanstopay,therewillalmostinevitablybeareasonfornonpayment.

Onaccountofthemanydifficultiesarisingoutofmostterminations,itisadvisableforcontractstocontain"earlywarning"
mechanismsthatalertthepartiestobreachesandallowopportunityforthebreachtobecured(orfornegotiationstooccur)
priortothebreachbecomingagroundfortermination.Thatsaid,terminationcanbetheonlyviableoptionincertainsituations
(i.e.insolvencyorperhapsitispatentlyapparentthattheContractorlackstheskillsandresourcestoperformtheworks)and
thisarticlebrieflyaddressessomeimportantthingstoknowandconsideraboutterminationofconstructioncontractsandits
consequencesunderUAElaw.

Ensureyouhavetherighttoterminate

Priortoterminatingacontract,theterminatingpartymustensurethatithasthelegalrighttodosoandstrictlyfollowsany
contractuallyagreedprocedures(suchasnoticerequirements).

Itisnotuncommonforpartiestoincorrectlyassumethattheyhavearighttoterminateinaparticularsituationandtopurportto
terminatethecontractwithoutanylegalrighttodoso.Thiscanresultintheterminationbeingineffectiveandtheterminating
partybeingexposedtoadamagesclaim.Inotherwords,ratherthanbeingtheinnocentparty,thepartywhoineffectively
terminatesthecontractunwittinglybecomesthepartyinbreach.

Contractterminationrights

Inaccordancewiththeprinciplesoffreedomofcontract,partiestoconstructioncontractsfrequentlyagreeonthe
circumstancesuponwhichtheconstructioncontractmaybeterminated,togetherwiththecompensationregime.Indeed,thisis
thepositionunderstandardformcontracts(suchastheFIDICsuite).

TheimpactofUAELaw

TherighttoterminateishoweversubjecttoUAELaw.TheUAECivilCodeaddressestheterminationofmuqawalacontracts
(i.e.contractsforthecarryingoutofworks)andprovidesthat"acontractofmuqawalashallterminateuponcompletionofthe
worksagreedoruponcancellationofthecontractbyconsentorbyanorderofthecourt".

Aswellasclearlysettingoutcontractuallyagreedterminationrights,itisimportantthatthecontractprovidesthatitmaybe
terminatedwithoutacourtorder.Ifthecontractdoesnothavesuchaclause,theterminatingpartyisrequiredtonotifythe
otherpartyofitsintentiontoterminatethecontractbeforeproceedingtoseekthecourt'sconsenttoterminatethecontract.
Thisstepobviouslycoststimeandmoney.

Pendingacourt'sordertoterminatethecontractandiftherearenoapplicablesuspensionrights,thepartiesmayberequired
tocontinuetoperformtheircontractualobligations.Thiscanleadtoobviouscomplications.However,ifthedraftingprovides
thatanocourtorderisrequired,thecontractwillterminateinaccordancewithitstermswithoutanyfurtherformality.

Alternatively,ifacontractdoesnotcontainanycontractuallyagreedterminationrights(orifthecontractfailstoprovidethatit
maybeterminatedwithoutacourtorder),apartywishingtoterminatethecontractisrequiredtoseektheconsentofthecourt.

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2015/7/20 WhatHappensWhenItAllGoesWrong?TerminatingAConstructionContractFromAUAELawPerspectiveRealEstateandConstructionUnit
Thecourtwillconsiderallrelevantcircumstances(particularlytheseriousnessofthebreach)beforedeterminingwhetherornot
toorderterminationofthecontract.Dependingonthecircumstances,specificperformancemaybeorderedasanalternativeto
terminationwhileanextendedcureperiodmaybeimplementedasapreconditiontoanytermination.Priortothecourtissuing
itsterminationorder,thebreachingpartymayremedyanybreach(andthusavertanytermination).

Thefinalgroundforterminationpriortocompletionoftheworksarisesbyoperationoflawif,forexample,performanceis
renderedimpossibleonaccountoftheoccurrenceofaneventthatisnotattributabletoeitherparty(i.e.aneventofforce
majeure).

Consequencesofterminationanddamages

Closelyconnectedtoterminationisthequestionofdamages.

Theguidingprincipleisthatcompensationshouldbeequaltothequantumoftheharmsuffered.UndertheCivilCode,aparty
isentitledtobecompensatedforthe"damage,infact,sufferedatthetimeoftheoccurrenceofthebreach".Intheabsenceof
fraudandgrossnegligence,directnessandforeseeabilityarerequiredinordertorecoverdamagesforbreachofcontract.This
correspondswiththepositionundermanystandardformcontractswhichtypicallyexcludeliabilityforindirectand
consequentiallosses.

Inordertomanagetheprocessfollowingtermination,partiesfrequentlyagreeonacontractualmechanismthatappliestothe
transition.Forexample,ifanEmployerterminatesonaccountofaContractor'sbreach,itiscommonfortheEmployertonotbe
requiredtomakefurtherpaymenttotheContractoruntilthecostofcompletingtheworks(andthereforeofengagingan
alternativecontractor)hasbeendetermined.TheintentionofsuchwordingistoensurethattheEmployerisnotoutofpocket
onaccountofhavingtoengageareplacementcontractor.

AnEmployershouldalsohavethecontractualrighttorecoverfromtheContractor(anduse)anydesignsorotherdeliverables,
togetherwiththeabilitytotakeoverkeysubcontracts.

AContractorwhoterminatesonaccountoftheEmployer'sbreachistypicallyentitledtoimmediatepaymentofsumsduetoit
underthecontract,togetherwithoutofpocketexpenses(includingitsdemobilisationcosts)andinterest.Partiesarefreeto
agreetheapplicablerateofinterestonthelatepaymentofdebts,subjecttoacapof12%.Ifthecontractfailstoprescribea
rateofinterest,adefaultrateof9%isoftenimplied.

Conclusion

Atthetimeaconstructioncontractisenteredinto,partiesareusuallyfocusedontheconstructionprojectitselfratherthanwhat
happensifthingsdonotgoaccordingtoplan.Unfortunately,constructionprojectsfrequentlyencountertroubledwatersandit
isthereforeimportantthatpartiesspendthetimetoagreewelldraftedterminationclausestofacilitatethechallengingprocess
oftermination.

OriginallypublishedMay2015

Thecontentofthisarticleisintendedtoprovideageneralguidetothesubjectmatter.Specialistadviceshouldbesoughtabout
yourspecificcircumstances.

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