Practical Law

As the Gulf nations enter a period of readjustment following the oil price rout and debate continues about where the price of crude is heading, the fact remains that infrastructure projects are being impacted by dwindling funding opportunities. In turn, this increases the temptation to “press the termination button” throughout the contracting chain.

Sector downturn leads to an increase in the rate of contract terminations, as the construction industry knows all too well. Whatever the originally anticipated outcome of the Doha meeting between oil producing and exporting nations on 17 April 2016, an upturn in fortunes was always unlikely to be speedy. For this reason, a review of the law surrounding the termination of contracts in Qatar seems timely.

Termination in Qatar

The legal principles concerning termination are set out in the Qatari Civil Code (Law No. (22) of 2004 issuing the Civil Law). (There are variations in the exact English wording of articles within the Qatari Civil Code. This reflects the fact that it is a translation from the original Arabic script and no translation should be considered in isolation.)

There are three bases upon which contracting parties might give effect to the dissolution of their contract:

• Termination for convenience.
• Termination for default.
• Termination on the grounds of impossibility (what common law lawyers would call frustration).

The first and third of these grounds do not require a judicial order (although there is some limited judicial oversight). However, termination for default necessitates an order from the Qatari courts, subject to the use of clear and explicit contractual wording to the contrary.

In the event that such express wording is used, this ground of termination is often referred to as “unilateral” termination. It is not in fact a separate basis upon which to terminate a contract, only a separate means by which to achieve the same end.

Termination for convenience

Article 707(1) of the Qatari Civil Code entitles either contracting party to terminate the contract and cease performance of the work at any point prior to completion. The quid pro quo, naturally, being that the terminating party compensates the counterparty for expenses, works performed and loss of profit assessed on the basis that the contract was performed to completion.

The Qatari Court is empowered by article 707(2) of the Civil Code to reduce the compensation for loss of profit provided that, in the circumstances of the individual case, it considers it is just to do so. However, it is not simply the opportunity cost that must be assessed pursuant to the Civil Code. The court is required to deduct those costs saved by virtue of the counterparty being relieved from performance, as well as the gains that party has made by utilising time on other projects.

Termination on grounds of impossibility

Articles 187 and 188 of the Qatari Civil Code provide that where performance of an obligation incumbent upon one or both parties “becomes impossible for an extraneous cause beyond his control” that obligation will be extinguished. An obligation that is “partially” impossible to perform might give rise to the requirement to perform the remaining part.

The important consideration for any party (whether seeking to terminate or in receipt of a notice threatening termination) is that the grounds upon which “impossibility” can be claimed are narrowly defined. Performance of the contract must be impossible and not simply burdensome.

Termination for default

Article 183 of the Qatari Civil Code permits one contracting party to request the contract’s dissolution following notification to the defaulting party and thereafter to seek compensation.

Note the use of the word “request” in this provision. To common law lawyers unfamiliar with civil law jurisdictions, the concept of seeking permission from a court to lawfully terminate a contract may come as a surprise. However, the Qatari Civil Code requires, in the absence of certain conditions, the grant of a judicial order permitting dissolution of the contract in the event of default. Crucially, the court can:

• Have regard to whether the obligation breached is sufficiently important in view of the totality of the parties’ respective obligations under the agreement.
• Refuse the request for dissolution if the obligation breached was of “minimum importance”.

The Qatari court is also empowered to extend a period of grace to the defaulting party so as to allow it to rectify its breach.

Though judicial intervention can be jettisoned within the limits of the Civil Code, the default position remains that a party seeking to terminate must seek the court’s permission. It is also handy for the party allegedly in default to have regard to both the formal steps required to achieve an effective termination and the requests for amelioration that can be made to the court.

Termination without a court order

It is possible for the parties to terminate without the need to obtain an order from the Qatari courts. Under article 184 of the Qatari Civil Code, the parties may provide for what has come to be termed “unilateral termination” in circumstances where there has been default. However, the terms of the parties’ agreement are paramount. The parties must give contractual voice to their intention to empower themselves to terminate without recourse to judicial authority (article 184(1)). More than that, the contract’s wording has to clearly indicate the parties’ intention to “restrict the judge’s authority” as regards the dissolution of the contract (article 184(2)).

It is also essential to bear in mind that getting rid of the need for a court order through clear contractual wording will amount to nothing unless notification of termination is provided to the defaulting counterparty. In anything “other than commercial matters”, there is no scope under the Civil Code for the parties to contract out of the requirement for notification as such a provision will be rendered void (article 184(3)).

What constitutes a “commercial matter” is not clearly defined within the Civil Code. It may be tempting to resort by analogy to definitions provided within Law No. 27 of 2006 Promulgating the Trading Regulation Law, which would tend to include construction contracts within this definition. However, the safer option is to serve a notice of termination. Not only does this avoid falling foul of the relevant provisions, it helps to clearly define the basis upon which the contract is purportedly being dissolved for the purpose of any future dispute.

If the contract has been dissolved, the two contracting parties are returned to the situation they were in before the contract was entered into. If this is impossible, the court may order compensation, pursuant to article 185 of the Civil Code.

Analysis

It is worth remembering that where there is scope to agree to terminate for convenience, the parties can come to a commercial agreement to ensure an outcome that is as mutually beneficial as possible. Getting legal representation at an early stage can better facilitate the negotiation of a successful “clean break” solution and avoid a dispute as to compensation arising in the courts.

If there has been an alleged default giving rise to the desire to terminate, it is important to have regard to one practical reality: most firms operating in this testing economic environment will find that contracts providing for a termination clause that satisfies the stringent conditions of article 184(2) are rare (that is, a clause that incorporates wording that is “clearly indicative towards the parties’ intention” to allow for unilateral termination without the need for a court order). In all likelihood, the self-help remedy will not be available to contracting parties, though it is important to establish whether this is the case at the outset. In any event, seeking out legal advice at the earliest opportunity is likely to save costs in the long run.

Contrary to some opinions, there are only three bases (not four) upon which a contract can be terminated under the Qatari Civil Code: convenience, impossibility and default. There is, of course, a second means by which to give effect to termination for default, namely through the use of words that are clearly indicative of the parties’ intention not to resort to the courts. But this does not serve as a separate rationale for termination.

The benefit of being able to appeal to the courts’ justice is important to consider in the event that you are on the receiving end of a threatened termination for default. The priority must be to preserve evidence of the conduct and actions of the terminating party and, once more, to seek out help from your internal or external legal teams as soon as possible.

Paul is a barrister at 4 New Square Chambers and is currently on secondment with Pinsent Masons LLP, Qatar.