In the current economic climate, there is growing interest in whether a contract can be cancelled, particularly where one party is no longer able to fulfill its obligations under the contract due to financial difficulties.
There are a number of options under UAE law for a party seeking to end a contract. However they must satisfy a number of conditions. The current global financial crisis is unlikely to be sufficient grounds for one party to seek to end a contract as changes in economic conditions is an economic risk which a contracting party should take into account in the negotiation of the contract.
In brief:
A party to a contract subject to UAE law can seek to end the contract in one of three ways:
it is declared null and void by a court
it is cancelled, terminated or rescinded
performance becomes impossible or oppressive.
Changes in a party's financial circumstances, for example due to the current economic crisis, is unlikely to be sufficient grounds for ending a contract in one of these ways.
General principles
A general principle of contract law is that the contracting parties must perform their obligations as stated in the contract with good faith and in a manner consistent with the contract's purposes and requirements. A contract must contain a lawful benefit to both contracting parties, otherwise the contract is not valid according to Article 208 of the UAE Civil Code.
After a contract is made the following outcomes are possible:
The contracting parties perform their contractual obligations in accordance with the contract. In this situation, the contract automatically comes to an end.
The contracting parties mutually agree to revoke the contract after the contract is made but before it is performed.
The contracting parties revoke the contract with their mutual consent at any stage of performance of the contract.
One party moves to hold the contract null and void.
One party moves to cancel, terminate or rescind the contract.
Complete or partial impossibility of the performance of contract exists, or its performance becomes oppressive for one party.
In the first three situations, there will be no dispute regarding the performance of the contract. However, it is in the last three situations where disputes occur and the question of how one party can seek to end the contract arises.
Void contract
Article 210 of the Civil Code defines a void contract as follows:
A void contract is one which is unlawful in its essence and form i.e. lacking the elements of a contract, or defective in its subject matter or purpose or form as laid down by the law, and is not capable of being rectified by consent.
Accordingly, whether or not a contract is void is generally decided by the court. Either party to a contract may seek to void the contract. This could be done by bringing a lawsuit before the competent court, or during a course of a trial of a case.
During a course of action, the court may rule on its own motion that a contract is void. An example of this is the judgment passed by the Dubai Court of First Instance on 19 March 2009 in case no. 39/2009 (real estate case) in which the court held the contract of sale of a property is void under Article 3 of Dubai Law 13 of 2008 regulating the interim Real Estate Register in the Emirate of Dubai (Article 3 states that a sale or other disposition that transfers or restricts title or any ancillary rights is void if it is not recorded in the Register). It should be noted that this appears to be an unusual approach by the court and it is unlikely that a court in the future would make the same finding in the same or similar circumstances.
Cancelling a contract
Article 267 of the Civil Code provides that valid contracts are binding on the parties and no party can withdraw from, change or rescind the contract, unless the parties mutually agree to this or by an order of the court. So on what basis can a party to a contract obtain a court order for the dissolution of a contract? The Civil Code deals with this matter in Articles 272 and 273.
Under Article 272, if a party to a contract does not do what they are obliged to do under the contract (the obligor), the other party may, after giving notice to the obligor, require the contract be performed (specific performance) or cancelled. The court may order the obligor to perform the contract immediately or may defer performance to specified date. The court may also order that the contract be canceled and compensation paid if appropriate.
Also under Article 272, litigants normally bring their cases to court. This Article provides two options for the party who has fulfilled all of their obligations and where the other contracting party has not. These options are specific performance or cancellation of the contract.
In our experience, in recent cases brought before the Dubai courts relating to property disputes, buyer plaintiffs have been seeking cancellation of a contract. It is highly unusual for a buyer, in today's market, to seek specific performance. Most recently, this seems to be largely driven by the downturn in the market as a result of the global financial crisis. It is important to note that the court should order specific performance if the plaintiff claims specific performance of the contract, if it is possible to do so.
However, when the plaintiff seeks cancellation of the contract, it would not be necessary for the court to order cancellation of the contract. Article 272 of the Civil Code gives the court the option to allow the defaulted party a specific period of time to enable the performance of their past obligations. The court may also order compensation if it sees fit. It is also necessary to remember that there are a number of local laws that affect the making of specific contracts such as contracts for the sale of property. For example, in the Emirate of Dubai, there have been a number of laws in the past few years that regulate property transactions, such as Law 13 of 2008 (as mentioned above) and more recently Law 9 of 2009 (see the article on Law 9 by my colleagues Michael Lunjevich and Brent Baldwin in the June edition of Hadef Highlights).
In a recent case where we acted for the seller of a property, the purchaser claimed cancellation of the contract and the refund of the advance payment. The Dubai court rejected the case and accordingly the purchaser lost the advance payment he had made. The defence raised in this case was that the plaintiff was the defaulting party according to the terms of the contract as he has an obligation to release the property's mortgage from the bank, which he failed to do. Additionally, we argued that our client intended to perform the contract from his side, provided that the plaintiff pays the balance of the sale price in court or release the mortgage. Our client's obligation was only to transfer the title of the property to the purchaser's name, which he showed the court a good faith to do.
This is also an instance where the court made reference to the concept of good faith, as mentioned in Article 246 of the Civil Code. This generally implies a general duty to act reasonably and honestly and decently.
In Cassation Court judgment No. 73/2008, the Cassation Court ruled that good faith can be regarded as material fact, which could be evidenced by all legal methods of evidence including experts, testimonies and presumptions. Under Article 246 (1) and (2) of the Civil Code, the Court stated that any contracting party could seek the cancellation of the contract if the other contracting party acts contrary to good faith (in other words, acts in bad faith).
Generally, it is possible for any contracting party to seek cancellation of the contract based on Article 246 of the Civil Code in the event that the other contracting party does not perform his contractual obligation in consistence with the requirements of good faith.
Force Majeure
Another consideration is the concept of "force majeure" or exceptional circumstances of a public nature which prevent the performance of a contractual obligation. Where it is alleged that an obligation under a contract cannot be performed due to force majeure, a contracting party can approach the court with a claim to reduce the oppressive obligation to a reasonable level. This is clearly stated in Article 249 of the Civil Code. It is also possible that force majeure could be argued as a good defence in cases where natural crises completely or partially prevent the performance of a contract. Examples of force majeure in this regard are earthquakes, wars or floods. An Egyptian court ruled in one case that, the 1967 war between Israel and Egypt which caused the Suez Canal Authority to stop navigation in the canal, is not a case of force majeure (in regard to that particular contract in dispute) on the grounds that there were many signs publicly known and widely disseminated that the state of war would soon be declared. The contracting party, on entering the contract in question, was fully aware of this fact.
Concluding thoughts
While there may be exceptional circumstances generally considered to be legal ground for cancellation of a contract or reducing any party's obligations to a reasonable level, it is highly unlikely that the global financial crisis could be considered as an exceptional circumstance or force majeure. The global financial crisis could only be considered as an economic risk of which any contracting party should be aware and which should be factored in at the contract negotiation stage.
By Omar Al Shaikh
© Hadef & Partners 2009
