Overview
The UAE is a well-known international commercial hub having its geographical and strategic business advantages which invites numerous cross border deals executed between parties from different parts of the world. Quite often in the region, commercial contracts governed by UAE law are incorporated from standard form templates readily available with the internationally based parent company or prepared by foreign lawyers or business specialists. However, while drafting such contracts, certain localized peculiarities required in the contracts are either overlooked or may not be known to the parties, in particular, the form and manner of terminating the contract.
Parties having some familiarity with the common law regime may think that it would be convenient to part ways simply by serving a termination notice without having to prove the breach of the contract, leaving the aggrieved party to challenge the termination before courts / tribunals and / or seek damages. However, to their surprise, the position in respect of termination of commercial contracts is entirely different under UAE Law as would be discussed in this article.
Article 267 of the Federal Law No. 5/1985 (“UAE Civil Code”) allows three different ways by which parties can terminate contracts i.e. by mutual consent, order of the court or a law provision.
- By Mutual Consent
Commercial contracts usually empower either one or both parties to terminate where there is a breach of certain obligations under the contract or for ‘convenience’ (either with or without notice) if so, explicitly provided in the contract. Although, on the face of it, and quite rightly so, such modes of termination can very much be categorized as ‘mutual consent’ under Article 267 but for contracts governed by UAE law, it is always advisable to indicate in clear terms in the contract that such termination is as per mutual consent contemplated under Article 267.
Issuing a termination notice is also an important consideration while terminating which is often overlooked or not drafted properly in the contract. Since Article 271 makes it mandatory for the parties to serve a notice of termination, it is imperative that the parties expressly mention their intention to dispense with the requirement of serving such a notice in their contracts, if that is what they intend to do so.
It is also pertinent to mention that Article 247 enables either party to terminate the contract regardless of mutual consent, if one of the parties fails to honor its contractual obligations. However, if the breaching party is willing to remedy the breach and perform its contractual obligations, the termination may not be successful. Nothing however, precludes the parties from approaching the court to seek termination as will be discussed below.
In addition, there are also requirements of ‘good faith’ under Article 246 along with the restrictions regarding exercise of unlawful rights under Article 106 which include infringement of another’s rights, violation of Islamic Shari’a, public policy or morals which the parties need to be mindful of while terminating contracts.
Good faith, which in general terms would mean the obligation to act honestly without taking an unfair advantage over another person, often at times is open to a broad interpretation by the Courts / Tribunals. Such an interpretation can make a termination for convenience, believed by the terminating party to be exercised in good faith, in effect, become unlawful and to the detriment of such party. What is more important is that unlike common law, the parties cannot contract out of their good faith obligations under UAE Law and therefore, it is prudent for the parties to comply with the duty of ‘good faith’, even while terminating their contracts by ‘mutual consent’.
- By an order of the Court
Parties may terminate the contract by an order issued by the Court / Tribunal as the case may be and such an option can also be exercised in the absence of a termination clause in the contract. In such cases, the terminating party would have to serve a notice upon the party being terminated prior to seeking a court order for termination which would obviously incur time and expenses.
The Court will decide the termination of the contract by analyzing and considering the breach and all other relevant circumstances leading to the termination and in some cases, may even order specific performance under Article 272 as an alternative relief instead of termination. The breaching party may also prevent the termination by remedying such breach prior to the court issuing the termination order. Hence, is advisable for the parties to continue performing their contractual obligations until the court order is obtained to avoid further issues.
If the Parties are desirous of dispensing with the requirement of obtaining a court order, they may expressly and unequivocally stipulate that in the contract. However, if the contract remains silent or ambiguous on such a requirement, Article 271 shall apply making it mandatory to obtain a court order for seeking termination.
- By operation of law
The third mode of termination of a contract is as the term suggests, by operation of law i.e. instances where the performance of the contract is rendered impossible on account of a force majeure event under Article 273 of the Civil Code which would automatically cancel the contract provided the event was unforeseeable, unavoidable and rendered the contract’s performance impossible. Parties can also terminate in any circumstances of ‘public nature’ provided either of the parties confirm that performance of the contract is onerous and unprofitable.
Conclusion and Recommendations
The Parties, quite understandably so, seem to pay a lot more attention to their commercial terms and conditions at the time of negotiating their contracts while not emphasizing enough on the termination and / or dispute resolution clauses which leads to ambiguity and confusion at the time of parting ways. The parties are well advised to think ahead right from the inception and robustly draft their contracts by considering all options and risks associated in the event they might look to exit the contract.
Given that there is no straight jacket formula for drafting a termination clause and each contract individually reflects the terms and conditions agreed between the parties including termination, here are some general instructions / guidelines which can be followed while drafting termination provisions for the contracts governed by UAE law:
- Even though it might be protocol to use standard form templates, especially for MNCs doing business in the UAE, it is always advisable to have such contracts reviewed by local lawyers to inter alia advise on the termination peculiarities under UAE law.
- It is imperative for the terminating party to be clear whether it has the legal right to terminate the contract as per the procedure laid out in the contract. An invalid termination can itself be treated as a breach leading to a possible claim for damages from the other party.
- It is advisable, as much is practicable, to clearly mention in the termination clause whether the parties are terminating the contract by mutual consent, whether there is requirement of serving a notice upon the breaching party and / or whether they are desirous of terminating the contract with / without a court order.
- From a UAE law perspective, the termination for convenience clause should be made more robust after carefully considering all associated options and risks and preferably by expressly waiving the requirement for seeking a court order.
- In the event of disagreement between parties while negotiating the factors that would constitute breach and the consequent termination procedure, it is imperative to holistically identify the aspects of the contract crucial to either party and ‘trade off’ certain provisions to arrive at a consensus.
- A termination notice should clearly lay out valid and substantial reasons due to which the contract is being terminated bearing in mind that the court will decide the issue of termination on the basis of actual proof of such reasons for terminating the contract.
- It is also prudent to provide an opportunity to the breaching party to remedy the breach rather than straightforwardly terminating the contract which may consequently lead to wastage of time and money on litigation.
About the Author
Siddhanth Kochhar is a Principal Associate with Kadernani and Company Legal Consultants where he is primarily involved with disputes before the DIFC and ADGM Courts, arbitration under the DIAC, DIFC-LCIA and ICC Rules and instrumental in drafting commercial contracts.