Summary

Contracting parties need to understand the circumstances in which they are entitled to either suspend or terminate the relationship, for example arising from breach or insolvency and to have clarity on how such rights may be exercised. Civil Code jurisdiction with their codified approach disputes may cut across commercial arrangements.  

This article focuses on the United Arab Emirates (the UAE) and explores how its civil code (the UAE Civil Code) sits with the FIDIC Conditions of Contract for Construction 1999 (the Red Book). 

Although a civil code jurisdiction, the courts of the UAE will generally look to uphold the basic principle of freedom of contract (i.e. the parties are free to agree the contractual terms that govern their contract including express rights of suspension and termination unless the terms are perceived to be manifestly unfair or incompatible with requirements of the UAE Civil Code). This article sets out the various circumstances when a contractor may wish to suspend its works and/or terminate the contract under (the Red Book) and, to furthermore explore the position under the UAE Civil Code if the contract being used is silent on these points.

FIDIC

The Red Book entitles the contractor to suspend work (after giving the employer not less than 21 days’ notice) in any of the following circumstances:

  • The engineer fails to certify interim payment certificates in accordance with the requirements of the contract;
  • The employer fails to provide reasonable evidence of its financial arrangements to pay the contract price, within 28 days of a request by the contractor; or
  • The employer does not pay the contractor in accordance with the contract (for example, the final date for paying the contractor is 56 days after the issue of each interim payment certificate).

Furthermore the contractor can terminate the contract (after giving the employer not less than 14 days’ notice, with the exception that the contractor may by notice terminate immediately in respect of prolonged suspension or insolvency) in a number of express circumstances, including if:

  • The contractor does not receive reasonable evidence of the employer’s financial arrangements within 42 days of suspending for the same reason (as detailed above);
  • The engineer fails to issue an interim payment certificate within 56 days of receiving all of the required information under the contract;
  • The contractor is not paid an amount properly due in an interim payment certificate within 42 days of the 56 days for payment (i.e. a total of 98 days after the issue of the interim payment certificate); 
  • The employer substantially fails to perform its obligations under the contract;
  • There is a prolonged suspension of the works (typically a period in excess of 84 days);
  • The employer becomes insolvent.

FIDIC – contractor’s right to suspend work

  • Failure to certify
  • Failure to demonstrate ability to pay
  • Failure to pay

FIDIC – contractor’s right to terminate contract before compltion of works

  • Failure to certify
  • Failure to demonstrate ability to pay
  • Failure to pay
  • Substantial failure to perform obligations
  • Prolonged suspension
  • Insolvency

Civil Code

The UAE Civil Code does not mention suspension expressly, but Article 247 does provide some limited comfort as it states that a party may refuse to continue its obligations (i.e. carrying out of the works) if the other party is not performing its obligations (i.e. payment). The risk in relying solely on Article 247 in suspending work is that following suspension the employer could seek to terminate the contract on the basis of the contractor’s performance breach. However, a court or arbitrator dealing with a contract governed by UAE law would typically look at Article 247 and whether (as a question of fact) it did apply.

The Civil Code applicable to Muqawala contracts (i.e. construction agreements) stipulates termination may only occur in one of three ways (per Article 892):

  • Completion of the agreed works/services;
  • Mutual consent (this would include a contractual provision entitling a party to terminate in specified circumstances);
  • Court order.

Clearly the first two of these options would apply in any event as contractual obligations to perform come to a natural end when they have been fully performed and parties can agree to vary their contractual relationship by agreement, even if subject to procedural requirements on how such agreement is documented.

Therefore, by way of example, without an express right to terminate for non-payment included within the contract, a party seeking to extricate itself from an existing contractual arrangement would need to obtain a court order to terminate the contract. This could of course be time consuming, costly and mean the parties are obliged to keep working (potentially unpaid) for a period of time while such order is obtained.

Civil Code - contractor’s right to suspend works

  • No such right

Civil Code – contractor’s right to terminate contract before completion of works

  • Mutual consent
  • Court order

Conclusion

Relying solely on the UAE Civil Code for the ability to suspend work or terminate a contract, for example in a contractual dispute over payment, is risky. The UAE Civil Code does not give either party real protection against the need to continue performance of its own obligations in face of continuing breach by or insolvency of the other contracting party, at least until such time as a court order can be obtained to bring the relationship to an end. Parties should consider seeking to include written contractual rights in their contracts expressly setting out the specific circumstances in which rights of suspension and termination arise, and how these are then operated.