Termination of the contract

by Dennis Brand
For termination of a contract due to default by the Contractor, FIDIC 4th Edition provides remedies for the employer in Clause 63.1 which, save for a fairly common provision relating to the contractor’s bankruptcy, liquidation or dissolution, requires a certificate to be issued by the engineer stating (a) that the contractor has repudiated the contract, or (b) without reasonable excuse has failed to commence or proceed with the works following a 28-day notice, or (c) has failed to comply with a specific notice or instruction concerning rejection and/or removal of improper work, materials or plant, or (d) despite previous warning from the engineer, is neglecting to comply with any of the contractor’s obligations, or (e) has contravened the provisions of the contract related to sub-contracting, in which case, upon the employer giving 14 days’ notice to the contractor, may enter upon the site and terminate the contract.

FIDIC 1999, however, does not require certification by the engineer; termination is dealt with wholly by the employer and, save for the additional grounds for termination being the failure to provide performance security following a written notice and an anti-bribery provision, Clause 15.2 sets out, in general terms, similar grounds for termination of the contract by the employer due to default by the contractor.

I think it is fair to say that when one thinks of termination of a contract under FIDIC, one automatically thinks of termination by the employer for the default of the contractor. Given the current economic climate, it is perhaps more appropriate to consider the rights of the contractor to terminate the contract for the employer’s default under FIDIC, and also to consider the provisions of the UAE’s Civil Code in that regard.

Referring back to FIDIC 4th edition, default by the employer is dealt with in Clause 69.1, which provides for termination following 14 days’ notice in the event of (a) the employer failing to pay the contractor an amount due under any certificate of the engineer; (b) interfering or obstructing the approval of any such certificate (the engineer); (c) the employer becoming bankrupt or going into liquidation; or (d) giving notice to the contractor that, for unforeseen economic reasons, the employer cannot continue to meet his contractual obligations. Interestingly, all these provisions relate to the financial condition and/or obligations of the employer.

Clause 16.2 of FIDIC 1999 provides some similar provisions to Clause 69.1 of the 4th edition for termination for default by the employer – that is, if the engineer fails to issue a payment certificate within a specified period, if the contractor does not receive the amount due under a payment certificate within a specified period, or if the employer becomes bankrupt or insolvent, or goes into liquidation.

In addition, Clause 16.2 provides for termination if the employer substantially fails to perform his obligations under the contract, or if the employer fails to comply with the provisions of the contract agreement (Sub-Clause 1.6) or the assignment provisions (Sub-Clause 1.7), or if there is prolonged suspension which affects the whole of the works as described in Sub-Clause 8.11. However, the most radical provision of Clause 16.2, which allows the contractor to terminate the contract, is under 16.2 (a): “[if] the contractor does not receive the reasonable evidence within 42 days after giving notice under Sub-Clause 16.1 [contractor’s entitlement to suspend work] in respect to failure to comply with Sub-Clause 2.4 [employer’s financial arrangements].”

Sub-Clause 2.4 (employer’s financial arrangements) provides that “the employer shall submit within 28 days after receiving any request from the contractor reasonable evidence that financial arrangements have been made and are being maintained which will enable the employer to pay the contract price (as estimated at that time) in accordance with Clause 14 [contract price and payment]. If the employer intends to make any material change to his financial arrangements, the employer should give notice to the contractor, along with detailed particulars.”

This provision is frequently the cause of discussion, particularly from the side of the employer. However, it is a provision within FIDIC’s 1999 standard form and, unless it is modified or removed by way of special conditions, the provision applies.

Article 892 of the UAE Civil Code provides that “a contract of Muqawala [contract of work] shall terminate upon the completion of the work agreed or upon the cancellation of the contract by consent or by order of the court.” This provision is clear, and effectively prevents one of the parties unilaterally terminating the contract. However, Article 893 provides that “if any cause arises preventing the performance of the contract or the completion of the performance thereof, either of the contracting parties may require that the contract be cancelled or terminated as the case may be.” Article 893 therefore allows a contract of Muqawala to be cancelled or terminated if performance is prevented or completion is prevented.

Termination of a contract by reason of its provisions can only be done when one of the parties exercises his rights in accordance with the provisions of the contract. Termination of the contract will usually result in a continuing obligation on one or both parties with regard to payment for removal of equipment and materials. Termination at law might be described as a cancellation of the contract, at which point generally the obligations of the parties in respect of the contract are at an end.

Termination should be very much a last resort, a step that should be taken when there is really no alternative – and, as with suspension of the works, is a step that should be taken only after seeking legal advice.

Arabian business

  1. Hi,
    Comparing the termination provisions under clause-63.1 of fidic-4 and clause-15.2 under fidic-1999, it appears that the termination under clause 15.2 is not at the risk and cost of the contractor. Do you agree?
    Liaqat Hayat

  2. Termination under clause 69:
    Is the Contractor obliged to provide a discharge certificate to Employer? or Any other confirmation to final due figure which he is entitled for.

    Please clarify.

  3. Brian Honeyfield

    Termination at law might be described as a cancellation of the contract, at which point generally the obligations of the parties in respect of the contract are at an end.

    Does the above statement therefore mean that the Employers obligation to pay the outstanding money owed, or the Contractors obligations under Defects Liability of work completed, is also waived?

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