How to terminate construction contracts?

Amid the construction contract, things may turn out badly. Contractual relationship may come to an end; the trust may vanish and, in the troublesome financial atmosphere, organizations or people can be declared bankrupt. Thus, the clause allowing either or both the parties to rescind a construction contract should be considered prior to signing the agreement. 

In the legal world, this clause is known as the Termination of the contract. Termination of a construction contract can exhibit
genuine dangers and has a vast impact if done inappropriately. This is on the basis that if termination is
done without appropriate reasons is itself deem to be a rapture of an agreement. It is thus vital that
both the parties comprehend and value the law of the contract termination and
subsequent procedures. Ergo, it is always advised by Construction Lawyers of
UAE to beware of the legal consequences prior to taking such a drastic step and should never be taken lightly.

Common Grounds for Termination

Ideal Construction contracts set out the premise on which the party can
terminate the agreement, some of the common grounds on which parties are
allowed to rescind the contract are as
follows:

·       
Either party is declared bankrupt and pays off the
creditor;

·     
Either party is insolvent;

·       
Contractor fails to abide by the obligations under the
contractor fails to perform the
construction works properly;

·    
Construction work is
suspended due to court or any other relevant authority;

·      
Failure of the owner to remunerate the
contractor;

·     
Owner breaches the contract.

In lieu of the foregoing,
there are numerous consequences of termination which can involve significant
work for replacement contractor, if the previous
contractor was terminated or for the
contractor it may lead to non-payment of dues by the employer. Even if the employer has the potential to clear the
outstanding dues of the contractor. Due to a considerable number of challenges emerging out of terminations, it
is prudent for contracts to contain “early warning” systems that can alert the
parties towards the violations and allow them to undo the breach. All things
considered, termination can be the main practical choice in specific
circumstances (for example in bankruptcy or failure to perform contractual
obligations), and this article will
address some vital points to consider regarding the termination of construction
contracts and subsequent consequences.

Are you sure you can Terminate?

At the time of terminating the
contract, the terminating party should be
assured that he holds a lawful right to terminate the contract and follows the legal procedures to
terminate the contract. It is exceptional
for parties to erroneously presume that they have the privilege to end in a
specific circumstance and to terminate without possessing a legal right to do
so. As a result, the termination will be ineffectual, and the terminating party will be
exposed to unnecessary civil
claims for damages. Instead of being the blameless
party, the party who inadequately ends the agreement accidentally becomes the party in breach.

Termination rights within contracts

Given the difficulties in the law to
terminate the agreement, parties often agree on certain obligations, breach of
which lead to the termination of the agreement. Subsequently, it mentions the
conditions that will be followed during termination
along with the compensation clause. The preceding is
based on the FIDIC form which governs the construction contracts.

UAE law and Termination

The Civil Law and
the Commercial Transactions Law of UAE govern the termination of
construction contracts which is also referred to as Muqawala Contracts and
states that “a contract of muqawala
shall be terminated upon completion of the works as agreed between the parties
or upon termination of the contract post receiving order from the competent court.”

The law further sets out rights of termination
mutually; it is essential that the
agreement gives that the termination can
be effective even without a court order. In the event that the agreement
does not have such a condition, the terminating party is required to inform the
other party of its intention of terminating the contract prior to seeking court’s order. However, if
there are no conditions which allow parties to terminate the contract on their terms, they may any time seek
assistance and consent of competent court before taking such action.

Additionally, the relevant court will contemplate all relevant positions of both the parties while determining to terminate the contract or
not. Contingent upon the circumstances, the may order for specific performance
of the contract as a replacement of the
termination. The concerned ordered
provides an opportunity to the breaching party to remedy the wrong and fulfil the pending
obligations.

The event of force majeure can also lead to termination of
the contract as these are certain unforeseen events which can make it
impossible for the contractor to perform his contractual duties.

Repercussion of Termination

The core value is that compensation ought to be equivalent
to the quantum of the damage endured. Under the Civil Code of UAE, a party is
qualified for damages equal to "harm, indeed, endured post the occurrence
of an event". Without extortion and gross carelessness, certainty and
predictability are required so as to recoup damages from breach of the agreement.

So as to deal with the procedure following termination, parties
every now and again concur on a legally binding component that applies to the
change. For instance, if an Employer terminates by
virtue of a Contractor's violation, usually for the Employer to not be forced to make additional payments to the
contractor until the expense of finishing the works has been resolved. The
expectation of such wording is to guarantee that the Employer is in the loss on account of appointing a replacement
contractor. <

An employer should subsequently hold the right to recover
from the contractor the relevant documents of the constructions and the ability
to recover anything pertaining to the contract. A Contractor who terminates
by virtue of the Employer's breach is normally qualified for damages under the
contract and the out of pocket expenses incurred by the contractor. Parties are
allowed to concur the appropriate rate of interest on the late payment, subject
to a maximum of 12%.

Conclusion

At the time of finalizing
the contracts, parties should be equally focused on the termination clause
compared to other contractual obligations, to be
prepared for the worst. Unfortunately, construction projects frequently
encounter issues ergo; it is pertinent that parties spend the time to agree well-drafted
termination clauses to facilitate the challenging process of termination.