22 October 2011
If you are a contractor, a consultant or an architect, you must have at least once received a notice from your employer that they are terminating the agreement pursuant to the termination of convenience clause under your contract.
Most of the contractors may not be aware of the information contained herein this article and this is precisely the reason why I have chosen to write one, to continue my effort to increase awareness of those aspects protective aspects of laws of the UAE which protects an audience which is not even aware of the existence of these principles and laws. The exercise of termination of convenience clauses is one of these instances where the UAE law does offer protection to the contractors.
While most contractors involved in the actual construction of large developments are large scale companies themselves, but most consultants like architects have small firms leaded by a handful of qualified professionals who do not have an in-house counsel for handy legal advice.
Standard conditions of construction and consultancy contracts standard conditions including the FIDIC Red Book 1999, have what is often labeled as a "Termination of Convenience" clause, whereby the Employer has the right to terminate the Contract at any time for Convenience, without any default of the Contractor. It must be noted that contractors barely have much negotiating powers when these contracts are drafted and executed and that such clauses can be quite unfairly used, each country has its own governing law to regulate the exercise of this clause.
Although the Employer's right to terminate may seem very clear and undisputed as after all it is clearly given to an employer under the contract, an Employer's contractual right to terminate the construction contract must be distinguished from its rights to terminate under law. In the former case the court does not have to order termination but declare, if necessary, that the contract was validly terminated at the time of termination notice and in the latter case, where there is perhaps no termination clause under the contract or it has not been exercised properly, the courts must review the merits of the case to decide whether termination ought to be granted.
Whilst the contractual terms can be drafted in a manner to provide greater remedies to either of the contracting parties and a contract can be validly terminated if the circumstances allowing such terminated existed at the time, termination under law is a different exercise all together and termination of a contract is granted in cases of very severe contractual breaches.
In most jurisdictions, the justificatory principle behind validity of the termination of convenience clause is to uphold the sanctity of the freedom of contract and to secure the Employer's position if the termination of the contract is necessitated for instance due to the cancellation or abandonment of the Project. Therefore, whilst the Contractor would remain entitled to the payment of works that have already been carried out, the contractor would not be permitted to make a profit by recovering the full value of the contract. The Employer however is not entitled to terminate the Contract to carry out the works himself or by engaging a new contractor.
While these clauses are regularly invoked in United States of America and although the English courts have confirmed the validity of these clauses is at best questionable and most likely to be held invalid in the UAE.
The law of the United Arab Emirates does, to a relative extent, upholds the sanctity of the parties freedom to contract and permits the unilateral termination of contracts under Article 219-225 of the Civil Transactions Law of Federal Law No. 5 of 1985 (the "Civil Code"). However, the courts further uphold the sanctity of a binding promise and principles of justice and fairness. This is why, termination under law is under law is given limited grounds and the magnitude of the breach committed by the defaulting party ought to be severe enough to justify the terminating party to escape from a binding agreement.
This is why the courts have wide powers to interpret or amend the nature of the contracts in consideration of fairness and justice. For example, Article 248 of the Civil Code allows a judge to vary unfair provisions of a contract if justice so requires; and Article 249 of the Civil Code states that if due to exceptional circumstance the obligation under a contract becomes oppressive or has the likelihood of causing grave loss to the obliged, the judge can reduce the oppressive obligation to a reasonable level if justice so requires.
Therefore, it should not be surprising that the UAE law has taken a very unfavorably approach towards "termination for convenience clauses".
Construction contracts are known as Muqawala Contracts under the Civil Code and are specifically regulated by the same. As a basic principle of interpretation of law, the specific law takes precedence over and ousts the general law.
As per Article 892 of Section 4 of the Muqawala Contracts under the Civil Code it is stipulated that there are only three ways in which a Muqawala Contract can be terminated:
Moreover, the termination of construction contracts is also governed strictly because the contractors are strictly liable for any defects up to 10 years from the date of completion even those arising from the defects in land or those known by the Employer. This liability is also jointly shared by those architects who carry out supervisory works. Therefore, if an Employer continues to change its contractors, it may become a rather difficult task to determine who carried out the work that turned out to be defective, and who should be held responsible for such a severe liability entailing that construction contracts should only be terminated under court supervision or completion of works.
However, many consultants, architects and other contractors are unaware of the aforementioned aspects of construction law and it is unfortunate that they do raise any objection when they receive a notice of termination on grounds of the termination for convenience clause. The contractors may feel that the termination is unfair or have suspicions that the employer is terminating the contractor on t
The termination of convenience clauses are regularly invoked in the United Arab Emirates without caution, very few Employers are aware of the legal consequences of what may very well amount to a wrongful termination and expose the employer to pay compensation to the contractor and many contractors innocently accept the termination without challenge and risk this termination to become a termination by mutual agreement under law, which as mentioned above is permitted.
Therefore, next time that a contractor receives a notice of termination from their employer and that employer terminates pursuant to the termination of convenience clause, it is worth having that the notice reviewed by a specialist lawyer before taking further action.
Fareya Azfar is a Partner at The Legal Group and can be contacted on +971 4 4477044 or fareya@tlg.ae. The views expressed in this article do not necessarily constitute the views of Zawya.
The Legal Group 2011
If you are a contractor, a consultant or an architect, you must have at least once received a notice from your employer that they are terminating the agreement pursuant to the termination of convenience clause under your contract.
Most of the contractors may not be aware of the information contained herein this article and this is precisely the reason why I have chosen to write one, to continue my effort to increase awareness of those aspects protective aspects of laws of the UAE which protects an audience which is not even aware of the existence of these principles and laws. The exercise of termination of convenience clauses is one of these instances where the UAE law does offer protection to the contractors.
While most contractors involved in the actual construction of large developments are large scale companies themselves, but most consultants like architects have small firms leaded by a handful of qualified professionals who do not have an in-house counsel for handy legal advice.
Standard conditions of construction and consultancy contracts standard conditions including the FIDIC Red Book 1999, have what is often labeled as a "Termination of Convenience" clause, whereby the Employer has the right to terminate the Contract at any time for Convenience, without any default of the Contractor. It must be noted that contractors barely have much negotiating powers when these contracts are drafted and executed and that such clauses can be quite unfairly used, each country has its own governing law to regulate the exercise of this clause.
Although the Employer's right to terminate may seem very clear and undisputed as after all it is clearly given to an employer under the contract, an Employer's contractual right to terminate the construction contract must be distinguished from its rights to terminate under law. In the former case the court does not have to order termination but declare, if necessary, that the contract was validly terminated at the time of termination notice and in the latter case, where there is perhaps no termination clause under the contract or it has not been exercised properly, the courts must review the merits of the case to decide whether termination ought to be granted.
Whilst the contractual terms can be drafted in a manner to provide greater remedies to either of the contracting parties and a contract can be validly terminated if the circumstances allowing such terminated existed at the time, termination under law is a different exercise all together and termination of a contract is granted in cases of very severe contractual breaches.
In most jurisdictions, the justificatory principle behind validity of the termination of convenience clause is to uphold the sanctity of the freedom of contract and to secure the Employer's position if the termination of the contract is necessitated for instance due to the cancellation or abandonment of the Project. Therefore, whilst the Contractor would remain entitled to the payment of works that have already been carried out, the contractor would not be permitted to make a profit by recovering the full value of the contract. The Employer however is not entitled to terminate the Contract to carry out the works himself or by engaging a new contractor.
While these clauses are regularly invoked in United States of America and although the English courts have confirmed the validity of these clauses is at best questionable and most likely to be held invalid in the UAE.
The law of the United Arab Emirates does, to a relative extent, upholds the sanctity of the parties freedom to contract and permits the unilateral termination of contracts under Article 219-225 of the Civil Transactions Law of Federal Law No. 5 of 1985 (the "Civil Code"). However, the courts further uphold the sanctity of a binding promise and principles of justice and fairness. This is why, termination under law is under law is given limited grounds and the magnitude of the breach committed by the defaulting party ought to be severe enough to justify the terminating party to escape from a binding agreement.
This is why the courts have wide powers to interpret or amend the nature of the contracts in consideration of fairness and justice. For example, Article 248 of the Civil Code allows a judge to vary unfair provisions of a contract if justice so requires; and Article 249 of the Civil Code states that if due to exceptional circumstance the obligation under a contract becomes oppressive or has the likelihood of causing grave loss to the obliged, the judge can reduce the oppressive obligation to a reasonable level if justice so requires.
Therefore, it should not be surprising that the UAE law has taken a very unfavorably approach towards "termination for convenience clauses".
Construction contracts are known as Muqawala Contracts under the Civil Code and are specifically regulated by the same. As a basic principle of interpretation of law, the specific law takes precedence over and ousts the general law.
As per Article 892 of Section 4 of the Muqawala Contracts under the Civil Code it is stipulated that there are only three ways in which a Muqawala Contract can be terminated:
- Upon completion of the work;
- By mutual consent; or
- By an order of the court
Moreover, the termination of construction contracts is also governed strictly because the contractors are strictly liable for any defects up to 10 years from the date of completion even those arising from the defects in land or those known by the Employer. This liability is also jointly shared by those architects who carry out supervisory works. Therefore, if an Employer continues to change its contractors, it may become a rather difficult task to determine who carried out the work that turned out to be defective, and who should be held responsible for such a severe liability entailing that construction contracts should only be terminated under court supervision or completion of works.
However, many consultants, architects and other contractors are unaware of the aforementioned aspects of construction law and it is unfortunate that they do raise any objection when they receive a notice of termination on grounds of the termination for convenience clause. The contractors may feel that the termination is unfair or have suspicions that the employer is terminating the contractor on t
The termination of convenience clauses are regularly invoked in the United Arab Emirates without caution, very few Employers are aware of the legal consequences of what may very well amount to a wrongful termination and expose the employer to pay compensation to the contractor and many contractors innocently accept the termination without challenge and risk this termination to become a termination by mutual agreement under law, which as mentioned above is permitted.
Therefore, next time that a contractor receives a notice of termination from their employer and that employer terminates pursuant to the termination of convenience clause, it is worth having that the notice reviewed by a specialist lawyer before taking further action.
Fareya Azfar is a Partner at The Legal Group and can be contacted on +971 4 4477044 or fareya@tlg.ae. The views expressed in this article do not necessarily constitute the views of Zawya.
The Legal Group 2011
