Termination vs Cancellation: Commercial Agreements in Dubai

One area that often creates confusion is understanding the difference between “termination” and “cancellation” in a commercial agreement. To navigate these waters, legal advice from one of the best law firms in Dubai is indispensable.

‍Termination vs. Cancellation: What’s the Difference?

In many jurisdictions, termination and cancellation are used interchangeably. However, in Dubai’s context, the distinction is more nuanced. The UAE Civil Code primarily uses the term “cancellation” to govern what many understand as termination (See Articles 267, 271, 272). Interestingly, the term “termination” isn’t even mentioned in the Civil Code.

Moreover, there’s the expression “automatically canceled”, which signifies a contract ended by the operation of law or due to some external cause, without the active involvement of either party (See Article 273 of the UAE Civil Code).

‍Understanding Default Termination:

A lawful termination for a breach requires a court order. This is termed a judicial termination. A few instances where a termination must be sought judicially include:

• Absence of a termination clause in the agreement.
• Ineffectiveness or ambiguity in the termination clause’s language.

In these situations, the non-defaulting party must approach the court to file a termination claim. The judge will then determine if the breach warrants the termination, possibly granting the defaulting party a grace period to correct their wrongs.

If an agreement includes a clause like:

“Both parties have the right to terminate this agreement in the event of non-performance of the obligations set out herein or breach of any of the material obligations.”

The UAE courts might view this as having “an implicit termination clause” as per Supreme Federal Court: No. 656/2016. However, specific conditions must be met for a breach-based termination.

‍Consensual Termination – An Exception to the Rule:

One might wonder if there’s a way to bypass the courts. There is: ‘Mutual Consent’. This essentially means that if both parties agree, they can terminate the contract without the need for a court order.

Article 271 of the Civil Code discusses termination “in advance”, also known as the “Explicit Termination Clause”. This clause allows for an automatic termination upon breach, without any court intervention.

For instance:

“This Agreement shall be automatically terminated without obtaining any court order or taking any legal action in the event of breach of the respective obligations set out under this Agreement.”

Dubai Court of Cassation No. 49 of 2009 clarifies that no specific wording is mandatory for such a clause. Yet, the spirit should indicate clear and automatic termination upon a breach.

‍Special Contracts: The Muqawala Agreements:

Muqawala Agreements, or Construction Agreements, are a unique contract type under the UAE Civil Code. The Civil Code provides specific instances (Articles 892-895) when such a contract can be terminated.

As per judgments from the Dubai Court of Cassation (No. 218/2005 and 248/2005), such contracts, often long-term, might face varying circumstances that can influence the employer’s ability to meet anticipated costs.

‍Post-Termination Implications:

Beyond termination itself, the aftermath of a contract’s end is equally crucial. Questions arise, especially concerning ancillary obligations, like non-compete provisions in franchise agreements. Dubai Court of Cassation No. 237/2007 highlights that in some cases, obligations like non-compete might survive even post-termination or cancellation.

Conclusion:

The intricacies of commercial agreements in Dubai, especially concerning termination and cancellation, highlight the importance of seeking professional guidance. And who better to navigate this intricate maze than the top experienced lawyers in Dubai at Lawbridge?

If this all seems a tad overwhelming, you’re not alone. Commercial agreements, with their myriad clauses and legal lingo, can be daunting. The good news? You don’t have to go it alone. For a better understanding of your contract and its implications, or legal advice tailored to your unique situation, schedule a legal consultation with a Lawbridge expert today. Your peace of mind in commercial dealings is just a call away.