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The inconvenient truth: good faith and termination for convenience under UAE law

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Contract termination remains a topical issue in the offshore sector and the UAE is no exception.

There can of course be a number of reasons why a party may seek to terminate such as delay, poor performance, or for failing to meet a particular standard. The question of whether that party is in fact entitled to terminate will depend on whether there is a right to terminate under the contract or the applicable law.

Many contracts include a right to terminate for convenience, usually without restriction (although an early termination fee may be applicable). It allows a party to end a contract at any time (with or without notice) without having to prove that a breach of contract has occurred or that express contractual obligations have not been met. This can be a much quicker and less expensive option than terminating for breach, eliminating many potential legal costs and counter claims for damages. In the current market conditions there may be commercial reasons why a party wishes to terminate and the party receiving a notice of termination for convenience may feel aggrieved.

A party accustomed to contracts governed by English law may be quick to dismiss an impulse to claim that termination for convenience was not done in good faith.

Recent English law cases have considered whether good faith is relevant to the exercise of a right to terminate for convenience and concluded that it is not. Monde Petroleum SA v WesternZagros Limited [2016] EWHC 1472 (Comm), decided last summer, confirmed that English law will not imply a duty to act in good faith in terminating a contract where no express contractual duty to do so exists. Therefore, if your contract is governed by English law and it gives a party the right to terminate for convenience, in the absence of an applicable and express requirement, good faith will not apply.

However, the position is different under UAE law and in other Middle Eastern countries, which follow the Egyptian Civil Code. Article 246 of the UAE Civil Code provides that:

“The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith.”

In addition, Article 106 of the Civil Code provides that a person cannot exercise its rights unlawfully, which includes, inter alia, intentional infringement of another person’s rights and violation of rules of Islamic Sharia, public order or morals. It is easy to see that these two articles read together could hinder a party’s right to terminate for convenience where it is not being exercised in good faith.

Nevertheless, there remains a problem in defining what constitutes good faith. In general terms, it is often described as the obligation to act honestly and in a cooperative manner. This leaves a lot of room for interpretation by the courts. For example, where a contract provides for accrual of a certain benefit to the innocent party upon achievement of a final milestone and the other party terminates the contract for convenience just before completion of this milestone (as were the facts in Monde Petroleum), does this constitute lack of good faith? If it does, then English law would still allow a party to terminate, but the answer may well be different under UAE law.

Another difference between English and UAE law is in the amount of freedom that parties have to negotiate the position regarding good faith in their contract. Under English law there is no prohibition on agreeing that parties shall have good faith obligations if they wish to do so. However, if the parties wish the obligation of good faith to extend to the contractual right to terminate, they must say so expressly in the contract. Under UAE law, however, the parties cannot contract out of the duty of good faith imposed by Article 246.

Therefore, a party who wishes to terminate a contract for convenience under UAE law must make sure that it is doing so in compliance with the duty of good faith. It is also worth noting that there is a degree of uncertainty under UAE law as to whether unilateral termination of contracts is ever possible and whether a party wishing to terminate needs to obtain a court order to that effect. For this reason, from a UAE law perspective a clause entitling a party to terminate for convenience can be made more robust by expressly waiving the requirement for a court order. Termination for convenience may seem like the easiest option but all options and associated risks should be considered before making that choice.

Rania Tadros

Rania Tadros Managing Partner

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