by Paul Taylor
 
Construction and engineering contracts, whether they be one of the industry’s standard forms or bespoke contracts created and tailored for an individual client’s needs, invariably contain rights and remedies relating to termination of the contract agreement.


 
In addition, the UAE federal law sets out provisions in the civil code that provide for termination and the consequences arising out of such situations.
 
However, termination of a building contract is not a matter to be taken lightly, and the legal and procedural framework must be carefully analysed and complied with in order to avoid a potential claim from the party whose contract is being terminated, that the termination is unlawful.
 

The threat or intimation of termination on the part of one party often means that relations on a project are already in a precarious state. However, that is not always the case, and the proposed termination might be required for a variety of genuine commercial or business-related reasons. Therefore, contracts and appointments often seek to give rights to termination ‘for the convenience’ of one or other of the parties, as well as ‘for default’ in performance by one of the parties.
 
The widely used FIDIC Red Book (4th Edition) 1987 provides in clause 63 for termination for default where the contractor has repudiated the contract, or has failed to commence the works, or has failed to comply with certain notices, or has been otherwise ‘persistently or flagrantly neglecting to comply with any of his obligations under the contract’.
 
But equally, the ‘default’ can be on the part of the employer. Clause 69 of the FIDIC Red Book 1987 allows the contractor to terminate in situations where the employer has failed to pay certified amounts, or where it has interfered with or obstructed, or refused approval for a payment certificate.
 
The procedures for invoking these termination clauses are set out and must be carefully adhered to. Thereafter, further provisions deal with how the process of payment for preliminaries, materials, equipment removal and demobilisation should take place.
 
It is also not unusual to see bespoke amendments allowing the employer to terminate the contract for its convenience, by giving a period of notice to the contractor in return for re-imbursement to the contractor for work performed, up until the effective date of the termination for convenience.
 
Moreover, some standard forms of contract already have this type of clause included as of right; for example, clause 15.5 of the ‘new’ FIDIC Red Book 1999 specifically gives a right to terminate ‘at any time for the employer’s convenience’.
 
While the parties may agree to, and include, termination clauses in the contract, the UAE civil code also contains provisions that deal with termination. The effect and scope of these provisions in different parts of the civil code are a matter of some potential debate as to their meaning and effect.
 
For muqawala (contracts of work), civil code articles 892 to 896 set out the legal framework, with article 892 stating: ‘A contract of muqawala shall terminate upon the completion of the work agreed or upon cancellation of the contract by consent or by order of the court.’
 
Within the general provisions on contracts, article 267 states: ‘If the contract is valid and binding, it shall not be permissible for either of the contracting parties to resile from it, nor to vary or rescind it, save by mutual consent or an order of the court, or under a provision of the law.’
 
The requirement for ‘mutual consent’ raises issues as to whether an agreed termination for convenience clause in a signed contract would in itself be accepted as that required element of ‘mutual consent’. Article 218(1) states that a contract will not be binding (despite its validity and effectiveness otherwise) if there is a condition allowing one party to cancel the contract without mutual consent or an order of the court.
 
In situations where one party is in default, article 272(1) provides that: ‘In contracts binding upon both parties, if one of the parties does not do what he is obliged to do under the contract, the other party may, after giving notice to the obligor, require that the contract be performed or cancelled.’
 
If other legal requirements, such as good faith and performance in accordance with local custom and the nature of the transaction are then added into the melting pot, it soon becomes clear that a great deal of careful consideration needs to be taken in ensuring any proposed termination (whether it be for default or convenience) is compliant with the contractual procedures and UAE law.
 
The practicalities of any termination involve the parties having to deal with a whole range of issues relating to demobilisation, vacation from and clearance of site, ownership of materials and copyright in drawings and designs, relocation of staff and provision of labour accommodation. Invariably, relations become even more strained in ‘default’ cases and rather than moving on to new projects, the management team and its advisers on both sides become embroiled in legal disputes for many months after the termination has taken place.
 
Ultimately, the repercussions of getting the procedure and the legal and contractual requirements of termination wrong are extremely serious and could lead to substantial awards of compensation for all the financial consequences arising from any unlawful termination. The momentum and goodwill required for undertaking a project in such circumstances is harmed, and the project usually suffers irreparable damage to its timeframe and budget for delivery.
 
If a termination scenario is being contemplated, it is therefore imperative to ensure full and careful consideration is given to the legal and contractual rights of the parties and also the full effects, both commercially and financially, which may arise from such action.

Construction Week

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