By Justin Alexander Gambino, Senior Associate & Ahmed Abdelnabi, Associate
Overview
This Practice Note provides an overview of:
- the grounds upon which a construction contract can be terminated under the relevant provisions of Federal Law No. 5/1985 on the Civil Transactions Law of the United Arab Emirates State; and
- the termination of construction contracts under the more commonly used form of construction contract in the UAE, i.e., the 1999 edition of the FIDIC Redbook.
Definitions
- FIDIC: International Federation of Consulting Engineers.
- Muqawala: A contract whereby one of the parties thereto undertakes to perform work against a counter value for consideration which the other party undertakes to provide, as per article 872 of Federal Law No. 5/1985.
Practical Guidance
Construction contracts are categorized as muqawala contracts under UAE law. Article 872 of Federal Law No. 5/1985 defines muqawala contracts as a “contract for work […] by virtue of which one of the parties undertakes to do a piece of work in consideration of a remuneration which the other party undertakes to pay”. Accordingly, construction contracts are governed both by the provisions pertaining to muqawala contracts, as well as the general principles of contract law. However, in the event of any conflict between these articles, the provisions pertaining to muqawala contracts will take precedence.
The FIDIC suite of contracts is predominantly used in the UAE construction sector, the 1999 edition of the FIDIC Red Book (i.e., model contract for works designed by the employer) being one of the most popular amongst employers in infrastructure projects.
Contracts generally can be terminated in the UAE in one of three ways, namely by (i) mutual agreement; (ii) court order; or (iii) operation of law under article 267 of Federal Law No. 5/1985. With specific regards to muqawala contracts, termination by mutual consent or court order is provided for by article 892 of Federal Law No. 5/1985.
Mutual agreement
Parties can express their mutual consent to terminate their contract by way of an express termination clause. In addition to article 267 of Federal Law No. 5/1985, article 271 of Federal Law No. 5/1985 provides that the parties can agree for a contract to be terminated, in the event of non-performance by one of the parties, without the need to obtain a court order. However, article 271 of Federal Law No. 5/1985 expressly mandates that the party claiming termination must serve formal notice, unless the parties have stipulated otherwise in their contract.
The 1999 edition of the FIDIC Redbook expressly provides the grounds under which either the employer (Sub-Clause 15.2) or a contractor (Sub-Clause 16.2) can terminate a construction contract. Under most circumstances, both the employer and the contractor must give 14 days’ notice prior to exercising the contractual right to terminate.
In the event that a party disputes the termination, the judge (or arbitral tribunal) will determine whether the contract was legally terminated. In this case, the termination by mutual consent will become a termination by a court order.
Court order
Where a contract does not provide an express termination clause, the parties will need to obtain an order from the court to lawfully terminate their agreement. Article 272 of Federal Law No. 5/1985 provides that where one of the parties fails to perform its contractual obligations, the other party – after serving formal notice on the defaulting party – may request the court to order performance or termination of the contract. In the event that the defaulting party is found to have breached its obligations under the contract, the court may: (i) order the party to immediately perform; (ii) provide the defaulting party additional time to perform; or (iii) order termination of the contract and award the non-defaulting party damages.
In the event of contract termination, article 274 of Federal Law No. 5/1985 stipulates that the contracting parties must return to the pre-contract state. Where this is not possible, the court may award damages.
Operation of law
A construction contract may also come to an end by operation of law, for example upon the occurrence of a force majeure event. Article 273 of Federal Law No. 5/1985 provides that, if performance of a party’s obligations becomes impossible as a result of force majeure, the party will be relieved from performance and the contract will be terminated. However, article 273(2) of Federal Law No. 5/1985 clarifies that, where performance merely becomes partially impossible, the party claiming force majeure will only be discharged from performing those obligations impacted by the force majeure event.
Force majeure is similarly addressed by article 287 of Federal Law No. 5/1985. This provision provides that a party is not liable to contractual damages where it can establish that these were caused by an event beyond the party’s control, such as force majeure.
Federal Law No. 5/1985 does not define the term force majeure and the courts will assess whether an event qualifies as such on a case-by-case basis. In practice, force majeure has mostly been found in cases of unforeseeable events beyond the control of the parties, such as natural disasters. Economic events, such as the financial crisis of 2008, have not been held to constitute force majeure on the ground that market fluctuations are reasonably foreseeable, and that employers and contractors are supposed to be seasoned merchants who should anticipate such incidents when planning their projects.
Given the absence of a definition of force majeure in Federal Law No. 5/1985, commercial parties are advised to include one in their agreement. Under Sub-Clause 19.1 of the 1999 edition of the FIDIC Redbook, force majeure events are those which: (i) are beyond a party’s control; (ii) could have not reasonably anticipated; (iii) could not have been reasonably avoided; and (iv) which are not substantially attributable to the other party. This provision also provides a non-exhaustive list of examples of force majeure events, such as war, hostilities, rebellion, disorder and natural catastrophes.
Other provisions concerning a party’s ability to perform its obligations in the context of muqawala contracts are articles 893 and 894 of Federal Law No. 5/1985. Article 893 of Federal Law No. 5/1985 states that a party may seek recission or termination of a contract when an excuse arises that prevents performance. Under article 894 of Federal Law No. 5/1985, a party is entitled to the value of the work performed (as well as expenses incurred for performance to the extent that the other party has benefited from such performance) where it is unable to complete the works for reasons beyond its control.
An alternative remedy to termination for force majeure is the doctrine of ‘unforeseeable circumstances’ pursuant to article 249 of Federal Law No. 5/1985. This provision empowers a judge to reduce a party’s obligation to reasonable limits in circumstances where performance has become extremely burdensome (if not impossible) as a result of “public exceptional unpredictable circumstances” to the extent that it threatens the party with “heavy loss”. In evaluating whether such relief should be granted, the judge will consider the circumstances and balance the interest of both parties.
This doctrine has rarely been invoked successfully, potentially due to the fact that the notion of ‘public circumstances’ is not defined in Federal Law No. 5/1985. It is, however, understood that such circumstances are those that affect the public as a whole, and not just a specific party.
Termination for convenience
In addition to the grounds outlined above, the Dubai Court of Cassation has also held that an employer can unilaterally terminate a muqawala contract for convenience, provided that the employer compensates the contractor for whatever costs it had incurred, whatever works it had completed and whatever profits it would have gained if it completed the whole works (see DCC 620/2013 and DCC 348/2012). In practice, contractors rarely recover lost profits given the high evidentiary burden that it needs to satisfy, namely that such profits must have been certain to occur in the future. However, in a recent Dubai Court of First Instance judgment where an employer had terminated a contractor who had completed 90% of the whole works, the Court decided to award the contractor a compensation of 10% of the value of the remaining works and characterised it as a compensation for lost profits (see DCFI 41/2021 dated 28 April 2021).
Related Content
Legislation
- Federal Law No. 5/1985 on the Civil Transactions Law of the United Arab Emirates State
Regulations
- FIDIC Redbook, 1999 Edition
Cases
- DCC 620/2013
- DCC 348/2012
- DCFI 41/2021