How convenient is termination for convenience in Qatar?
A clause that gives a party the right to terminate a contract at their absolute discretion, is commonly referred to as ‘termination for convenience’ clause. Such right may be granted in favour of either (or both) parties, however in a normal commercial context, it is almost always a right inserted by the client, for the benefit of the client.
Inclusion of termination for convenience clauses
In uncertain times, the prevalence of termination for convenience clauses often becomes more widespread. This is usually a result of two key factors:
- There is greater hesitation by the client, fearful of what may occur over the term of the contract which may require them to abandon the project; and
- A shift in market forces, whereby consultants are more desperate for work, giving the client a significant advantage in bargaining power.
It is these two factors that perhaps explain why the inclusion of termination for convenience clauses (even during the best of times) are so common throughout the Middle East. Firstly, there are a number of elements of increased uncertainty in the region. For example, the embargo against Qatar by several Middle Eastern countries (including its three closest geographical neighbours: Saudi Arabia, the UAE and Bahrain) is a recent example of how the political structure of the region creates an uncertain commercial environment. Secondly, as most major projects are procured by the state, there is a substantial inequality in bargaining power. As a consequence, the client has the ability to issue a tender on a ‘take it or leave it’ basis, and still will receive a multitude of commercial bids.
In Qatar, the inclusion of termination for convenience clauses are not only common in consultancy contracts, but are a right that exists at law. Article 707 of Law No. (22) of 2004 Regarding Promulgating the Civil Code (‘Civil Code’) states as follows:
“The employer may withdraw from the contract and stop the work at any time prior to its completion, provided that the contractor shall be indemnified for all expenses incurred, all works completed, and any profit he could have made had the work been completed.”
Firstly, as can often be the case with English analysis of Arabic law, the translation itself provides some uncertainty. The above translation is as published on Al Meezan (Qatar Legal Portal), yet the word “withdraw” (as shown in the first line) is perhaps misleading. In fact, the literal translation of this word in the original Arabic text is “dissolve”. To further add to the confusion, another translation of this Article of the Civil Code uses the word “disengage”. Whilst the words “disengage” and “withdraw” are relatively interchangeable, “dissolve” is quite different. These discrepancies make it difficult to have confidence in how this Article of the Civil Code is intended to apply.
In any case, Article 707 does not provide clients with a particularly enticing option when needing to get out of a contract, because exercising this right pursuant to Article 707 will entitle the consultant to recover its expenses and lost profit. As such, it is essentially akin to the client repudiating the contract, as it carries similar payment consequences.
FIDIC Model Services Agreement
This particular provision of the Civil Code therefore requires some special consideration when drafting a termination for convenience clause in a contract to be used in Qatar. It is also the case that international standard forms may not be sufficient in this regard. By way of example, clause 4.6.1 of the FIDIC Model Services Agreement 2006 (commonly used in Qatar) provides the following termination for convenience clause:
“The Client may suspend all or part of the Services or terminate the Agreement by giving at least 56 days' notice to the Consultant, and the Consultant shall immediately make arrangements to stop the Services and minimise expenditure.”
Many lawyers reviewing such agreement on behalf of the client may initially be of the view that such clause gives the client a simple and convenient way to bring the contract to an end. However, if the contract does not address the amounts payable to the consultant upon such termination, does Article 707 come into play?
The question essentially comes down to whether or not terminating the contract for convenience pursuant to this clause 4.6.1 is deemed to be withdrawing/disengaging from the contract (or perhaps ‘dissolving’ the contract), pursuant to Article 707?
One view is that by exercising the right pursuant to clause 4.6.2, the client effectively withdraws from the contract, and as a consequence, Article 707 comes into effect. This would result in the Contractor being entitled to recover its costs and loss of profit as the FIDIC Model Services Agreement does not provide any further information about what is payable upon termination for convenience. As Article 707 does not conflict with the contract, it can be argued that it essentially provides guidance to the parties as to what is payable in that scenario.
The argument contrary to this interpretation is that terminating for convenience pursuant to an explicit term (such as clause 4.6.2) is an active measure taken by the client to bring the contract to an end, rather than withdrawing from (or dissolving) the contract pursuant to Article 707. In that case, it would only be liable for the services performed up to the date of termination. In my view, this argument is the more persuasive.
Drafting for termination for convenience
However, with conflicting views and uncertainty in the law, there are ways to avoid this risk and draft appropriate conditions for contracts used in Qatar. Most simply, the contract can be explicit about what is (and what is not) payable in the event of the contract being terminated for convenience. Article 707 is not mandatory, therefore if the contract is states that loss of profit is not payable upon termination for convenience, the potential impact of Article 707 is immediately tempered. This recommendation is not limited to Qatar, as any contract, used in civil or common law jurisdictions benefits from improved certainty and explicitly stated rights.
Effect on the tender process
As the Middle Eastern markets mature, the prevalence of termination for convenience clauses may become less common. This is because, despite the level of comfort it gives the client (particularly during uncertain times such as we are experiencing now), a termination for convenience clause will have an impact on the outcome of the tender.
There is no doubt that consultants bidding for a significant volume of services must account for the risk posed by a condition that allows the client to terminate at any moment, for any reason. This is particularly the case where recruitment of staff, purchase of specialised equipment and other mobilisation costs are substantial.
The consultants who critically take this information into account will tend to be those who can be more selective about the risks they are willing to bear in order to secure the engagement. As a consequence, the inclusion of such provisions could result in the client losing the most qualified and competent consultants through the tender process.
This is not to say that termination for convenience has no place in contracts, but there are ways to mitigate its impact on the tender.
Firstly, the client can impose specific circumstances as to when it may exercise the right to terminate for convenience. If there are particular events that the Client is fearful would have an impact on the need for the services (such as an embargo or a pandemic), it may reserve a right to terminate the contract in these specific instances only. By limiting the extent of its right to terminate, it will reduce the consultant’s risk, particularly where such matters are limited to events that:
- are not within the complete control of the Client; and
- have a relatively a low likelihood of occurring.
Secondly, the client can include in its termination for convenience clause, provisions that ‘share the pain’ if the right to terminate is exercised prior to a particular percentage of the works have been completed. This way, the client is disincentivised to terminate the contract for convenience, and the consultant is assured that part of its cost will be recovered if such right is exercised. Both the disincentive and the ability to recover part of the costs reduce the consultant’s risk which should reflect in a reduced contract price.
It is expected that as the market continues to mature throughout the Middle East, these, and other methods will be more commonly adopted, replacing a blanket right to terminate for convenience.
Disclosing Third-Party Funding in International Arbitration: Where Are We Now?
What is third-party funding and what further developments can we expect in this fast-moving area?
UAE Family Businesses Law
In an article for LexisNexis Middle East the team analyse the much-anticipated Federal Decree-Law No. 37/2022 on Family Businesses.
Rose Carey quoted in The Evening Standard on visitor visa applications
“Family visas are currently taking up to six months to process and with no priority service available...”
Patrick Gearon FCIArb
Charles Russell Speechlys Middle East celebrates a double anniversary: building on local roots
As Charles Russell Speechlys Middle East celebrates a double anniversary this year, Patrick Gearon talks to the Oath.
Paula Boast is interviewed by Construction Week on Bahrain's construction industry and how it is moving towards more functional and responsible building
Dissecting Bahrain's construction practices
Construction News quotes David Savage on the slight rise in construction output in September
"It remains to be seen how the sector reacted in October amid the political turmoil"
How final is a Final Certificate?
A recent Scottish case grappled with the complexities of a smash and grab adjudication.
CDR – Essential Intelligence: The Belt and Road Initiative
Of the BRI nations situated within the Gulf, the UAE stands to be a leader and consolidate itself as the trade hub of the Middle East.
Jurisdictional Challenges in Arbitrations in Qatar
Exploring jurisdictional challenges in arbitrations within the State of Qatar, both under Qatar law and the law of the QFC.
Non-payment: What’s a Contractor to do?
Payments to contractors are widely subjected to extensive delays.
JCT v NEC: Which contract is right for your project?
Unsure of what building contact to use. Learn the difference between NEC and JCT contracts with our guide.
HR Magazine quotes Anne-Marie Balfour on the importance of protecting employee data
Interserve handed £4 million fine after staff data breach
The Technology Disputes Law Review: Bahrain
Bahrain continues to be a regional hub for information and communications and other technological innovations.
Ghassan El Daye
Business Crime Law and Regulations UAE 2023
Ghassan El Daye authors the UAE chapter of the ICLG, Business Crime 2023.
Financial Crime Challenges as We Enter Internet 3.0
The developing “crypto economy” will become a significant part of the real economy in a very short time.
Charles Russell Speechlys advises Silbury Finance on a £59.3m facility to the Audley Group.
"We are delighted to have completed a second deal in a short period of time with Silbury." Jon Bond, Partner
Charles Russell Speechlys sponsors the Gulf Data Centre Association
“We are excited to be supporting the newly formed Gulf Data Centre Association (GDCA). "
The Virtual Currency Regulation Review
Virtual Currency Regulation in the UAE
UAE Court Rejects Enforcement of Foreign Arbitral Award
UAE Court Rejects Enforcement of Foreign Arbitral Award for Irregularity in the Placement of the Arbitrator’s Signature
The Legal 500: Intellectual Property Country Comparative Guide
Charles Russell Speechlys is the exclusive contributor for the Legal 500 Intellectual Property Country Comparative Guide - UAE chapter.