How to terminate construction Agreement?

Originally, the contractual works should be completed by the expiry of a period as specified by both parties. Sometimes, the relationship may end with the termination of the contract by either party during implementation. Also, the employer has the sole authority to unilaterally terminate the construction contract. Thus, there are many reasons for terminating the contract. However, the material differences between the completion of the contract should be indicated, whether by the end of its term, the successful completion of works, or termination under the employer's authority to terminate it unilaterally in certain cases, for several reasons and factors under the circumstances, the contractor or the interest of the work.

However, the employer's authority is not absolute in all cases regarding the termination of the contract, as well as the method adopted in termination. Rather, the authority of the employer in this case is limited by the applicable laws regulating the different types of contracts or works.

First: Definition of Contract Termination:

 Contract Termination means the dissolution of the contractual relationship between the parties to the contract and the removal of all its effects so that the contract becomes null and void. Article 119 of the Egyptian Civil Code (“Code”) stipulates that:

In contracts binding on both parties, if either contracting party fails to fulfill his contractual obligation, the other contracting party may, after giving notice to the debtor, demand the execution or termination of the contract, with indemnification in both cases, if applicable. A magistrate may, depending on the circumstances, allow the debtor to defer payment. He also may refuse to annul the contract, if the part thereof not honored by the debtor is of small importance compared with the obligation as a whole.

In short, the aforementioned Article provides that to terminate a contract, three requirements shall be met:

1. The Contract to be Terminated is Binding on both parties:

It is self-evident, as the creditor in a binding contract has no interest in one side against the other side to terminate the contract, but rather, his interest is realized when the contract is successfully completed and demands the implementation thereof. As for the interest of the creditor in a contract binding on both sides, such interest may entail termination of the contract because the creditor is, at the same time, a debtor. As long as the contractual relationship remains, he is required to implement thereof.

2. Failure of Contractor to Fulfill All or Part of Contractual Obligations:

The termination may be applied as a penalty for the contracting party’s failure to fulfill his obligation, and, hence, a party is not originally entitled to demand the termination of the contract unless the other party breaches his obligation. The term “Failure of Performance” means total and partial implementation of the obligation or delay in implementation. A party is also in breach of his obligation even if it is related to a secondary obligation or consequential responsibility.

3. Fulfillment of Terminating Party of his Contractual Obligations:

It is unreasonable for a party to insist on terminating the contract because the other party failed to perform his obligation, whereas the terminating party failed also to take the initiative to implement his obligations. In this case, the terminating party shall not be in default in carrying out his obligation, as this requires that he has fulfilled, or at least is willing to fulfill, his contractual covenants and obligations.

In construction contracts, the law provided that the employer may, instead of requesting the specific performance of the contractor’s obligation, request the termination of the contract. In this case, termination shall be then subject to the sole discretion of the judge, who may order to terminate the contract if he is satisfied that the contractor’s n breach of the contract is serious.

Termination may also occur by agreement in certain events:

Article (120) of the Code stipulates that:

“It may be agreed that a contract may be deemed nullified by law if the obligations arising therefrom are not fulfilled as soon as the agreed conditions are fulfilled, without a court ruling.”

In the absence of a specific legal formulation for the contract termination clause, both parties are completely free to set the contract formulation. However, the terms and conditions shall be observed to reflect the parties’ clear intention and will in this regard. Where, in addition to an express agreement between the contracting parties to terminate the contract when either party fails to perform his obligation, their will shall aim to exclude judicial termination. The purpose of the termination clause is to exclude judicial termination, i.e., to avoid the judge's discretion. As the judge’s role is limited to investigating the availability of the conditions established by the parties to be fulfilled and established. Thus, the contract shall be simply terminated once such conditions have been fulfilled. This is contrary to the case in judicial termination, where the contract is still valid pending a judgment of termination. Thus, the judgment in which the agreement termination is proven is merely a ruling that discloses the same and is not a constituent thereof.

However, recent trends have granted the employer substantial authority to terminate construction contract to which he is a party at his option, in many cases, as follows:

Second: Unilateral Termination of Construction Contract:

The employer’s rights established under construction contracts are numerous, as he has the right to appoint engineers and contractors, as well as he has the right to terminate the contract, in addition to some other rights, including, but not limited to, the following:

Right of Employer to Terminate Contract:

Where the employer, as the project owner, has the sole ability to assess the feasibility and financial adequacy of his project, given that the implementation of the contractual works takes a long period during which the conditions and circumstances may change, he also has the power to terminate the contract, which is an exclusive authority under the contract. Within this context, the International Federation of Consulting Engineers (FIDIC) organized events where the employer has the right to terminate the contract due to certain works that are related to the contractor. Also, FIDIC established the employer's right to terminate the contract voluntarily and without any default on the part of the contractor, as follows: -

1. Termination of Contract due to Default of Contractor:

The Employer is entitled to terminate the Contract if the Contractor:

1. Fails to provide the Performance Security within the required time, or fails to respond to the correction notice;
2. Abandons the Works or otherwise plainly demonstrates the intention not to continue the performance of his obligations under the Contract;
3. Assigns or sub-contracts the whole or any part of the Contract Works without the prior agreement of the Employer; and
4. Gives or offers to give (directly or indirectly) to any person any bribe, gift, gratuity, commission, or consideration of a value, as an inducement or reward, for doing or forbearing to do any action in relation to the Contract, where he has become bankrupt or insolvent and then became unable to implement his contractual obligations.

If the contractor performs defective works, the employer may not wait for the end of the contract period to use his right to request specific performance. In this case, the employer may terminate the contract unilaterally and carry out the works by another contractor at the expense of the main contractor.

2. Termination of Contract for a Reason not Attributable to Contractor:

 The Employer may, without a reason related to the contractor, terminate the Contract, at any time for the Employer’s convenience, by giving notice of such termination to the Contractor. The termination shall take effect 28 days after the earlier of the dates on which the Contractor receives this notice or the Employer returns the Performance Security.

• Scope of Unilateral Termination of Contract by the Employer

Although contract termination by the employer is a right granted to him by law, it this, however, conditional on a specific scope; i.e., this intention shall be announced before the contractor completes the work as once the contractor has completed the work, the employer cannot terminate the contract. Also, the employer may terminate the contract, regardless of the nature of the contract works; ice. construction works, etc.

• Contractor's Right to Claim Indemnification for Damage he Sustained as a result of Termination

As the Civil Code granted the employer the power to unilaterally terminate the contract, it also obligated him to indemnify the contractor for any damage sustained by the contractor as a result of such termination. Such indemnification is in addition to the moral damage that the employer is obligated to indemnify the contractor for, such as the obligation of the employer who terminated his contract with the architect to pay his fees for developing the design and making an assessment, as well as indemnification for any damage he sustained in relation to his business reputation.

Indemnification for material damages is of interest to doctrine and jurisprudence, under the provisions of the Civil Code, which was indicated by Article 663 of the Code in terms of the following aspects: -

1. Expenses incurred by the Contractor for performing the contract work, including prices of the materials purchased and used in the work;
2. The value of works actually completed by the contractor until such time when he received the employer's notice to cease implementation of the works; and
3. Lost profit, regarding profit that the contractor would have made if he had completed the works.

Thus, based on the foregoing, we have indicated the essential differences between contract termination and the power of the employer to terminate the contract unilaterally.