Due consideration should be given at the time of entering into the contract to the circumstances that will entitle both the contractor and the employer to terminate it and the consequences of doing so, says Adam Webster. Here, he gives an insight into the right to terminate, pointing out that invoking these provisions should always be the last resort.
Rising costs of labour, materials and other resources and a shortage of quality contractors with the availability to carry out the many projects that are currently at the conception stage in the Gulf have led to something of a power shift between employers and contractors.
An employer who works on the assumption that contractors will walk blindly into contracts that are biased heavily in the employer’s favour may need to think again. Contractors (especially those who are large multi-nationals with a wealth of contracting experience and a large order book) will often stall in signing up to anything that is more onerous than standard FIDIC!
Provisions on termination often prove to be one of the most difficult areas to negotiate with both parties anxious to protect their respective positions as much as possible in the event that it should be necessary to rely on such provisions. Contracts are made to be performed, however, parties may break their promises (perhaps due to circumstances beyond their control), putting them in breach of contract and it is, therefore, essential that sensible provisions are in place to cover this eventuality.
The parties will obviously have their own drivers in this regard. An employer will want to ensure that his interests are sufficiently protected by the remedies provided for in the contract on termination and the contractor will not want to give away anything that he is unable to claw back under the subcontracts.
The various “trigger” events giving rise to a right to terminate a contract include the contractor’s default (including insolvency); the employer’s default (normally failure to make payment for a specified period); extended force majeure; and termination for convenience.
Legally, a breach entitles the innocent party to a remedy, be it compensation and/or, in certain scenarios, the right to bring the contract to an end. A party should give thought, therefore, as to whether it requires termination to be expressly agreed in the contract as an exclusive remedy for a given event, or to be non-exclusive, in which case a claim for damages for breach of contract may be pursued concurrently.
Another key consideration when negotiating the inclusion of a right-to-terminate for a particular event will be whether the lack of a legal right to terminate will prejudice a party’s commercial position under the contract. For instance, a contractor may be willing to forego its right to terminate for an employer’s continued failure to make payment if a payment guarantee is in place. The issue here, however, is what happens if the party giving the guarantee also reneges on its part of the bargain? The contractor will require a right to suspend and/or terminate the works in the event that the payment guarantee is not honoured.
In any event, a party will want to know what its rights on termination will be. An employer will normally require a right to complete the works himself or have them completed by another contractor and to recover any costs over and above the original contract price from the original contractor. He will also be keen to secure an entitlement to any intellectual property rights that may have accrued in the documentation prepared by the contractor for continued use in relation to the particular project. A contractor, on the other hand, will require a right to be paid all outstanding amounts up to the date of termination and will not want to relinquish its rights in respect of the intellectual property of the documents until he has received such payment.
Where a project is debt financed, lenders may require rights against the contractor in the event that the employer defaults on its obligations. Usually, this is addressed by way of a direct agreement, which entitles the lenders to suspend the contractor’s right to terminate for employer breach for a fixed period while the lenders decide whether to cure the breach and step into the shoes of the employer under the contract. Further consideration of direct agreements and their typical provisions may be found in Joanne Emerson’s article in the April 2008 issue of Gulf Construction.
If a contract does not make adequate provision for termination, it will be necessary to look to the law that governs the contract to establish the options available to a party. Article 272 of the UAE Civil Transactions Law No 5 (1985) provides that where a contract does not confer a right to terminate, if a party does not do what he is obliged to do under the contract, the other party may, after giving notice to the party in breach, require that the contract be performed or cancelled. This is akin to the concept of specific performance under English Law. If the party in breach continues to default on the contract, it is then open to the affected party to seek a court order obliging the defaulting party to perform the contract, or terminating the contract and awarding compensation.
If a contract is not concluded, an employer may face vastly inflated costs and will have little or no control over the progress of the works. It is perhaps ironic, therefore, that the consequences of terminating a contract – typically delay to the project, increased construction costs and the risk of protracted dispute resolution – are the very things that an employer is attempting to avoid and/or control by entering into a contract.
An employer should bear in mind, however, that it is more to his detriment than the contractor’s if works commence in the absence of a formal agreement. Indeed, savvy contractors are often happy to proceed on the basis of a simple letter of award.
Walking away from a contract and invoking the termination provisions should always be the last resort, but if the parties have given due consideration at the time of entering into the contract to the type of circumstances that will entitle them to terminate and the consequences of doing so, the right to terminate should serve as a suitable incentive for both parties to achieve common objectives – to deliver a project on time and on budget.