Contracts do not have to always proceed as originally intended. During the times of economic uncertainty, geopolitical situations and the fluctuating market conditions there can be situations where the party seeks to terminate a contract before its completion or where the subject matter of the contract is damaged or destroyed before delivery. Articles 836 and 837 of the New Civil Transactions Law address these issues by establishing a framework governing termination, compensation, delivery, and the consequences of loss, while seeking to balance the interests of both parties.

Employer’s Right to Terminate for Convenience

In the new civil transaction law under article 836 the employer is expressly allowed to release itself from the contract, suspend execution and terminate the project before completion.

Compensation Following Termination

This right given to the employer is balanced by requiring the employer to compensate the contractor:

  1. Expenses Incurred – The employer must compensate the contractor for all the expenses that are incurred.
  2. Work Completed – The employer must compensate the contractor for the value of the work already completed.
  3. Lost Profit – The employer must compensate the contractor for the profit that would have been earned had the contract been completed.

Court’s Power to Reduce Compensation

Article 836(2) states that the court can reduce compensation relating to the lost profit if the reduction is equitable.

The court will consider:

  1. what the contractor has saved because of the employer’s release from the contract; and
  2. what the contractor has earned by employing their time in other work.

The amended article provide flexibility to the employer to terminate the contract at the same time makes sure that the contractor is duly compensated with the losses they may have incurred from the termination.

Risk Before Delivery

Article 837(1) states about what would happen if there is a risk of destruction of the subject matter of the contract.

Where the thing perishes due to force majeure before delivery to the employer:

  1. the contractor may not claim consideration for the work;
  2. the contractor may not claim reimbursement of expenses.

The loss of the material falls upon the party who supplied it. The risk position changes the moment the delivery becomes due and notice has been given.

Destruction Following Employer’s Notice

If the thing perishes after the employer has formally summoned the contractor to take delivery; or the loss is attributable to the contractor’s fault, the employer has the right to compensation.

Destruction Following Contractor’s Notice

If the thing perishes after the contractor has served the notice and requires the employer to take delivery or the loss is to the employer’s fault. The contractor shall be entitled to consideration and compensation if applicable.

Articles 836 and 837 establish clear rules governing termination, compensation, and the allocation of risk between contracting parties. The provisions recognise an employer’s right to terminate while ensuring that the contractor is appropriately compensated. They also clarify the consequences of loss occurring before and after delivery, with particular significance given to notice and fault. Together, these provisions promote contractual balance and provide greater certainty regarding the rights and obligations of the parties.

We at Ayesha Aldhaheri Advocates & Legal Consultants, we regularly handle contractual disputes involving termination, compensation, liability, and risk allocation. We assist clients in understanding their contractual rights and obligations and represent them in resolving disputes arising from the performance, suspension, or termination of contracts.