In the UAE, the legal basis for suspension and termination of construction contracts primarily comes from the Federal Law No. (5) of 1985 On the Civil Transactions Law of the United Arab Emirates (Civil Code). Under Article 892 of the Civil Code, a Muqawala (construction) contract can be terminated upon the completion of work, by mutual consent, or through a court order. Termination due to breach or non-performance, however, is more complex and typically requires strict adherence to the contract terms and the legal provisions. 

For instance, Article 247 of the Civil Code allows a party to suspend performance if the other party fails to meet their obligations. This is a significant tool, particularly when payment delays occur, as it permits the contractor to halt work until the issue is resolved without automatically leading to contract termination. 

Standard form contracts, like those from FIDIC, often supplement these provisions by offering a more detailed framework for suspension and termination, emphasizing the need for proper notice and adherence to procedural requirements. 

This post is a part of our Construction Disputes in the UAE:An Overview

Suspension of Construction Contracts 

Suspension typically occurs when one party fails to meet their contractual obligations. Suspension of a construction contract can be initiated by either the contractor or the employer, depending on the circumstances. Contractors may suspend work if the employer fails to make timely payments or breaches other critical contract terms. Conversely, employers may suspend the contract if the contractor is not meeting deadlines, violating safety standards, or otherwise failing to comply with contractual obligations. 

However, the right to suspend work must be explicitly stated in the contract, and the suspending party must follow the contract’s procedures, such as providing notice and allowing time for remedy. Failure to comply with these requirements can lead to disputes and legal challenges. 

The concept of suspension in the UAE differs from Common Law jurisdictions, where suspension is often not recognized unless expressly provided for in the contract. In the UAE, while suspension is not explicitly recognized, Article 247 allows a party to refuse to continue their obligations if the other party is in breach, effectively permitting a form of suspension until the breach is rectified​ 

Termination of Construction Contracts 

Termination of a construction contract in the UAE can be categorized into three types like termination by mutual agreement, termination by court order, and termination under specific legal provisions.  

Termination by Mutual Agreement

This is the most straightforward method, where both parties agree to end the contract. It can be pre-agreed in the contract terms or negotiated later. However, the terms of termination, including any payments or penalties, must be clearly defined to prevent future disputes. 

Termination by Court Order

If a dispute arises and mutual agreement is unattainable, either party may seek a court order for termination. Common grounds for such termination include significant breaches, failure to perform contractual obligations, or unforeseen circumstances that make the continuation of the contract impossible 

Termination Under Specific Legal Provisions

 Certain situations allow for termination under statutory provisions. For instance, force majeure events that make the contract impossible to perform can automatically lead to termination. According to Article 892 of the Civil Code, the termination of a Muqawala contract without mutual consent generally requires a court order, unless otherwise stipulated in the contract. 

The termination process in the UAE is nuanced. While mutual agreement or legal provisions can simplify the process, court involvement is often required, particularly in contentious cases where one party disputes the termination. 

Challenges in Suspension and Termination 

Suspension and termination of contracts pose significant challenges. One of the primary issues is the potential for disputes over the validity of the suspension or termination. If one party feels that the other has acted unjustly, they may seek legal recourse, leading to lengthy and costly litigation or arbitration. 

Another challenge is the financial risk involved. For contractors, termination can mean loss of anticipated profits, while for employers, it can result in delays and additional costs associated with finding a replacement contractor. To mitigate these risks, both parties must carefully assess the legal and financial implications before proceeding. 

Moreover, the process of obtaining a court order for termination can be complex and time-consuming. In the UAE, courts are generally cautious about terminating contracts, preferring to enforce them where possible. This makes it essential for parties to follow the correct legal and contractual procedures to minimize the risk of disputes. 

Procedural Steps and Notice Requirements 

The UAE Civil Code and standard contract forms like FIDIC outline specific procedural steps and notice requirements that must be followed before suspending or terminating a contract. This typically includes providing written notice to the other party, detailing the reasons for suspension or termination, and allowing a reasonable period for the other party to rectify the situation. 

Adhering to these procedures is critical to avoid disputes. For example, if a contractor suspends work without giving the proper notice, the employer may argue that the suspension is invalid, leading to potential legal consequences. 

Notice

The party seeking suspension or termination must provide written notice to the other party, specifying the reasons and allowing time for the breach to be rectified. This notice must be clear, detailed, and delivered within the timeframe specified in the contract. 

Rectification Period

Typically, the contract will outline a period during which the breaching party can rectify the issue. Only if the breach is not resolved within this period can the contract be suspended or terminated. 

Legal Recourse and Remedies 

In cases of wrongful suspension or termination, the aggrieved party may seek legal recourse through the UAE courts or arbitration. Possible remedies include financial compensation for any losses incurred, specific performance of the contract, or restitution. 

The choice between litigation and arbitration will depend on the terms of the contract and the nature of the dispute. Arbitration is often preferred in construction disputes due to its relative speed and confidentiality compared to court proceedings. 

The suspension and termination of construction contracts in the UAE require a thorough understanding of both the legal framework and the practical considerations involved. Both contractors and employers must navigate these processes carefully, adhering to contractual and legal requirements to avoid disputes and minimize financial risks. By following the correct procedures and seeking timely legal advice, parties can effectively manage their contracts and mitigate the challenges associated with suspension and termination.