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.
Following on from our first article looking at the law of the Dubai International Financial Centre (DIFC), here we consider how the UAE Federal Law addresses termination (or cancellation) of commercial contracts including notice requirements and other potential pitfalls to be aware of when looking to terminate.
UAE Federal Law
The applicable law dealing with the cancellation (ie termination) of a UAE law governed contract is the Federal Civil Transactions Law No. 5 of 1985 (the Civil Code). The starting point for a party considering its options in this regard is at Article 267 which provides that a party may only cancel a contract by:
- mutual consent
- an order of the court (or arbitral tribunal)
- under a provision of law.
Mutual Consent
Article 268 of the Civil Code entitles parties to mutually agree to revoke their contract any time after the parties have entered into that agreement. For example, the parties may have settled their differences and signed a settlement agreement which deals with termination by consent. In those cases, a court order will not be required.
Alternatively, under Article 271 of the Civil Code, parties may include a provision in the contract that agrees in advance that if one party fails to perform its obligations, the contract may be cancelled automatically without the need to obtain a court order declaring this. If a breach occurs, the aggrieved party must notify the counterparty that it is availing of its right to the automatic cancellation, unless they have agreed to dispense with that formality.
Parties might query whether, by agreeing to such a clause in advance, it could preclude them from challenging the cancellation later on. Although this is a valid consideration, the counterparty does retain the right to challenge a purported automatic cancellation of the contract. For example, they can bring a claim to declare the termination unlawful by demonstrating that it had performed its obligations or that the alleged breach did not give rise to the right to an automatic cancellation.
If it is decided that the right to an automatic cancellation did not rise, the counterparty may also have a right to claim compensation if, for example, it had been prevented from continuing work since the alleged cancellation. With that in mind, an aggrieved party should tread with caution and preferably seek legal advice before relying on automatic termination clauses.
Court Order (or Arbitration Award)
Where there is no mutual agreement to terminate the contract, either before or after it has come into effect, an aggrieved party will need to obtain a court order (or arbitral award, if appropriate) declaring that the agreement is cancelled. In such cases, they ought to seek legal advice before issuing a default notice, termination notice and/or taking steps which might prevent the counterparty from continuing its work under the contract.
In particular, the contract should be reviewed for any agreed notice provisions in the contract. If the aggrieved party has not complied with such provisions, the judge (or arbitrator) may decide that the right to an order declaring termination will not have arisen. If the contract is silent, the aggrieved party must at least comply with the notice requirement under Article 272 of the Civil Code by informing the other party of the breach of contract and that it be cancelled.
If the counterparty disputes the default notice, then the aggrieved party will need to bring a claim to demonstrate the breach, that it has served a valid notice under Article 272 and that it is, therefore, entitled to an order for cancellation.
During the course of the proceedings, the contract will remain in force, therefore, the counterparty might even be able to cure its breach of the agreement, albeit late. In line with the 2010 Ministry of Justice (MoJ) commentary for Article 272, if the counterparty is no longer in default at the time the court is issuing its order, the judge will not declare that the contract has been cancelled.
Even if the defaulting party remains in breach or has only partially performed its obligation(s), the judge retains discretion under Article 272 to give that party more time to cure its breach or to order compensation instead of cancellation.
Provision of Law
The least common scenario in which a commercial contract might be cancelled will be due to a provision of the law. An example of this is set out in Article 273 of the Civil Code which provides that where an event of force majeure occurs making performance of the contract impossible, the contract shall be automatically cancelled. The MOJ commentary makes it clear that in these circumstances there will be no requirement to serve a notice on the other party, which is also reflected in Article 388 of the Civil Code.
Nevertheless, if one party disputes cancellation due to performance becoming impossible, they may still bring a challenge in the court. If relying on Article 273, for example, the judge will assess whether performance of the obligation has become impossible due to an event of force majeure and, if it has, may affirm the cancellation by operation of the law. On the other hand, if it is found that a party was responsible for performance becoming impossible, an order of compensation may be more appropriate.
Conclusion
In summary, parties considering termination of a UAE law governed contract in Dubai, must pay attention to procedures outlined in their contract as well as the Civil Code. While automatic cancellation clauses may potentially offer a chance to terminate quickly, parties must exercise caution as challenges in the court (or in arbitration) may still arise. Compliance with notice provisions is essential, therefore, seeking legal advice at an early stage of a dispute is crucial to eliminate any costly mistakes.
Take a look back at our first article considering the provisions relevant to termination of contracts under DIFC law.
