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TerminatingAConstructionContractFromAUAELawPerspectiveRealEstateandConstructionUnit
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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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