By Alexander Brightman, K&L Gates, Doha
Although “freedom of contract” is a concept that is recognised in both the common law and civil law jurisdictions, the codified and prescriptive nature of a civil law system means that the relevant provisions of the Civil Code may even be implied into robustly drafted contracts, including standard forms. As set out below, such implied provisions could have the undesirable effect of delaying termination whilst a court order is obtained or exposing the terminating party to a claim for breach of contract (and compensation) for unlawful termination. In this article, I will be discussing suspension and termination rights under the FIDIC Contract (Red and Yellow Books), before examining the position under the Qatar Civil Code. In a follow-up blog post, I will look at suspension and termination under the UAE Civil Code.
Suspending and Terminating Under FIDIC
Although suspension and termination rights are recognised in many Civil Codes, parties should always try and expressly agree on such provisions in their contracts. Contractual suspension and termination rights are often less ambiguous and more advantageous than equivalent rights under civil law.
Clauses 15 and 16 of the FIDIC Contract (Red and Yellow Books) set out the circumstances that may lead to a termination of the contract by the employer and, in the case of the contractor, suspension and termination (the former principally for payment related breaches). Both clauses describe the procedures that must be followed and the financial arrangements that will apply following suspension or termination. Critically, both clauses also contain wide-ranging termination events. For example, the employer can terminate the contract under sub-clause 15.2 due to abandonment of the works, failure by the contractor to provide a performance security, failure to comply with a Notice to Correct and contractor’s insolvency (to name a few). The employer is also entitled to terminate the contract for convenience under sub-clause 15.5.
Although most standard form subcontracts (including FIDIC) entitle the main contractor to terminate the subcontract immediately on notice in the event that the main contract is terminated, contracting parties should not assume that subcontracts have “back-to-back” suspension and termination rights. This point is particularly pertinent in the Middle East given the propensity for contracting parties to heavily amend standard form contracts. Furthermore, “back to back” is not a legal term and may not mean much to a Qatari judge or to a dispute resolution authority under Qatari law if its substance is not reflected in the subcontract with an express explanation of what clauses of the main contract are to apply by analogy or verbatim to the subcontract. As yet, no court in the State of Qatar has addressed the issue and no legal provision directly states whether such clauses are valid or not.
Further, as explained below, unless the termination clause in the subcontract unequivocally states the parties’ intention to allow termination by notice, the contract may not automatically terminate without a court order giving effect to the termination. Accordingly, a contractor seeking to terminate a subcontract on a “back-to-back” basis following the termination of the main contract without express wording permitting it to do so may inadvertently expose itself to a claim for wrongful termination.
Suspending and Terminating Under Civil Law
Qatar Civil Code
If the contract is governed by Qatar law, the contract may only be terminated by the agreement of the parties, as prescribed by law or by an order of the court. If a contract is silent or the contractual terms are ambiguous in respect of the right of a party to terminate the contract unilaterally, a contractual party may under Article 183(1) apply to the court for an order terminating the contract in the event that the other party has failed to fulfil its contractual obligations. Before making the application, Article 183(1) requires the party seeking to terminate the contract to first give notice to the defaulting party of the default and its intention to terminate the contract. Article 183(2) grants the judge wide discretion in such circumstance to terminate the contract or determine a grace period within which the defaulting party must rectify the breach (e.g. a period in which the employer must certify or make payment to the contractor). It may also reject the terminating party’s application if it considers the breach is minimal in light of the defaulting party’s overall obligations under the contract.
Article 184(1) permits the contractual parties to agree to terminate the contract without obtaining a court judgment in the event of a breach by one party. Article 184(2) requires that “the terms of the contract are explicit in demonstrating that it is the will of the parties”. In other words, unless the language of the contract clearly states the parties’ intention to permit termination of the contract by notice, the termination will be unlawful without a court order giving effect to the termination. Based on the foregoing, contracting parties should give careful consideration when drafting termination provisions to avoid exposing the terminating party to claims for compensation as well as placing it in the invidious position of being in breach for non-performance of their contractual obligations.
In addition to the aforementioned termination rights, a contracting party may also terminate a construction contract under Article 704 if “the agreed work is impossible to perform due to a foreign cause beyond the control of either party”. In such event, the employer may be liable to the contractor for costs incurred (including wages) within the scope of the benefit obtained by the employer from such work. It is important to emphasise that work will need to be “impossible” to perform rather than onerous. To avoid any ambiguity and mitigate the risk of disputes, it is in the parties’ best interests that force majeure is clearly defined in the contract and that compensation is agreed at the outset as it may be difficult to objectively measure the scope of the benefit obtained by the employer.
Finally, a contractor may have a right to suspend the contract under Article 191, which provides as follows “…if the corresponding obligations are outstanding, either party may decline to perform its own obligation unless the other party performs its own obligation, unless the parties agree otherwise or unless the practice provides otherwise”. What this could mean (in theory at least) is that unless it is otherwise agreed between the parties, the contractor may refrain from performing its obligations in the event that an employer fails to certify, or pay, sums due to the main contractor for works already carried out under a contract. However, suspension is a difficult right to enforce in practice as it is likely to require a substantial failure of performance by the other party before it can be relied upon.
Relying exclusively on the Qatar Civil Code for the ability to suspend work or terminate a contract is a risky strategy. It is not uncommon for parties to incorrectly assume that they have a right to suspend or terminate in a particular situation and to purport to suspend or terminate the contract without any legal right to do so. This can result in the suspension or termination being ineffective and the party seeking to rely on such rights being exposed to a damages claim. The risk of unlawful suspension or termination can be mitigated in large part by setting out clearly in the contract the specific circumstances in which rights of suspension and/or termination may be invoked and the procedures that need to be followed. This will give the parties greater confidence in the termination process and avoid the requirement of having to obtain a court order to bring the contract to an end.