How to Terminate a Contractor for Default in the UAE

Your contractor has stopped performing. Progress has stalled. Subcontractors are leaving site. The programme is collapsing, and you are now exposed to liquidated damages under your sales agreements with purchasers.

You want this contractor gone.

But in the UAE, terminating a construction contract the wrong way can cost more than keeping a failing contractor on site.

In Brief

Terminating a contractor in the UAE without strict compliance with FIDIC and the Civil Code can expose developers to counterclaims exceeding the original contract value.

Most terminations fail not because the contractor was performing, but because employers rushed the process, skipped notice requirements, or terminated while their own house was not in order.

This guide explains how to terminate lawfully and avoid becoming the party in breach.

Why Termination Is High-Risk in the UAE

Under UAE law, you cannot simply terminate a contract because the other party is in breach.

Article 267 of the UAE Civil Code says a contract can only end three ways: by mutual consent, by court order, or by operation of law. Article 892 applies the same rule specifically to construction contracts (muqawala).

What this means in practice: even if your contract gives you a clear right to terminate, a UAE court may still need to validate that termination if the contractor disputes it. Until then, the contract remains in force.

If you terminate without proper grounds or without following the correct procedure, you become the party in default. The contractor can then claim against you for wrongful termination, including loss of profit on the work they never performed.

We have seen employers face counterclaims exceeding the original contract value because they terminated in haste. The counterclaim often dwarfs whatever the contractor's original default cost.

Grounds for Termination Under FIDIC

Most UAE construction contracts use FIDIC forms, typically the 1999 Red Book or Yellow Book. Clause 15.2 sets out when an employer can terminate for contractor default.

Grounds requiring a Notice to Correct first

These require you to issue a formal notice under Clause 15.1, give the contractor reasonable time to fix the problem, and only terminate if they fail:

• Failure to comply with a Notice to Correct
• Demonstrating an intention not to continue performing
• Subcontracting the whole works without consent
• Assigning the contract without consent
• Failing to provide or maintain the performance security

Grounds allowing immediate termination

These do not require a notice period:

• Contractor becomes bankrupt or insolvent
• Giving or offering bribes

In practice: almost every termination we handle involves the first category. That means the Notice to Correct is your foundation. Get it wrong, and the termination fails.

The Notice to Correct: Where Most Terminations Fail

The Notice to Correct under Clause 15.1 is not a warning letter. It is a formal contractual step that must satisfy specific requirements.

A valid Notice to Correct must:

• Identify the specific obligation the contractor has breached
• Reference the relevant contract clause
• Specify a reasonable time for remedy
• Be issued by the correct party (usually the Engineer under FIDIC)

Common mistakes we see

Vague language. Notices that say "the contractor is in delay" without specifying which milestone, which obligation, and which clause.

Unreasonable cure periods. Giving five days to remedy three months of delay will not survive scrutiny. What is reasonable depends on the breach, but courts and tribunals expect proportionality.

Wrong issuer. Under unamended FIDIC, the Engineer issues the Notice to Correct, not the Employer. If your contract has been amended, check who has authority.

Notices for disputed matters. If the contractor says a variation was instructed but not valued, that is a dispute, not a default. Terminating on that basis is dangerous.

If the contractor fixes the breach within the cure period, you lose the right to terminate on that ground. But the pattern of default can support future action if conduct continues.

The Termination Notice

If the contractor fails to comply with the Notice to Correct, you can issue a termination notice under Clause 15.2.

Requirements:

• State that the contract is being terminated
• Reference the ground(s) for termination
• Give at least 14 days' notice (immediate for insolvency or bribery)

After the 14 days, termination takes effect and you can expel the contractor from site.

Critical drafting point

Your contract should include language stating that termination under Clause 15.2 constitutes mutual consent under Articles 267 and 892 of the Civil Code, and takes effect automatically without a court order.

Without this language, you may need to go to court to confirm the termination. That creates delay, cost, and uncertainty, during which the contractor may remain on site or claim ongoing entitlements.

On projects where we advise from contract negotiation stage, we ensure this language is included. On projects where the contract is already signed, we assess the risk before any termination notice is issued.

What Happens After Termination

Once termination takes effect, several consequences follow under FIDIC Clause 15.2 and 15.3.

Employer's rights

• Enter the site and expel the contractor
• Use contractor's equipment and materials on site
• Require assignment of subcontracts to a replacement contractor
• Withhold further payment until cost of completion is established

Contractor's obligations

• Leave the site
• Deliver documents, plant, and materials
• Remove equipment not needed for completion

Financial settlement

Under Clause 15.3, you are not required to pay anything further until the works are complete and the full cost is known. If completion costs exceed what you would have paid the original contractor, you recover the difference. If there is a surplus, it goes to the contractor.

In practice: this calculation takes months or years to finalise. Disputes over the valuation of work done, the cost of completion, and responsibility for defects are common. We advise clients to document everything before and after termination to protect their position in this inevitable negotiation.

Calling the Performance Bond

Most UAE construction contracts require a performance bond, typically 10% of contract value. When terminating for default, employers often call the bond immediately.

This must be done carefully.

On-demand bonds

The bank pays on first written demand. The contractor's only remedy is to seek an attachment order under Article 417(2) of the UAE Commercial Code, which requires "serious and certain reasons." UAE courts set a high bar for this.

Conditional guarantees

Payment requires proof of actual loss under the main contract. This can take years.

Timing matters

If you intend to call the bond, do so promptly after termination. Delay creates arguments that you waived your rights or that the bond expired.

What we see: contractors often rush to court seeking an injunction the moment they hear a bond call is coming. If they succeed, you lose immediate access to those funds when you need them most, typically to pay a replacement contractor to mobilise.

Five Mistakes That Lead to Counterclaims

1. Terminating without valid grounds

The most common error. Employers terminate because they are frustrated, not because they have established a clear, documented breach. If the contractor was entitled to an extension of time that was never granted, or if variation costs were disputed, the termination may be wrongful.

2. Failing to follow notice procedure

Skipping the Notice to Correct, giving inadequate cure periods, or having the wrong party sign the notice. Any procedural defect gives the contractor grounds to challenge.

3. Terminating while in breach yourself

If you have not paid certified amounts, or have obstructed access, or have failed to provide approvals, the contractor has a defence. Worse, they have a counterclaim.

4. Poor records

Termination disputes turn on documents. If you cannot prove the defaults, the dates, and the notices, your position weakens. We have seen employers lose cases they should have won because their project records were incomplete or disorganised.

5. Acting too fast after notice

Expelling the contractor before the notice period expires, or before documenting site condition, creates legal exposure and practical chaos.

Before You Issue Any Notice

Review the contract. Confirm termination provisions, notice requirements, and any amendments to FIDIC standard terms.

Audit the defaults. Document each breach with dates, correspondence, and evidence. Separate genuine defaults from disputed entitlements.

Check your own position. Have you paid all certified sums? Provided access? Issued approvals on time? Any breach on your side can be used against you.

Assess the bond. Is it still valid? What are the call conditions? Can you call before termination takes effect?

Plan for completion. Identify replacement contractors. Estimate cost and time to complete. This tells you what is really at stake.

Document site condition. Before the contractor leaves, survey the works. Photographs, measurements, inventory of materials and equipment. This protects you in the financial settlement.

Take legal advice. Termination is a significant step. The counterclaim risk is real. Do not proceed without advice specific to your contract.

When Termination Is Not the Answer

Termination is not always the right outcome, even when the contractor is clearly failing.

Consider:

• Will completion by a replacement contractor cost more than finishing with the current one?
• Will a dispute delay the project further than poor performance would?
• Are the contractor's problems actually caused by matters outside their control?
• Would a negotiated exit, perhaps with reduced scope or early sectional handover, be faster and cheaper?

Sometimes the commercial answer is to work with a failing contractor toward a managed exit rather than fight them in arbitration for three years.

We advise clients on both paths. The right choice depends on the numbers, the contract, and the practical realities of the project.

How We Handle Termination for Clients

We act for developers and employers on UAE construction projects who need to remove failing contractors without walking into a counterclaim.

Before termination: We review the contract, correspondence, and project records. We tell you whether termination is defensible and what the risks are.

During the process: We draft or review notices. We coordinate with your project team on site security, bond calls, and replacement contractor engagement.

If it becomes a dispute: We handle the matter through negotiation, DIAC or ICC arbitration, or litigation in the Dubai Courts. We do not refer out; we run these cases directly.

Do Not Do This Alone

Terminating a contractor is not a letter you send when you are frustrated. It is a legal and commercial decision with seven-figure consequences.

A single defective notice can undo your entire strategy. A termination made without proper grounds can turn you from the victim of contractor default into the defendant in a loss-of-profit claim.

If you are considering termination, do not issue notices or call the bond until your position has been properly reviewed.

Speak With a Construction Lawyer

Key Takeaways

• UAE law requires strict compliance with notice and procedural requirements
• A defective Notice to Correct can invalidate the entire termination
• Wrongful termination exposes you to counterclaims that can exceed the contract value
• Document everything before, during, and after
• The performance bond is valuable but must be called carefully
• Not every default justifies termination
• Take advice before you act

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