Parties entering into a contract must be aware of what will happen if it all goes wrong. To this extent, it is fundamental that each party knows what rights it has to terminate the agreement and the consequences of such termination. Furthermore, each party needs to know that the termination provisions that have been included in the contract are appropriate to the jurisdiction and are going to be enforceable and effective.
The importance of the termination provisionswithin a contract are often overlooked during contract negotiations, as both parties are focused on commencing (or continuing) a successful, harmonious and profitable relationship. When an unforeseeable event occurs and the relationship breaks down, it is particularly important that the party looking to terminate the contract is not impeded by drafting errors or oversights concerning the local law,. Such issues will often result in the termination process becoming a much more difficult and costly to deal with.
This series will look at the issue of termination in relation to a construction contracts governed by Qatari Law. In particular, we will look at the provisions of Law No (22) of 2004 Regarding Promulgating the Civil Code 22 / 2004  (‘’the Civil Code’’) to identify what rights the parties have in relation to the termination of a contract and highlight important considerations that need to be taken into account when drafting these provisions.
Although a contract can be bought to an end for a variety of reasons, this series will only focus on the following three reasons which are commonly addressed in the contract:
- Termination for breach (Part 1);
- Termination for convenience (Part 2); and
- Termination in the event of force majeure (Part 2).
As discussed in our previous article entitled “Liquidated Damages and Applicability in Construction Contracts in Qatar”, Articles 171(1) and 172(1) of the Civil Code set out the general and overarching principles of contact law in the State of Qatar. This can be broadly summarised as a freedom of contract (Article 171(1)) and the requirements of good faith (Article 172(1)). However, as previously noted, the agreed terms of a contract are subject to change where a court finds “reasons as prescribed by law”.
In Qatar, termination of a contract can only be effected by an order of a court, the agreement of the parties or as prescribed by law. Furthermore, the Civil Code requires the intention of the parties relating to termination to be very clearly set out in the contract. It is therefore critical to be aware of the relevant provisions of the Civil Code that need to be taken into account when preparing or entering into a contract, particularly for the following reasons:
- If the provision is contrary to the law, a court will amend the provision to be compliant with the Civil Code; and
- If the provision is ambiguous, implied or open to alternative interpretations, the relevant termination provisions of the Civil Code will apply.
Having knowledge that the clauses drafted to address these matters are effective and enforceable is vital. Alternatively, where parties have elected to prepare a contract that is silent on these matters (or the clause prepared is defective) it is important to know the provisions that will be in effect pursuant to the terms of the Civil Code.
TERMINATION FOR BREACH
Article 183 of the Civil Code relates to the termination of a contract as a consequence of a breach and provides as follows:
“1. In contracts binding on both parties and imposing reciprocal obligations (synallagmatic contracts), where one of the parties fails to perform his obligation, the other party may, upon formal notice to the former, demand performance of the contract or its rescission, and may claim any damages caused by such failure to perform.
2. The judge may, mutatis mutandis, determine a period of grace within which the obligor shall perform his obligation. The judge may also reject the application for rescission if the obligation not performed is insignificant compared with the obligations considered in their entirety.”
Article 183(1) provides the requirement of issuing a formal notice in the event of a breach, but does not grant a right on the party to terminate. Essentially, a judge needs to determine the binding force of the notice, being capable of dismissing it if such demand for performance is based on matters not significant enough to warrant termination of the contract. When considering such application, a judge also has the option to grant a period of grace, allowing the defaulting party additional time to remedy the default.
It is without doubt that situations will arise where the question of what may be considered “insignificant compared with the obligations considered in their entirety” will be a very difficult and uncertain question. This test set out in Article 183(2) is subjective and open to broad interpretation. As a consequence, parties would benefit by seeking to avoid such procedures when terminating a contract and fortunately Article 184 provides such relief.
Article 184 of the Civil Code provides as follows:
“1.The parties may agree that, in the case of a failure to perform the obligations arising from the contract, such contract shall be deemed to have been rescinded ipso facto without a court order.
2.Such an agreement may not limit the authority of the judge to terminate the contract, unless the wording of the contract expressly indicates that this is the parties' mutual intention.
3.Other than in commercial transactions, an agreement to deem a contract rescinded ipso facto shall not release the parties from the obligation of serving a formal notice. Any agreement between the parties to the contrary shall be void.”
Whilst Article 184(1) provides that the contract can be terminated in the absence of a court order, Article 184(2) sets out the key requirement that the contract “expressly indicates this mutual intention of the parties”. As this drafting requirement is foreign to common law jurisdictions, it is usually not included in standard forms and therefore can often be overlooked by the parties.
Getting this provision right in the contract is essential to avoiding the potential pitfalls, cost and uncertainty of requiring a court order to terminate the contract. The contract needs to include clear and explicit terms to the effect that following a default of the contract, the non-defaulting party may terminate the contract by notice, and that the parties agree that the termination shall be effective in the absence of a court order.
Although this does not relieve the parties from the difficult process of calculating the damages and making the demand for the amount due to the wronged party, it does remove the risk of the court prolonging the situation by granting a period of grace, or worse, dismissing the termination entirely.
Naturally in the construction context, where a court dismisses an employer’s application to terminate the contract, the contractor is likely to have been delayed and maybe entitled to delay costs and damages. Such matters will surely inflame an already fractured relationship between the parties, creating a situation that will be even more difficult to recover from.
In conclusion, the Civil Code provides that a party will always have the right to terminate the contract as a consequence of the other parties’ breach (provided that such breach is significant enough in light of the contract as a whole). Termination in this regard will require an order of the court, unless the parties have drafted the contract to take advantage of the Article 184 of the Civil Code. By doing this through clear and precise drafting, the parties will benefit from a greater level of certainty in the termination process and avoid the requirement of having to obtain a court order to bring the contract to an end.
This concludes part 1 of this series. Part 2 will look at other common termination clauses such as ‘termination for convenience’ and ‘termination in the event of force majeure’ and highlight the relevant considerations that need to be taken into account when drafting these provisions.