Contract termination in Dubai: the formalities and potential pitfalls

When it comes to terminating a commercial contract, the parties must pay attention to any pre-conditions set out in their agreement, such as notice formalities and cure periods. In addition, the parties ought to consider relevant provisions of the law which apply to their contractual relationship. 

In this two-part series, we focus on how the two different legal regimes in Dubai address the requirement to serve default and termination notices, together with some of the pitfalls to be aware of when looking to terminate. 

DIFC Law

In the Dubai International Financial Centre (the DIFC), DIFC Law No. 6 of 2004 (the DIFC Contract Law) provides that if a party fails to perform an obligation under the contract, this may constitute either a “non-fundamental” or a “fundamental” breach. The distinction is important as it will determine the process to be followed by the aggrieved party considering termination.

Non-performance and cure

The DIFC Contract Law defines “non-performance” as a failure by a party to perform any one or more of its obligations under the contract, including defective performance or late performance (Art.77). 

A non-performing party may take the initiative to cure its non-performance, subject to it giving notice without undue delay indicating the proposed manner and timing of the cure; the cure being appropriate in the circumstances; the Claimant having no legitimate interest in refusing the proposed cure; and ensuring that the cure is effected promptly (Art 80). 

Even if the defaulting party cures its non-performance, the aggrieved party retains the right to claim damages for delay as well as for any harm caused or not prevented by the cure.

Non-fundamental 

Where a cure has not been proposed by the defaulting party or agreed, in a case of non-performance the aggrieved party may give a notice to allow an additional period of time to perform. Where the delay is not fundamental and the aggrieved party has allowed an additional period which is reasonable in length, the aggrieved party may terminate the contract at the end of that period (Art 81(1) and (3)).

The aggrieved party may include a provision in the default notice that the contract will automatically terminate if the counterparty fails to comply within the additional period (Art 81(3)). Alternatively, at the end of the additional period the aggrieved party must serve another notice if it wishes to exercise its right to termination (Art 87(1)). 

Notably, the right to terminate will not apply where the obligation is only a minor part of the contractual obligation (Art 81(4)). Therefore, prior to termination, the aggrieved party ought to take legal advice to assess whether the non-performance is minor or could justify termination. 

Fundamental 

If a party’s failure to perform “amounts to a fundamental non-performance”, the aggrieved party may immediately serve a notice of termination without allowing a remedial period (Art 86). 

In determining whether a failure to perform an obligation amounts to a fundamental non-performance particular regard shall be had to whether:

• the non-performance substantially deprived the aggrieved party of what it was entitled to expect under the contract
• strict compliance with the obligation was of essence under the contract
• the non-performance was intentional or reckless
• the non-performance gave the aggrieved party reason to believe that it could not rely on the other party’s future performance.

The facts of each case will differ, and a party will need to provide sufficient evidence to enable the judge to evaluate if the alleged non-performance fulfils the above criteria. Before terminating an aggrieved party should exercise caution here and obtain legal advice to assess whether the failure would be characterised as a fundamental non-performance. 

Clear notice of termination

What constitutes a “notice” is dealt with at Article 13 of the DIFC Contract Law which provides that a notice “may be given by any means appropriate to the circumstances” and will be effective “when given to that person orally or delivered at that person’s place of business or mailing address and in the case of electronic mail, when so delivered“. 

In view of this broad definition, which includes verbal communications, a party should be careful and seek legal advice if it receives a communication from an aggrieved party, including a “declaration, demand, request or any other communication of intention”. 

The DIFC court (or arbitral tribunal) will look at this objectively and consider if a reasonable recipient of the communication could be left in doubt as to whether the aggrieved party was indeed terminating the contract. Any doubt could render it ineffective as a notice of termination. 

Timely notice of termination

The aggrieved party must serve its notice of termination within a reasonable time after it has, or ought to have, become aware of the non-performance (Art 87(2)). What will be considered reasonable will be fact specific. Whilst some thinking time will generally be acceptable, an aggrieved party should not take too long, or it risks losing its right to terminate the contract. 

Conclusion

In summary, parties considering termination of a DIFC law governed contract, must pay attention to procedures outlined in the DIFC’s Contract Law. The distinction between "non-fundamental" or "fundamental" non-performance will be key to deciding if a cure period should be allowed and when immediate termination becomes an option. 

In our second article, we take a look at the relevant provisions of the UAE Federal Law which will generally apply to contracts outside of the DIFC in onshore Dubai.