How to terminate construction contracts?

Author: Hassan Elhais

Contractual relationship may come to an end; the trust may vanish and, in the troublesome financial atmosphere, organizations or people can be declared bankrupt. Thus, the clause allowing either or both the parties to rescind a construction contract should be considered prior to signing the agreement. In the legal world, this clause is known as the Termination of the contract. Termination of a construction contract can exhibit genuine dangers and has a vast impact if done inappropriately. This is on the basis that if termination is done without appropriate reasons is itself deem to be a rapture of an agreement. It is thus vital that both the parties comprehend and value the law of the contract termination and subsequent procedures. Ergo, it is always advised by Construction Lawyers in UAE to beware of the legal consequences prior to taking such a drastic step and should never be taken lightly.

Common Grounds for Termination

Ideal Construction contracts set out the premise on which the party can terminate the agreement, some of the common grounds on which parties are allowed to rescind the contract are as follows:

  • Either party is declared bankrupt and pays off the creditor;
  • Either party is insolvent;
  • Contractor fails to abide by the obligations under the contractor fails to perform the construction works properly;
  • Construction work is suspended due to court or any other relevant authority;
  • Failure of the owner to remunerate the contractor;
  • Owner breaches the contract.

In lieu of the foregoing, there are numerous consequences of termination which can involve significant work for replacement contractor, if the previous contractor was terminated or for the contractor it may lead to non-payment of dues by the employer. Even if the employer has the potential to clear the outstanding dues of the contractor. Due to a considerable number of challenges emerging out of terminations, it is prudent for contracts to contain "early warning" systems that can alert the parties towards the violations and allow them to undo the breach. All things considered, termination can be the main practical choice in specific circumstances (for example in bankruptcy or failure to perform contractual obligations), and this article will address some vital points to consider regarding the termination of construction contracts and subsequent consequences.

Are you sure you can Terminate?

At the time of terminating the contract, the terminating party should be assured that he holds a lawful right to terminate the contract and follows the legal procedures to terminate the contract. It is exceptional for parties to erroneously presume that they have the privilege to end in a specific circumstance and to terminate without possessing a legal right to do so. As a result, the termination will be ineffectual, and the terminating party will be exposed to unnecessary civil claims for damages. Instead of being the blameless party, the party who inadequately ends the agreement accidentally becomes the party in breach.

Termination rights within contracts

Given the difficulties in the law to terminate the agreement, parties often agree on certain obligations, breach of which lead to the termination of the agreement. Subsequently, it mentions the conditions that will be followed during termination along with the compensation clause. The preceding is based on the FIDIC form which governs the construction contracts.

UAE law and Termination

The Civil Law and the Commercial Transactions Law of UAE govern the termination of construction contracts which is also referred to as Muqawala Contracts and states that "a contract of muqawala shall be terminated upon completion of the works as agreed between the parties or upon termination of the contract post receiving order from the competent court."

The law further sets out rights of termination mutually; it is essential that the agreement gives that the termination can be effective even without a court order. In the event that the agreement does not have such a condition, the terminating party is required to inform the other party of its intention of terminating the contract prior to seeking court's order. However, if there are no conditions which allow parties to terminate the contract on their terms, they may any time seek assistance and consent of competent court before taking such action.

Additionally, the relevant court will contemplate all relevant positions of both the parties while determining to terminate the contract or not. Contingent upon the circumstances, the may order for specific performance of the contract as a replacement of the termination. The concerned ordered provides an opportunity to the breaching party to remedy the wrong and fulfil the pending obligations. The event of force majeure can also lead to termination of the contract as these are certain unforeseen events which can make it impossible for the contractor to perform his contractual duties.

Repercussion of Termination

The core value is that compensation ought to be equivalent to the quantum of the damage endured. Under the Civil Code of UAE, a party is qualified for damages equal to "harm, indeed, endured post the occurrence of an event". Without extortion and gross carelessness, certainty and predictability are required so as to recoup damages from breach of the agreement.

So as to deal with the procedure following termination, parties every now and again concur on a legally binding component that applies to the change. For instance, if an Employer terminates by virtue of a Contractor's violation, usually for the Employer to not be forced to make additional payments to the contractor until the expense of finishing the works has been resolved. The expectation of such wording is to guarantee that the Employer is in the loss on account of appointing a replacement contractor.

An employer should subsequently hold the right to recover from the contractor the relevant documents of the constructions and the ability to recover anything pertaining to the contract. A Contractor who terminates by virtue of the Employer's breach is normally qualified for damages under the contract and the out of pocket expenses incurred by the contractor. Parties are allowed to concur the appropriate rate of interest on the late payment, subject to a maximum of 12%.

Conclusion

At the time of finalizing the contracts, parties should be equally focused on the termination clause compared to other contractual obligations, to be prepared for the worst. Unfortunately, construction projects frequently encounter issues ergo; it is pertinent that parties spend the time to agree well-drafted termination clauses to facilitate the challenging process of termination.