Recent UAE Court judgments: Software contracts as Muqawala contracts and termination of “continuing contracts”
Dispute Resolution / UAE
This article considers two recent UAE judgments, Ras Al Khaimah Action No. 206-2021 dated 20 June 2021, and Dubai Court of Cassation judgment No. 221/2019/445 dated 7 July 2019.
Law Update: Issue 366 - Transport & Insurance Focus
Adnan Al Erqsousi Senior Associate,Dispute Resolution
Zane AnaniSenior Professional Support Lawyer, Dispute Resolution
Fateh SammanIntern,Dispute Resolution
This article considers two recent UAE judgments, Ras Al Khaimah Action No. 206-2021 dated 20 June 2021, and Dubai Court of Cassation judgment No. 221/2019/445 dated 7 July 2019, in which the courts applied the Muqawala provisions of the UAE Civil Code to the supply and termination of software services agreements.
The Muqawala provisions, which are to be found in Articles 872- 896 of the UAE Civil Code, govern contracts of work/services in the UAE. Pursuant to Article 872 of the UAE Civil Code, “a Muqawala is a contract whereby one of the parties thereto undertakes to make a thing or to carry out work against a countervalue undertaken [to be provided] by the other party.”
The judgments demonstrate that the Muqawala provisions of the Civil Code therefore do not only apply to construction contracts but to all “contracts for work.”
This case involved a dispute between a private company (being the claimant in the case) and a government entity, represented by the Attorney General, over a service agreement for SAP systems and reports (financial accounting, Salesforce, AutoCAD, BO/BI reports). The Claimant claimed outstanding amount owed under the SAP Agreement.
In this case, the judge overseeing the Case Management Office appointed a tripartite expert committee to determine the nature and extent of the parties' contractual obligations and performance pursuant to the SAP Agreement. Upon inspecting the systems and applications provided by the Claimant, the expert committee submitted their report whereby they indicated that the Claimant had not completed some of the work under the SAP Agreement. As a result, the Claimant was only entitled to the amount that represented the completed work under the SAP Agreement.
The Claimant challenged the experts’ report before the Case Management Office. The Defendant filed a counterclaim adopting the conclusion of the experts’ report confirming that the Claimant had not completing the required work, therefore, the Defendant sought an order for the termination of the SAP Agreement. The Defendant requested that the parties be restored to the position they were in before entering into the SAP Agreement and demand that the Claimant return the amount already paid to the Defendant (as a consequence of termination under UAE law).
The action was referred to the court, which decided that the matter be referred to the experts committee again to reinvestigate based on the submissions of the Claimant and Defendant.
Based on the experts committee’s report, the court the Defendant had to pay the Claimant, a sum of AED 64,038.84 with 5% delay interest per annum from the date the claim was made in court, for the services the Claimant provided to the government entity under the software services agreement.
The court also concluded that the services agreement was terminated due to the Claimant's breach of contract in failing to complete the project within the agreed period and deliver all the project deliverables. The court awarded the Claimant part of its claimed amounts, based on the percentage of completion of the work and services.
The court dismissed all other claims made by both parties, including the Defendant's claim for a refund of the amount already paid to the Claimant and the late penalty, and ordered the parties to bear the costs and advocate's fees in equal shares.
In this case, the dispute concerned a fixed-term contract for the supply, installation, testing, and operation of a system for coding and chip solutions based on Radio Frequency Identification (RFID) technology (a wireless system comprised of two components: tags and readers). The contract was terminated by the Defendant because the Claimant had failed to complete the system by the agreed date.
The Claimant failed to complete the contract work by the agreed date and several defects and deficiencies were identified during commissioning. However, the Claimant did provide some training and equipment to the defendant as part of the contract, and the expert determined that the claimant's work thus was 9.74% complete and calculated the payment due to him accordingly. The Court of Cassation held that the defendant was obliged to pay AED 461,972 to the claimant for the work done under the contract.
In both cases, the courts applied the provisions of the UAE Civil Code and the Commercial Transactions Law to the agreements in dispute on the basis that they were Muqawala contracts involving the supply of services.
In this case, the SAP Agreement was considered a Muqawala contract whereby the Claimant would provide services to the Defendant for a specific sum of money. Pursuant to Article 877 of the UAE Civil Code, a contractor is required to complete the work in accordance with the conditions of the contract and that the employer may demand that the contract be terminated if the contractor fails to do so. However, the court held that in this case, the contractor was entitled to the value of the work it had completed, as opposed to all the items agreed upon in the contract, in case of termination.
Accordingly, the Court established that the Claimant was in breach of the SAP Agreement, which entitled the Defendant to seek termination. However, the court held that termination does not operate retrospectively for continuing contracts, such as the service agreement in question, and that the effects produced before termination shall survive. Therefore, the Claimant was entitled to claim the value of the work it had completed, while the Defendant was entitled to seek termination and extinguish the claim for the late penalty.
The court in this case made a number of significant observations on the nature of Muqawala contracts.
First, Muqawala contracts may involve the supply, installation, testing, and operation of a system or a project that cannot be performed in part, as the benefit of the work is only realized subject to full execution, without defects.
Second, Muqawala contracts are considered as a continuing contract, meaning that the completed work is not affected by termination and the contractor claims payment for work done as performance under the contract and not as a consequence of termination.
Third, akin to other contracts, Muqawala contracts are subject to the general rules of contract law, such as the validity and binding effect of the contract, the prohibition of unilateral termination, the possibility of specific performance or a substitute remedy, and the retroactive effect of termination, unless the nature of the contract or a provision of the law provides otherwise.
In this case, the court held that terminating continuing contracts does not have a retroactive effect, meaning that the effects produced before termination shall survive and the contract is considered terminated only from the date the termination clause is triggered (where the contract expressly permits parties to terminate without judicial confirmation) or judicial confirmation of termination is pronounced.
The court applied these principles in this case, finding that the service agreement between the parties was a continuing contract that was terminated during the course of its performance, and that the defendant was only liable to pay the claimant for the value of the work completed by the latter, as opposed to all the items agreed upon in the service agreement.
In this case, the court held that terminating continuing contracts does not affect the work that had been completed before termination and the contractor can claim payment for the work done as performance under the contract and not as a consequence of termination.
The court also held that continuing contracts are considered terminated only from the date of termination because of the triggering of an explicit termination clause or impossibility of performance due to force majeure or any other cause where termination is established on judicial grounds instead of contractual ones. The court has the discretion to determine the percentage of completion of the contract work and the amount of payment due to the contractor based on the evidence, including the expert's report, and the nature of the contract.
In summary, the judgments above provide clarity on the interpretation and application of the Muqawala provisions of the UAE Civil Code which apply to all types of work contracts (or contracts for services) in addition to construction contracts. Muqawala contracts are recognized as “continuing contracts”, and as such their termination is not retrospective. This means that the effects of the contract that were produced before the termination remain valid and enforceable, and the contract is only considered terminated from the date the termination clause is triggered (where the contract expressly permits parties to terminate without judicial confirmation) or judicial confirmation of termination is pronounced. Consequently, any penalty clause and/or compensation stated in a contract will be unenforceable after termination.
For further information,please contact Adnan Al Erqsousi and Zane Anani.
Published in March 2024
