08 May 2018

How to part ways – the three ways to terminate a contract in the UAE

Authored by: Hadef & Partners, Sector Groups

In the UAE there are just three ways to legally terminate a contract, as provided for in Article 267 of the UAE Civil Code which states that ‘if a contract is valid and binding, it shall not be permissible for either of the contracting parties to resile from it, or vary or cancel it, save by mutual consent, or an order of the court, or under a provision of the law’.

These three methods of termination are broken down below:

  1. Termination by Mutual Consent

Most written contracts will provide for termination by either party in certain circumstances, sometimes where there has been some form of breach by the other party (i.e. ‘for cause’), but sometimes also at the will of a party (i.e. ‘for convenience’).

This, in our view, constitutes an agreement between the parties as to termination rights, satisfying the reference to ‘mutual consent’ in Article 267 of the Civil Code, however, a prudent approach in the drafting is to expressly state that any such termination is deemed exercised within the meaning of mutual consent, as contemplated by that Article 267.

If the termination of the contract is stated to be immediate or automatic on the happening of a particular non-performance event, the contract should expressly state that no notice of termination is required (if that is what is intended), otherwise notice will still be required to be given to effect the termination (Article 271 Civil Code).

In the case of termination for convenience, where no breach has occurred, the unilateral act of terminating the contract is permissible under the Civil Code if the contract contains an express provision for a party to do so (Article 218), and again it is prudent to include wording to the effect that such termination is deemed exercised within the meaning of mutual consent, as contemplated by that Article 267.

It is worth bearing in mind that if the contract is an oral contract, it may be more difficult to demonstrate mutual consent due to evidential issues.

It is also worth noting that Article 247 of the Civil Code states that a party to a contract may withhold performance of its obligations if the other party has neglected to perform its obligations. If a party does or neglects to do something under the contract, then this Article may be raised as a defence to justify the actions of the alleged defaulter.

  1. Termination by litigation

If there is a legitimate dispute, then a party to the contract may choose to seek a court or arbitral order to seek judgment as to whether the purported termination of a contract is valid or not. In the absence of agreement or of a valid (i.e. mutually agreed) termination right, termination for breach will require a court order.

  1. Termination in accordance with the law
  1. Specific laws

Depending on the type of contract, there may be sector, industry specific or other laws which must be considered when terminating a contract.

An example of this is the UAE Commercial Agency Law. If this applies, it may not be possible for a supplier/principal to terminate the contract without a ‘material justified reason’ which is recognised as such by the UAE Ministry of Economy and the UAE courts.

  1. Force Majeure

An event of force majeure (i.e. an event external to the parties) automatically cancels a contract provided that the event was unforeseeable and unavoidable, rendering the contract impossible to perform. If the performance of the contract is only partially impossible, only the terms that cannot be performed will be cancelled. In practice, demonstrating that an event is unforeseeable is a high hurdle to overcome and the scope of a force majeure event has not been definitively defined under UAE law.

  1. Public nature

If there are exceptional circumstances ‘of a public nature’ which make performance of the contract extremely onerous for the obligor, relief is available.  In these circumstances, the court will intervene to adjust the effects of the contract to rebalance the parties’ interests. In practice however, this provision has rarely been successfully relied upon. Regarding the global financial crisis of 2007–2008, for example, most UAE courts held that this was not to be deemed to be an exceptional circumstance, as they took the view that the fluctuation of the economy and trading conditions is generally foreseeable.

For more information, please contact us on sectors@hadefpartners.com.