A rticle

Coping With Termination

By Omar Al Saadoon and Eric Teo
Construction & Engineering Practice, Al Tamimi & Co, Advocates &
Legal Consultants

T
he termination of a relationship
can often come as a surprise
causing both confusion and
resentment. Negotiations can escalate
into protracted and costly disputes.
This fact of life has parallels in the
law when parties seek to terminate
commercial relations, particularly in
the case of construction contracts,
where the stakes are often high
and the reputation and egos of
the protagonists are paramount
especially in construction dominated
economies such as the United Arab
Emirates (UAE).
This article will provide the reader
with a brief overview of termination
of construction contracts and will
highlight the fact that termination
under UAE Federal laws, when
considered in light of contractual
provisions to terminate, is by no
means a simple and clear cut
affair.
Importance of the right
to terminate
Any astute party negotiating a
contract should always consider
a definitive get out strategy that
will cover a variety of situations
that may arise during a contract
period, including those based on
convenience or default on the part
of the other contracting party. The
decision to terminate should be
well considered as, in essence, the
party being served with a notice
to terminate is being deprived
The right to terminate is both
important and practical as it helps
to ensure the contract is performed
as agreed. It also helps to form the
basis upon which parties may re-
negotiate with each other if their
contractual relationship encounters
difficulties.
The decision to terminate, either by
the contractor or employer, should
not be taken in circumstances
where there is a minor breach or
no breach at all (convenience). The
decision to terminate should only
be exercised in the event of a major
breach or an incident occurring UAE construction scene
which is the fault of neither
party e.g. events constituting force (FIDIC). It is usual for parties to set
majeure. out the events upon which one
or both parties may terminate the
I n the present climate where contractual relationship between.
the construction industry in the Some of the typical reasons
UAE is facing an unprecedented include:
rise in the cost of construction
materials, the issue of termination when one party breaches
is sometimes foremost on the minds certain terms of the contract (e.g.
of the contracting parties, especially workmanship);
contractors who have not properly
estimated the costs during a project when one party repeatedly fails
lifecycle. to perform its obligations;
Our recent experience suggests when a specific event occurs, e.g.
that notwithstanding contractual when a party becomes insolvent
agreement on the price of materials, or has a receiver or administrator
contractors sometimes threaten appointed over its assets;
termination based on some other
pretex t and given the current when one of the parties exercise
scarcity of available contractors with its discretionary right to terminate
capacity to resource projects, they for its own convenience;
are mostly successful.
when a prolonged suspension or

of a lawful bargain. The issue of
opportunity cost invariably arises
and is particularly important given
the current scarcity of essential
construction materials in the UAE
and the corresponding effect on the
escalation of prices.
Typical contractual grounds
to terminate
Termination clauses are a common
forms feature in standard construction
contracts such as the International
Federation of Consulting Engineers
force majeure type event occurs.
The viability of a termination
clause
The UAE Civil Code upholds the basic
principle of freedom of contract.

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A rticle
This means parties are, in theory,
free to stipulate whatever event
that they may deem appropriate
as a trigger for termination.
However, contracting parties often
overlook the fact that under UAE
law there are specific provisions
that govern the termination
of contrac ts (both commercial
and construction). It is vital the
provisions of the UAE Civil Code
are properly understood when
drafting or adopting termination
p rov i s i o n s i n o rd e r to e n s u re
those provisions do not fall foul
of the law or capable of its full
effect.
UAE law and termination
Construction contracts known as
Muqawala contracts under UAE
law are specifically governed
under the UAE Civil Transactions
Law, Federal Law No.5 of 1985 (as
amended by Federal Law of No.2
of 1987) (Civil Code).
A p rovi s io n i n t he Ci v il Co d e
applicable to Muqawala stipulates
there are three ways upon which
a contract may be terminated,
that is:
by completing the agreed
works;
by mutual consent; or
by court order.
This provision seems to suggest
that there are only three ways upon
which a construction contract can
be terminated.
Mutual consent
It is arguable whether the parties
agreement to an express provision
entitling a party to unilaterally
terminate under Muqawala can
constitute mutual consent. There
are provisions in the Civil Code
which seemingly contradict each
other as to whether mutual
consent is required.
UAE Termination dilemma
It is impor tant to appreciate
that coupled with the right to
terminate is the essential issue
of the enforcement of the right to
terminate. This goes to the heart
of the current dilemma facing
practitioners in the construction
industry.
The question here boils down
to the following: Does a par ty
follow what the contracting
parties intended and agreed as
reflec ted in contrac tual ter ms
(often on a hybrid of FIDIC
standard conditions) or do they
i gn o re w h a t t h e y a gre e d a n d
resor t to mandator y provisions
in the Civil Code on construction
contracts?
The answer is both can be
considered correct depending on
the wording of the contract.
Termination for
convenience
Construction contracts both in the
private and public sector contain
an unfettered right entitling an
employer at any time to ser ve
notice to unilaterally terminate
a contract with immediate effect
a n d fo r n o p a r t i c u l a r re a s o n .
Unilateral termination rights
often incorporated in construction
contracts in the UAE include those
based on:
convenience and which is
capable of being exercised
unilaterally;
s u b s t i t u t i n g t h e co n t r a c to r
with a third party to complete
unfinished works.
T h e s e r i g h t s fo r e x a m p l e a r e
contained in the FIDIC Red Book
(99 version).
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4th Quarter 2008
In respect of the rights above, the
question arises as to whether the
provision in the UAE Civil Code
is exhaustive so as to undermine
the viability of both these rights.
Put another way, will an employer
be entitled to enforce these rights
without obtaining a court order
first?
The answer to this question would
depend on the proper interpretation
of the terms of the particular clause
in conjunction with the relevant
provisions in the Civil Code and the
extraneous circumstances leading
to termination.
If the answer to this question
is in the affirmative, then the
result is the employer may have
unknowingly become liable for
a claim of unlawful termination
and face the prospect of paying
substantial compensation as a result
on the basis of a technicality.
Effects of termination
for convenience
Should an employer decide
to ter minate for convenience,
construc tion contrac ts usually
give the employer certain rights
including:
taking possession of the site;
taking over the sub-contracts;
obliging the contractor to
remove all non-essential equipment
and materials from the site.
Construction contracts in such
circumstances typically exclude all
claims for loss of profit, loss of use
and consequential losses.
Applicability of
repudiation under
common law principles
and the Civil Code
At common law, a party is deemed
to be in repudiation if its conduct
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indicates to the other party it no
longer intends to be bound by the
terms of their contract. The innocent
party may then elect to accept the
repudiation of the defaulting party.
When this occurs, the contract is
deemed to have come to an end.
To give an example, a contractor
walk ing out of a site without
completing the works, or having
previously given notice to the
employer for its reasons in doing
so, would be regarded as having
committed a repudiatory breach of
contract.
In this situation the employer may
quickly elect to accept the repudiation
(by giving written notice to the
defaulting contractor) enabling it to
bring in a replacement contractor to
complete the outstanding works.
The FIDIC Book (4th edition) sets out
grounds which entitle an employer
to terminate on the basis of a
repudiatory breach including failure
to comply with submitting notices
within prescribed periods. The Red
Book also entitles a contractor
to terminate on the basis of a
repudiatory breach on the part of
employers including failure to pay
amounts certified.
When applying the above scenario
to a project in the UAE the Civil
Code may not entitle an employer
to accept the repudiation and effect
the substitution. Depending on the
circumstances, the employer may
need to apply to the courts before
it could engage a replacement
contractor.
Whilst the common law recognizes
the principles of good faith its
application in construction related
disputes is relatively limited save for
the importance given to it under
partnering type agreements such
as the PPC.
Conversely, the Civil Code imposes
primary importance in the principle
of good faith which is to be implied
in all commercial contracts including
Muqawala contracts. In practical
terms this renders the viability of
unilateral termination rights less
reliable given that the onus is on
the party terminating to prove its
reasons are in accordance with
good faith.
Criteria of local courts
in awarding an order for
termination
In our experience the local courts,
pursuant to the authority conferred
on them by the Civil Code, are
entitled to order the termination
of a Muqawala on the following
grounds including:
contractor fails to remedy
defective works having previously
been served with notice under the
contract;
contractor in serious delays to
the works with no realistic prospect
of completing the works according
to the contrac tual completion
date.
Practical considerations
upon termination
In the midst of complying and
focusing on the procedural and
legal requirements of termination
parties often overlook important
issues and subsisting rights which
ideally should be factored as part
of the termination process and can
sometimes actually facilitate the
process of termination.
These issues include:
demobilisation from the site;
removal of unwanted materials
and debris;
facilitating unencumbered site
access to other contractors;
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4th Quarter 2008
securing the perimeter of the
site;
ensuring the proper storage
of materials and equipment
(particularly hazardous materials);
the compilation, production
and handover of the employers
p ro p r i e t a r y m ate r i a l, a gre e i n g
copyright issues in material,
relocation of staff and labour;
handover of labour
accommodation and the site office
and its facilities;
negotiating the return of
contractual forms of security such
as advanced payment bonds.
Conclusion
Rights of termination are important
as a prac tical means to apply
pressure on the other party to
perform but the exercise of such
rights must be approached with
extreme caution.
The interaction of common law
principles under FIDIC based
co n t r a c t co n d i t i o n s a n d t h e i r
interplay with the Civil Code is not
straightforward by any means.
G i v e n o u r f i r ms e s t a b l i s h e d
p r e s e n c e i n t h e UA E , w e a r e
commonly asked to advise
employers, contractors and
consultants on how to lawfully
terminate contracts with a view
to mitigating the commercial risks
of getting it wrong.
Coping with termination does not
necessarily need to be a time
consuming and costly affair, but
failing a commercial settlement,
careful attention needs to be
paid as to how the procedural
r e q u i r e m e n t s , UA E l a w s a n d
contractual rights fit together to
best suit the interests of the party
seeking to terminate, both prior to
and following termination.