Termination is one of the most consequential decisions in a construction project. Get it right, and you exit a failing contract with your position protected. Get it wrong, and you become the party in breach, exposed to counterclaims that can exceed the original contract value.
UAE law sets specific requirements for how construction contracts can be terminated. Contractual termination clauses, even clearly drafted ones, must align with the Civil Code to be effective. Procedural errors (missed notices, inadequate cure periods, or terminating while your own obligations remain unfulfilled) regularly convert valid grounds into wrongful termination.
This guide explains how construction contract termination works under UAE law, the grounds available to employers and contractors, the procedural steps required, and the financial consequences of each outcome.
What UAE Law Says About Termination
The baseline rule: Contracts cannot be unilaterally terminated simply because the other party is in breach.
Construction contracts in the UAE fall under the Civil Code (Federal Law No. 5 of 1985). Articles 872 to 896 govern Muqawala contracts, the legal term for construction agreements. The general termination rules in Articles 267 to 273 also apply.
Here's what matters:
Article 267: The Default Position
A binding contract can only end three ways:
- Mutual consent
- Court order
- Operation of law
Unilateral termination has no legal effect unless the contract or a specific law permits it.
Article 271: Automatic Termination Clauses
This is where UAE practice becomes more flexible. Article 271 permits automatic termination clauses, provisions that make termination effective upon notice, without requiring a court order.
This is the clause that matters most. If your contract states that termination takes effect when notice is delivered (with proper formalities), you can avoid the cost and delay of seeking judicial validation.
Without such a clause, even a party with clear grounds may need a court order if the other party disputes the termination.
Article 892: The Muqawala-Specific Rule
For construction contracts specifically, Article 892 provides that termination occurs upon:
- Completion of work
- Mutual consent
- Court order
Effective drafting brings your termination clause within "mutual consent," removing the need for court confirmation of what the contract already provides.
Grounds for Termination: Who Can Terminate and When
Most UAE construction contracts use FIDIC forms (1999 Red Book or Yellow Book), with project-specific amendments. Clause numbers vary by edition and local modifications. The following reflects typical provisions. Verify against your actual contract.
When Employers Can Terminate
When Contractors Can Terminate
Suspension as an alternative: Article 247 permits a party to pause performance if the other side has failed to perform. However, the Dubai Court of Cassation has held that suspension must be proportionate and exercised in good faith (Article 246). Suspending work over a minor unpaid amount while the employer has substantially performed its obligations can be found disproportionate.
Termination for Convenience: The Employer's Unilateral Option
UAE law permits employers to terminate Muqawala contracts at any time before completion, without proving fault.
The Civil Code does not state this explicitly. However, the Dubai Court of Cassation has recognised the principle, drawing on Egyptian Civil Code Article 663. The rationale is that construction projects extend over years, circumstances change, and employers should not be locked into contracts that are no longer commercially viable.
The compensation requirement: An employer terminating for convenience must pay:
The loss of profit component is significant. On a AED 50 million contract terminated at 40% completion, the contractor can claim its margin on the remaining AED 30 million of work.
Force Majeure: When Performance Becomes Impossible
Article 273 automatically cancels a contract if performance becomes impossible due to force majeure. Article 893 allows either party to a Muqawala contract to request termination when circumstances prevent completion.
The threshold is high. The claiming party must establish:
- The event was unforeseeable
- Performance is impossible, not merely more expensive or difficult
- The event could not have been avoided
Economic hardship does not qualify. Cost increases do not qualify. Supply chain disruptions generally do not qualify unless they make performance genuinely impossible.
The Termination Process: Procedural Requirements
Valid grounds for termination are insufficient without procedural compliance. Errors at this stage (missed notices, inadequate cure periods, or incorrect signatories) regularly convert valid terminations into wrongful ones.
Step 1: Notice to Correct
For most grounds, a Notice to Correct must precede termination. Requirements:
- In writing
- Identifies the specific breach
- References the contract clause violated
- Provides a reasonable cure period
If the contractor remedies the breach within the specified period, the right to terminate on that ground is lost. However, documented patterns of default support future termination.
Step 2: Termination Notice
If the breach is not cured (or for grounds like insolvency that do not require a Notice to Correct), the termination notice follows:
- States the contractual grounds
- Confirms procedural requirements were satisfied
- Specifies the effective date (typically 14 days after notice)
Common Procedural Errors
Consequences of Termination
Valid Termination for Contractor Default
The employer may:
- Complete works directly or engage a replacement contractor
- Withhold payments until completion costs are determined
- Recover losses and additional costs from the contractor
- Call the Performance Bond
- Take possession of documents, materials, and plant
Valid Termination for Employer Default
The contractor is entitled to:
- Payment for all work performed
- Cost of plant, materials, and equipment
- Demobilisation costs
- Loss of profit on uncompleted works
- Return of the Performance Security
Wrongful Termination
A party that terminates without valid grounds or proper procedure becomes the defaulting party. Consequences include:
- Damages for breach of contract
- Loss of profit on unperformed work (the Dubai Court of Cassation has confirmed this is recoverable)
- Loss of opportunity claims
- Counterclaims that can exceed the original contract value
In practice, counterclaims of AED 80 million on contracts valued at AED 60 million occur because loss of profit is calculated on work that was never performed.
Damages and Compensation
Article 389 provides that compensation must equal actual damage suffered. Courts assess damages based on loss incurred, not the severity of the breach.
Recoverable Categories
Court Expectations
- Damages must be foreseeable at contract formation
- Damages must result directly from the breach
- Courts expect reasonable mitigation even without an express contractual duty
Liquidated Damages
Article 390 permits agreed compensation amounts. However, courts retain authority to adjust liquidated damages if they are excessive relative to actual loss, regardless of contractual provisions stating the amount is final.
Conclusion
Terminating a construction contract in the UAE requires valid grounds, strict procedural compliance, and a clean record on the terminating party's own obligations. The financial exposure from wrongful termination, including loss of profit on unperformed work, can exceed the value of the original dispute.
Contracts should include automatic termination provisions that reduce reliance on court orders. Records should be maintained contemporaneously throughout the project. And before any termination notice is issued, the terminating party's own position should be verified as compliant.
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