Consequences of unilateral termination of contracts in the UAE

Suppose you have purchased a real estate property in the UAE, you sign the sale and purchase contract (the “Contract”) with the seller, and you pay the price. Suddenly, the seller informs you that he has terminated the Contract unliterally; what are the consequences of this action?

To answer this question, we must first determine when a contract is deemed formed, valid and legally binding. According to the laws of the United Arab Emirates, a contract is deemed formed upon meeting all elements of formation, which include consent of the parties, the existence of an object of contract, and a licit cause.

The UAE laws stipulate that a valid and binding contract may not be terminated unless one of the following cases take place: 

1. The agreement of the parties to the contract to terminate it, whether this termination is stipulated in one of the clauses of the contract, so that the parties or one of them is given the right to terminate it, or a subsequent agreement to terminate is made;

2. A termination order is issued by the court; and

3. A provision under the law grants the right to terminate in certain circumstances. 

Accordingly, termination of a contract by one of the parties (the “Debtor”) without meeting one of the above conditions is considered a void act with no effect with respect to the other party (the “Creditor”).

As a result, the Creditor may file a legal claim and demand a ruling on the validity of the Contract and the performance of the same, this type of performance is referred to as “execution in kind”. Alternatively, the Creditor may claim the termination of the Contract and the return of the amount paid to the Debtor.

Nevertheless, execution in kind may be hindered by the impossibility of performance in accordance with the provision of the law or the court’s discretion. For example, the Debtor may not have had title to the real property at the time of disposal, which deems it a disposal of someone else’s property and the Contract is considered automatically terminated. Consequently, the court may issue an order to rescind the Contract and oblige the Debtor to return the amount he received from the Creditor and as a result, the parties are reinstated to their former position, prior to contracting.

Further, the Creditor holds the right to claim remedying compensation which is compensation for the damage suffered by the Creditor because of unilateral termination and the withholding of the price incident by the Debtor. It is conditional that the damage suffered by the Creditor is a direct result of the error, occurring now or in the future. The estimation of this damage includes the loss of profits, and the losses suffered. Potential damages that are uncertain do not give grounds for compensation unless they occur and the burden of proof falls on the Creditor. The court determines the amount of reparation at its sole discretion and in accordance with the damage suffered by the Creditor.

In all cases, the court holds the right to determine whether the Contract is enforceable or not based on the facts and may award damages according to what it deems appropriate.

A common clause in sale and purchase contracts is a penalty clause, whereby the amount of damages can be agreed upon in the Contract in the event one of the parties fails to perform his obligations, and if the defaulting party refuses to pay the agreed upon damages, this is considered a legal ground to claim these damages before the court, a penalty clause implies that the damage has already occurred, and the Creditor is not required to provide evidence of its occurrence. Instead, the Debtor is required to prove otherwise. It should be noted that the amount stated in the penalty clause may be disregarded by the court. The court has the authority to estimate whether this amount is proportional to the damage suffered by the Creditor.

In conclusion, the Creditor can demand the performance of the Contract if it possible or otherwise claim the rescission of the same. The court has the right to adjust the amount of damages in proportion to what was suffered by the Creditor.

By Danah Mardini