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Citation: 10 Arab L.Q. 17 1995 Provided by: <br>SMU Underwood Law Library

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TERMINATION FOR BREACH IN ARAB CONTRACT LAW

Adnan Amkhan*

INTRODUCTION

A contracting party might sometimes not receive the performance which was due to him because of the failure of the other contracting party to honour his side of the bargain. In such circumstances the aggrieved party might wish, for a variety of reasons, 1 to put an end to the dishonoured contract. This course of action, which amounts to a remedy for breach, is available to the aggrieved party under many Western legal systems.2

This article attempts to outline the principles and rules relating to termination of contract (Faskh al-'Aqd) for breach in Arab contract law. 3 The question whether traditional Islamic law knew of termination of contract as a form of remedy for breach is examined; there is a survey of the relevant modern statutory provisions; the main prerequisites for the remedy are identified; there is a discussion of the two procedures through which the right to invoke termination may be exercised and granted if due; and finally, the legal effects of the remedy of termination when granted are outlined.

ISLAMIC LAW

Under traditional Islamic law, the Shari'a, specific performance and/or the equivalent in monetary compensation (damages), were the only two remedies available for failure to perform a valid contract. Therefore, the general principle of termination as a consequence of breach, as recognised today, was not offered by this legal tradition.4 Some modem Muslim jurists argue, however, that the basic

*Lecturer in International Law at the University of Edinburgh. My thanks are due to Mr Alastair Hirst for his useful comments.

1 Some of these reasons are that the innocent party may wish to discharge himself of his obligation, that he may seek the restoration of his own performance, or that termination will turn out to be the better of the available remedies.

2 For an excellent comparative examination of the major Western legal systems see Treitel, Remedies for Breach of Contract: a Comparative Account (1988), pp.318-409.

3 The Arab legal systems mentioned in this article are the Egyptian, Syrian, Libyan, Iraqi, Algerian, Jordanian, Kuwaiti, United Arab Emirates, Omani and Sudanese systems.

4 The phrase "termination of a contract", however, is to be found in most of the early books of Islamic jurisprudence, but obviously with different legal effects and connotations. A contract is terminated in the context of Islamic law when it is a void or voidable contract, or when it is terminated by extraneous causes.

ARAB LAW QUARTERLY

concept was not totally alien to traditional Islamic law.5 This proposition has been supported by assimilating the remedy of termination for breach to the classic Islamic law concept of Khaiyyar al-Naqd (payment option). This legal concept is to the effect that a seller and a buyer can agree on a certain period of time for payment, failing which the seller has the right to terminate the contract.6

Furthermore, al-Zarqi, a prominent contemporary Islamic jurist, while affirming that termination for breach was not available in traditional Islamic law as a general principle, sees no reason why it should not be adopted as such. He points out that this principle can easily be deduced from the Islamic law ideals of justice and equity.7

Nevertheless, it is still possible to find the occasional judicial pronouncement against admitting termination for breach when traditional Islamic law was held applicable.

8

Therefore, the question whether the remedy of termination of contract for breach has found its way into the Shari'a remains a moot point. What is certain, however, is that there is no mandatory rule of traditional Islamic law to be found against the adoption of this remedy by modem Arab contract law.

MODERN ARAB CONTRACT LAW

It is a general principle of Arab contract law that, if one party breaches his contractual promise, the aggrieved party thus injured is entitled to terminate the dishonoured contract. 9 Termination of a contract in this context is regarded as one

5 For a short survey of the cases where termination of a contract was resorted to in Islamic law, see al- Sanhdri, Masildir al-Haq f 7 al-Fiqh al-Isldmi, vol. 6, pp.225-229.

6 This rule was included in Majallat al-'Ahkim al-'Adliyyah. Article 313 reads: "Seller and buyer may validly conclude a bargain whereby payment of the price is to be made by a certain time and in the event of payment not being made, the sale is not to take place. This option is called an option as to payment."

7 He also invokes the well recognised principle of "there would be neither harming nor reciprocating harm", al-Zarqi, Al-fiqh al-'Islmi fi Thawbih al-Jidid, vol. 2, p.235; see also al-Mahmas~ni, al- Nazariyyah al-'Amah lil Mujibat wa al-'Uaid (1972), vol. 2, p.4 9 6 .

8 'Thus, for example, the Federal Court of the United Arab Emirates ruled that "the fundamental principle of classical Islamic law is that contracts are to be performed specifically; and the court must enforce their terms. Islamic law did not allow termination for breach. The aggrieved party had no option but to request specific performance".

9 Various theories have been put forward as to the possible juridical basis of termination for breach. According to one theory the right to effect termination for breach is based on the concept of "cause" (i.e. the cause of the obligation of one party is the obligation of the other party). Thus, termination due to breach results from the failure of the innocent party to receive what he bargained for in entering into the contract. Another school of thought asserts that termination is simply a remedy for breach like any other remedy, and that there is no need to look for any other underlying basis.

1Some writers advocate the principle of equity as the origin of the remedy of termination for breach. The most widely held theory among writers is that of the interdependence of obligations; namely that contractual obligations are dependent on each other, and so the disappearance of one obligation should lead to the cancellation of the counter obligation as well. A further theory, which has gained occasional judicial approval, and which can probably be attributed to the influence of French civil law (Art. 1184 of the Code Civile), involves the notion of an implied resolutive condition, in other words, that every synallagmatic (reciprocal) contract has an implied terminating clause, which becomes operative when

TERMINATION FOR BREACH IN ARAB CONTRACT LAW 19

form of remedy for failure to perform.' 0

Statutory Provisions

The statutory provisions which codify this general principle may be divided for convenience into four groups. Within the first group are Articles 157, 159, 158, 128, 119 of the Egyptian, Libyan, Syrian, Sudanese and Algerian Civil Codes respectively." These articles are identical and read as follows:

1. In synallagmatic contracts, if one of the contracting parties fails to perform his obligation, the other party may, after notifying the obligor, demand the performance of the contract or its termination, with damages in either case if need be.

2. The judge may grant additional time to the obligor, if required in the circumstances. The judge may also reject an application for termination if that which the obligor has not performed is of little importance in relation to the obligation as a whole.

The second group consists of Articles 177(1) of the Iraqi and 60 of the Qatari Civil Codes, which are identical and read as follows: In synallagmatic contracts, if one of the parties does not do what he is obliged to do under the contract, the other party, after notification, may demand termination in addition to damages if due. The court, however, may grant additional time; it may also reject the claim

2continued 3one of the contracting parties fails to perform his contractual obligation. None of the Arab civil codes

under consideration expressly supports the view that a synallagmatic contract has an implied terminating clause. It is, however, apparent from the explanatory memoranda of, for example, the Egyptian, Jordanian, United Arab Emirates and Kuwaiti codes, that the concept of an implied terminating clause was what the draughters of those codes had in mind. This theory, however, has been severely criticised by legal writers, since it suggests that whenever a contract is breached it will be automatically terminated, which is not the case. The aggrieved party must, in the absence of any agreement to the contrary, seek termination through court order, and the trial court, as we shall see presently, has the discretionary power to grant or refuse the request. For a summary of these theories, see, e.g., Bel-'Uytir ('Abdul Karim), Nazariyyat Faskh al-'Aqdfi al-Qanan al-Madani al-Jazd'iri al- Muqdran (1986), pp.85-113.

10 This has been emphasised by courts and legal writers. The Egyptian Court of Cassation, for example, referring to Article 147 of the Civil Code, indicated that "this Article provides for the principle of termination as a remedy for breach of a synallagmatic contract, a principle which this Court upholds. The right to effect discharge-and hence termination-is something inherent in every contract which creates reciprocal obligations, even in the absence of an agreed term to that effect. The Civil Code expressly provides for this remedy nor can it be disregarded in the absence of agreement by the parties," case no. 1919, 22/12/1980, reproduced in Mahkamat al-Naqd (1980), vol. 2, p. 2082 at p.2087. For the opinion of writers see, e.g., al-Sanhtiri, al-Wasitfs Sharh al-Qdnin al-Madani, vol. 1, p.69 (hereinafter referred to as al-Wast); 'Abd al-Baiqi, Nazariyyat al-'Aqd (1984), p.612; Bel-'uylir, ibid., p.133. It remains to be said that, in general, the remedy of termination for breach is applicable to all kinds of contracts, whether civil, commercial or administrative. See, for example, the Egyptian Court of Cassation Judgment, case no. 208, 22/4/1954, reproduced in al-Mausa'ah al-Thababiyyah ft Qadd' Mahkamat al-Naqd (Hasan al-Fakahini, ed.), vol. 7, p.808 (hereinafter referred to M. al-Thabab'yyah). See also Articles 57, 344 and 11 of the Jordanian, Syria and Iraqi Commercial Codes respectively. For the application of termination as a remedy in administrative contracts, see al-Tarnimiwi (Suliyymdn Muhammad), al-'Usus al-'Amah lil-'Uqid al-'Iddriyyah, 3rd edn (1975), pp. 537, 568.

"*These Articles appear in the section "effect of contract" under the sub-heading of "dissolution of contract".

ARAB LAW QUARTERLY

of termination if the part of the contract which the obligor has not performed is of little importance in relation to the obligation as a whole.

12

Within the third group are Articles 246 and 272 of the Jordanian and United Arab Emirates Civil Codes respectively. These Articles are identical to each other and similar to the provision quoted in the first group, but with the following differences: they omit the phrase reading "with damages in either case if need be" from the first paragraph, while the second paragraph of each reads as follows: "The court 13 may compel the obligor to perform his obligation specifically or grant him additional time for performance, or it may decide to terminate the contract, with damages in either case if need be".'

4

Finally, there is Article 219 of the Kuwaiti Civil Code, which, while very similar to the provisions mentioned in the first group, contains more additions and elaborations and so is quoted here in full:

1. In contracts synallagmatic, if one of the contracting parties fails to perform his obligation when due, and after being notified, the other party may, if he does not choose to affirm the contract, ask the judge to terminate it, with damages in either case if need be. This will apply if the party demanding termination was not himself in breach of his obligation.

2. The judge may, when termination is demanded, grant the obligor a specific time [to perform], if the surrounding circumstances requires so; and he [the judge] can refuse termination if the part of the contract which the obligor has not performed is of little importance in relation to the obligation as a whole.'

5

It is clear from the above survey that Arab civil codal provisions, despite certain differences in formulation, are in agreement as regards the general principle of termination for breach and as regards the prerequisites for its application.

PREREQUISITES FOR TERMINATION

Before the right to the remedy of termination can be exercised by a contracting party certain prerequisites must be present. They are that the contract must be of a synallagmatic nature, there must be breach, and the party requesting termination must not himself be in default.' 6 Some writers and courts have added that the

12 The Arabic version of these provisions is quite difficult to understand and the language use seems to be inaccurate, at least to the present writer.

13 The United Arab Emirates Article has "the judge" instead. 14 Although this provision is, on its face, quite different from its counterpart in the first group, the

Jordanian Explanatory Memorandum of the Civil Code equates it with the latter and interprets it as having the same meaning, vol. 1, p.252

15 It is to be noted that the inclusion of the phrase "when due", after "if one of the contracting parties fails to perform his obligation in para. 1", is erroneous, because it could be held to imply that the innocent party cannot effect termination until performance of the obligation is due, even in anticipatory breach, and such an interpretation would be wrong.

16 See, e.g., al-Ndhi (Saldh al-Din), al-Wafiz al-Wafi (1984), p.206.

TERMINATION FOR BREACH IN ARAB CONTRACT LAW 21

party invoking termination should be able to restore the status quo ante.'7 These prerequisites merit closer examination.

The Contract must be of a Synallagmatic Nature

The remedy of termination for breach is only applicable to synallagmatic contracts, in other words to contracts which give rise to reciprocal and interdependent obligations, such as contracts of sale, partnership, hire and lease. 19 Thus termination is not normally invoked for the breach of unilateral contracts (i.e. contracts which create obligations binding only on one of the parties, such as gift or deposit without consideration). 20 The reason for limiting the application of the remedy of termination to synallagmatic contracts is that it is only in the context of such contracts that termination will serve one of its main purposes: that is, releasing the aggrieved party from his obligation following the other party's breach. In unilateral contracts, however, the obligee will not gain any benefit from demanding termination for the obligor's failure to perform; rather, it would normally be in his interest to insist on the contract being duly performed.

There must be Breach

The most important requirement of all for the availability of the remedy of termination is that a breach of contract must have occurred.2 1 In this sense neither of the contracting parties can claim termination unless the other party has failed to carry out his obligations. In principle, the degree of non-performance--whether complete, or partial or defective, or in the form of delay-would not affect the aggrieved party's initial right to invoke termination; 22 but whether he will eventually secure termination for the alleged breach is entirely a different question, which is discussed below.

It is a general principle of Arab contract law that, for purposes of termination, breach should be brought to the attention of the party in default. The way in which this procedural requirement is usually met is that the innocent party officially notifies the defaulting party of his failure to perform.23 Thus, for example, the

17 'Abd al-Biqi, op. cit., note 10, p.624; also see case no. 47/1975 of the Kuwaiti High Appeal Court (Commercial Division); reproduced in al-Muhdmiin, 1982, no. 6, p.702 at p.703.

is See, e.g., case no. 23 of the Egyptian'Court of Cassation, 13/2/1969, reproduced in M. al- Thahabiyyah, vol. 7, p.821.

19 See, e.g., al-Sanhdiri, al-Wasit, vol. 1, p. 6 9 8 . 20 Ibid., p.699. 21 See, e.g., case no. 27/1985 of the Omani Authority for the Settlement of Commercial Disputes, 2/5/

1985, reproduced in Majmzi'at al-Qawd'id al-Qdnaniyyah (1985-1986), p.201; see also case no. 183/ 1985, 10/11/1985, ibid., p.62; and case no. 278 of the Syrian Court of Cassation, 23/3/1960, reproduced in Tu'mah, al-Taqnin al-Madani al-Siri, vol. 1, (2nd edn (1992), pp.741-742 (hereinafter referred to as Tu'mah).

22 See, e.g., Zaki (Muhmild Jamil al-Din), al-Wafizfi al-Nazariyyah al-Amah lii-'Iltizdmit, (1978), pp.404-405.

23 The question of form notification (mise en demeure) has been examined by the same author in a forthcoming article on damages.

ARAB LAW QUARTERLY

Syrian Court of Cassation ruled that "the failure to perform will not be regarded as a breach unless such failure has been brought to the attention of the defendant, otherwise the plaintiff will be considered as having tolerated such a failure and as having sustained no loss". 2 4 Therefore, notification is meant to place the defaulting party legally in breach, and to offer him the opportunity to perform, if still possible. It is widely accepted that commencement of judicial proceedings is a form of notification sufficient for present purposes.2 5 Notification is not always necessary, however, 26 For example, if one contracting party had already expressed his unwillingness to perform or to continue performing his obligation, notifying him would not be necessary.2 7

Performance and Readiness to Perform

As mentioned earlier, the Kuwaiti Civil Code expressly provides that a contracting party who invokes termination for the failure of the other party to perform should not himself be in breach of his obligation. 2s In other jurisdictions this requirement is prescribed by the judiciary and in doctrine.2 9

In addition to the above requirements, it has been said that the remedy of termination is only available to a party who can comply with the requirement that the status quo ante be restored. 30 Thus, for example, where a seller has only delivered part of the goods contracted for, the buyer will not be entitled to the remedy of termination unless he is capable of returning the goods which have already been delivered.3 1

24 Syrian Court of Cassation Judgment, case no. 197 20/2/1980, reproduced in Majallat al-Qdniin, nos. 1-4, 1980, pp.10-11; also see case no. 1036/87 of the Jordanian Court of Cassation, 30/1/1988, reproduced in Majallat al-Muhdmdh (1988), nos. 7 & 8, p.1382 at p.1385.

25 al-Sanhdnri, al-Wasit, vol. 1, p.794. See also judgment 1940, 20/12/1976 of the Syrian Court of Cassation, reproduced in Tu'mah, p.738; and case 238, 16/1/1990 of the United Arab Emirates Court of Cassation, reproduced in al-'Addlah (1990), p.51 at p.53.

36 The Kuwaiti Civil Code provides that in civil transactions the injured party may not be relieved from its duty to notify the party in breach, even when this was agreed upon in the contract.

27 The Egyptian Court of Cassation Judgment, case no. 392, 31/5/1956, p.631, reproduced in M. al- Thahabiyyah, vol. 7, p.810. The form of legal notification differs according to the type of contract involved. If the contracts in question is governed by the civil code, then the required notification must be served through official means; whereas if the contract falls within the domain of the commercial code, a registered letter or cable may constitute sufficient notification.

28 It is to be remembered that one of the courses of action available to the aggrieved party is the suspension of his part of the contractual obligation (exceptio no adimpleti contractus). Therefore, such action, if pursued, is not to be regarded as failure to perform by the party invoking termination.

29 Thus the Egyptian Court of Cassation ruled that: "To rule on termination it is not enough that the contract is reciprocal in nature, and the non-performance is attributed to one of the contracting parties; it is important as well, that the party demanding termination is ready to perform his side of the obligation. Thus if the claimant is himself in breach, he should not be granted termination for the other party's failure to perform", case no. 148, 8/4/1969, reproduced in M. al-Thahabiyyah, vol. 7, p.823; see also, case no. 238 of the United Arab Emirates Court of Cassation, op. cit., note 26; al-Sanhilri, al-Wasi t, vol. 1, pp. 710-712.

30 See, e.g., the Syrian Court of Cassation Judgment, case no. 2500, 26/10/1966, reproduced in Majallat al-Qdniin (1967), no. 1, p.50.

31 'Abd al-Bgqi, op. cit., note 10, p. 6 2 4 .

TERMINATION FOR BREACH IN ARAB CONTRACT LAW 23

TERMINATION FOR BREACH IS OPTIONAL

The remedy of termination is at the option of the aggrieved party. 32 The party claiming that the other party has failed to perform his obligation has the initial choice between demanding specific performance, if this is still possible, or termination.3 3 A request for either remedy can be submitted at any stage of the legal proceedings, while still at the court of fact (Mabkamat al-Maudil') level, but before the final judgment; 34 and the choice of remedy is always without prejudice to the claimant's right to damages for any loss sustained as a consequence of the breach in question.35

OBTAINING TERMINATION THROUGH A COURT ORDER

In principle, a court judgment is required for effecting termination as a remedy for breach; in other words, termination should be sought through judicial means.

36

Therefore, in the absence of an express contractual provision for termination resulting from breach, the court enjoys a wide margin of discretion regarding what action to follow. This discretionary power of the court can be exercised in two different ways.

First, the court may grant the defendant an additional period to cure his performance (a period of grace), within which he is to resume performance. 37 Such action will be taken by the court if the defendant has demonstrated his willingness to resume the performance of his obligation, or if the part which remains

32 Egyptian Court of Cassation Judgment, case no. 49, 25/12/1952, reproduced in M. at-Thahabiyyah,

vol. 7, p.806. See also, the Syrian Court of Cassation Judgment, case no. 1363/1772, 3/10/1982, reproduced in Majallat al-Qdniin, nos. 1-4, 1983, p.218; and case no. 134/1985 of the Omani Authority for the Settlement of Commercial Disputes, 30/10/1985, reproduced in Majmti'at al-Qawd'd al-Qni niyyah (1985-1986), p.54 at p.57.

3 Put differently, breach of a contract does not imply the automatic termination of a contract; rather it is a remedy at the disposal of the aggrieved party.

3 See, e.g., case no. 155 of the Syrian Court of Cassation, 15/2/1961, reproduced in Tu'mah, vol. 1, p.718; also case no. 91/1985 of the Omani Authority for the Settlement of Commercial Disputes, 13/1 l/ 1985, reproduced in Majmii'at al-Qaw'd al-Qdniniyyah (1985-1986), p.63.

Under commercial contracts, however, the choice of whether to demand specific performance or termination has been treated in somehow a different fashion in, for example, the Jordanian Commercial Code. Article 56(2) of this Code provides that the initial termination claim cannot be altered to a claim for specific performance once legal proceedings are under way, but that the claim for specific performance can be abandoned in favour of termination at any stage of the legal proceedings. Again, such change of heart should be brought to the attention of the court before it reaches a decision on the initial claim.

35 See, e.g., the Syrian Court of Cassation Judgment no. 844, 30/9/1975, reproduced in Tu'mah, vol. 1, pp.731-733; also case no. 123/1984 of the Omani Authority for the Settlement of Commercial Disputes, 27/5/1984, reproduced in Majmil'at al-Qawrd al-Qan!niyyah (1984-1985), p.56.

36 The Egyptian Court of Cassation affirmed this by saying that "terminatiion of contract should only be the result of an agreement between both contracting parties or of a court order ... ", Court of Cassation Judgment, no. 78, 24/1/1957, reproduced in M. al-Thahabiyyah, vol. 7, p.81 1. Also see case no. 148, 8/2/1962, p.196; ibid., pp.813-814.

37 Egyptian Court of Cassation Judgment, case no. 35, 13/2/1969, reproduced in M. al-Thahabiyyah, vol. 7, p. 8 2 1 .

ARAB LAW QUARTERLY

unperformed is very small compared to the entire contractual obligation. 38 There is authority tot he effect that additional time may be granted by the court even if the defendant has not requested it. 3 9 This discretionary power, however, is not unlimited. The Syrian Court of Cassation, for instance, has emphasised that the trial judge cannot offer an additional period for performance if this would inflict serious harm on the plaintiff.40 Moreover, additional time will not be granted if it has been established that the obligor has acted in bad faith. 4'

If the defendant has still not performed his obligation at the end of the period of extra time awarded, the contract will be terminated without any further action being required.42 Thus if the judge has already given the buyer in a termination action a period for performance, the buyer must perform his obligation during that time; otherwise he has exhausted his only opportunity, and the contract will be terminated automatically once the set time has expired;43 and the aggrieved party's right to damages for the delay in performance will not be prejudiced.

44

Whether to award the additional time to perform is a question of fact which is left entirely for the court of fact to evaluate in the light of the circumstances of each case.

4 5

It should be noted that if the contract is of a commercial character (i.e. governed by the provisions of the commercial code) the court's power to grant additional time is more restricted in that it can only exercise such power in certain exceptional circumstances.4 6

Second, the court may refuse to comply with the aggrieved party's request for termination.4 7 One of the main reasons for this is if the court believes that the non- performance in question has not amounted to a serious breach. There are several grounds on which the breach may be considered to be not so serious as to warrant termination: for example, that it affected only an insignificant part of the contract; or that it did not destroy the basis (subject matter) of the contract; or that the

38 Syrian Court of Cassation Judgment, case no. 297/76, 26/2/1976, reproduced in Majallat al-Qdnl

n, no. 1, 1977, pp.5 6-57. 39 'Abd al-Bgqi, op. cit., note 10, p.627. 40 See, e.g., case no. 587/81, 29/3/1981, of the Syrian Court of Cassation, reproduced in Tu'mah, pp.

723--724. 41 al-Sanhtiri, al-Wasit, p.799. 42 Egyptian Court of Cassation Judgment, case no. 155, 23/3/1950, reproduced in M. al-Thahabiyyah,

vol. 7, p. 8 12 . Also see, al-Sanhtiri, al-Was7t, vol. 1, p.707. 43 Syrian Court of Cassation Judgment, case no. 688/1150, 29/5/1982, reproduced in Majallat al-Qa

niln, nos. 5-10, 1982, p.236. 44 'Abd al-Biqi, op. cit., note 10, p.642. 45 HijiZi ('Abd al-Hai), Mada Khaydr al-Ddin bin al-Tanfid wa al-Faskh, Majallat al-'Ulam al-Qanr4

nzyyah wa al-'Iqtisadiyyah, no. 1 (1959), p. 13 9 at pp.174-175. 46 See, for example, Articles 56(1), 343(2) and 109 of the Jordanian, Syrian and Kuwaiti Commercial

Codes respectively. 47 The Egyptian Court of Cassation ruled that: "the trial court will not be questioned if, in the limits

of its discretionary power, it decides to reject the plaintiffs request for termination", case no. 122, 10/4/ 1952, reproduced in M. al-Thahabiyyah, vol. 7, p.805; also case no. 363 of the same court, 25/3/1965, ibid., p.815. See also the Iraqi Court of Cassation Judgment, case no. 297/76, 26/2/1977, reproduced in Majallat al-'Ahkdm al-'Adliyyah, no. 1, 1977, p.57. However, the trial court should base its rejection of termination on reasonable legal grounds.

TERMINATION FOR BREACH IN ARAB CONTRACT LAW 25

obligation which has not been performed is a subsidiary one, the non-performance of which does not affect the presumed equilibrium of the contract.48

If the non-performance has not affected such equilibrium, the court will be more likely to refuse to grant termination and instead award damages with or without an order for specific performance. Also, if a substantial part of the contractual obligation has been performed and what remains unperformed does not impair the interest of the aggrieved party, the court may decide not to terminate the contract and award damages instead.

All these factors will be balanced in the light of the interests of both parties. It is generally accepted, however, that it is possible for the defendant to avert termination by resuming his delayed performance at any time before the court rules on the request for termination,4 9 provided that this would not cause serious harm to the aggrieved party.

In sum, the general principle is that termination will not be granted unless the breach in question is serious and far-reaching in its effect upon the contract as a whole. 50

TERMINATION FOR BREACH BY PRIOR AGREEMENT

The other procedure available for securing termination for breach is conferred by the contract itself; in other words, the parties may wish to include a provision in the contract whereby the failure of one party to perform his obligation gives the other party the right to terminate. 5 1 This form of termination has also been codified in Arab civil codes.

Statutory Provisions

The provisions which provide for the general principle of termination by agreement are found in Articles 158, 159, 159, 178, 129, 271, 245, 120 and 61 of the Egyptian, Syrian, Libyan, Iraqi, Sudanese, United Arab Emirates, Jordanian,

48 For a general discussion of all these considerations see Hijdzi, loc cit., note 45, pp.176-189. 49 See, e.g., case no 477/1984 of the Omani Authority for the Settlement of Commercial Disputes, 19/

1241984, reproduced in Majallat al-Qawd'd al-Qaniiniyyah (1984-1985), p.145. It has been suggested by Hijazi that courts usually employ two general criteria in deciding whether

the breach in question is serious enough to warrant termination. The first criterion is an objective one: that is, examining all the material evidence surrounding the contract and the nature of its subject matter. The second criterion which the court might use is a subjective one: that is, to look at the initial intention of the contracting parties when the contract was entered into, loc. cit., note. 45.

51 Arab courts have emphasised that stipulated termination is permissible. For example, see case no. 702 of the Egyptian Court of Cassation, 30/5/1979, reproduced in Mahkamat al-Naqd, no. 2, 1979, p.792 at p.799; also, case no. 1932/82 of the Syrian Court of Cassation, 23/10/1982, reproduced in al- Muhmiin, no. 4 , p.418; case no. 606/1961 of the Jordanian Court of Cassation, reproduced in Majallat al-Muhimih, no. 4 (1961), p. 1 4 7 .

ARAB LAW QUARTERLY

Algerian and Qatari Civil Codes respectively. These Articles are identical and read as follows:

The contracting parties may agree that in case of non-performance of the contractual obligation, the contract will be terminated ipso facto without a court order. Such an agreement does not release the parties from the obligation of notification, unless the parties explicitly agree that such notification will be dispensed with.

Article 210 of the Kuwaiti Civil Code, however, differs from the above Articles. In the first paragraph it states that the explicit terminating clause will not be taken into consideration unless this is clearly provided for; and the second paragraph of the same Article provides that an agreement to terminate a contract without a court order will not relieve the innocent party from serving formal notice, irrespective of any express provision to the contrary, unless the commercial code is applicable.

52

Characteristics of the Right to Terminate by Agreement

As is the case with French contract law, the provision for termination by agreement is known in Arab contract law as the "explicit terminating condition" as opposed to the "implicit terminating condition". Termination by prior agreement differs from termination by a court order in that it is meant to deprive the court of its discretionary powers in deciding upon termination for breach.53 Therefore, the court cannot grant additional time for performance; it cannot refuse termination once it becomes applicable; and the defendant cannot escape the application of termination by resuming performance. The court's role in the case of agreed termination is in consequence merely declaratory: it is limited to declaring that the conditions which give rise to termination are present.54

Stipulating for Termination

To achieve the desired result, however, a contractual clause intended to provide for termination in case of breach must be unambiguous and must clearly reflect the common intention of the contracting parties to that effect.55

Contractual clauses which provide for agreed termination can be formulated in different ways resulting in different legal consequences. Let us take three examples. First, a provision that the contract will be terminated in case of breach is regarded as reaffirming what is already provided for by legislation: in other

52 Thus making the procedural requirement of notifying the obligor a rule of public policy in the

context of contracts which are governed by the Civil Code. 53 Egyptian Court of Cassation Judgment, case no. 82, 21/11/1974, reproduced in M. al-Thahabiyyah,

vol. 7, p. 8 2 4 . 54 al-SanhdIri, al-Wasit, p.812. 55 See, e.g., case no. 654 of the Egyptian Court of Cassation, 25/5/1978, reproduced in Mahkamat al-

Naqd, no. 2 (1978), p. 13 2 8 at p.1334 ; also case no. 578 of the Syrian Court of Cassation 8/5/1986, reproduced in Majallat al-Qdniln, nos. 1-10, p.260. Courts will invariably interpret any provision allegedly providing for agreed termination restrictively.

TERMINATION FOR BREACH IN ARAB CONTRACT LAW 27

words, as a reference back to the statutory provision which provides for judicial termination. 56 This means that the aggrieved party has to follow the normal procedures for effecting judicial termination by notifying the defaulting party and demanding termination through judicial means. Thus a contractual provision which merely reads that: "This contract will be terminated if either of the parties fails to perform his contractual obligation" will in itself be of little significance, for such a principle has expressly been codified in legislation.

Second, a provision that a contract is to be terminated ipso facto for non- performance without a court order means that the contract is to be terminated upon the demand of the aggrieved party in the event of a breach.5 7 The aggrieved party, however, is not relieved from placing the other party legally in breach by notifying him formally.58 In this kind of agreement there is no need to seek a court order to terminate the contract. The contracting party allegedly in default, however, might challenge the other party's decision to terminate, either by denying that he has failed to perform his contractual obligation, or by arguing that his failure to perform as due to the other party's own fault. The sole function of the court in this event will only be to affirm, in the light of the contractual terms, whether in fact the breach which has given rise to the claim for termination has occurred or not.59

Third, a provision that the contract is to be terminated for breach without a court ruling or formal notification has the effect of relieving the aggrieved party of all the restrictions which are normally associated with the remedy of termination. He is not required to serve a formal notification, 60 neither does he need to seek a court order to enforce termination of the contract in question. Again, this does not deprive the defaulting party of the right to challenge the other party's decision to terminate the contract.

It is to be noted that the availability of the agreed termination option does not deprive the aggrieved party of the right to demand specific performance instead of termination. Also, it is only the aggrieved party who may invoke and benefit from the explicit terminating condition. The party in default cannot, for obvious reasons, invoke the agreed termination for his own failure to perform.

6 1

56 See e.g., case no. 541 of the Syrian Court of Cassation, 18/4/1978, reproduced in Tu'mah, vol. 1,

pp.760-761. 57 Syrian Court of Cassation Judgment, case no. 506, 2/4/1980, reproduced in Majallat al-Qdniln,

nos. 1-4, 1980, p.47. 58 See, for example, case no. 506 of the Syrian Court of Cassation, 2/4/1980, reproduced in Tu'mah,

vol. 1, pp. 7 62-763; also case 1220, 21/8/1980, ibid., pp.764-766. 59 The Egyptian Court of Cassation Judgment, case no. 258, 26/3/1953, reproduced in M. al-

Thahabiyyah, vol. 7, p.807 . 60 With the exception of Kuwaiti civil contract law. 61 al-Bal'dwi (Siyaf al-Din Muhammad Mahlmtd), _7azd" 'Adm al-Tanfidfi al-'Uqad al-Mulzimah

lil-jdnibin (1982), p.307.

ARAB LAW QUARTERLY

LEGAL CONSEQUENCES OF TERMINATION FOR BREACH

It is a general principle of Arab contract law that the main effect of termination for breach is that the parties are released from their contractual obligations, and the contract is retrospectively dissolved.6 2 This requires the affected parties to restore the status quo ante by returning to each other anything delivered or received under the terms of the terminated contract.63 For example, if a contract of sale is terminated, the buyer must return the goods bought with any benefits he may have acquired therefrom, and the seller must return the paid price plus interest.6 4

Restitution as a consequence of termination for breach is based on and assessed according to the doctrine of unjust enrichment 65 and, more specifically, according to the legal principle of payment of what is not due.

6 6

As mentioned earlier, the majority of contract law writers note that termination as a consequence of breach cannot be effected unless the contracting parties are able to comply with the restitutionary requirement.67 This restriction is not always essential, however: if restitution is not possible the equivalent monetary indemnification will be awarded instead. 68 This has been explicitly provided for in the Arab civil codes. For instance, Article 248 of the Jordanian Civil Code reads as follows:

When a contract is terminated, the parties are restored to their former positions. If restoration is impossible, the court may award monetary compensation.

69

62 See, e.g., case no. 5/1985 (Civil) of the Kuwaiti High Appeal Court (Cassation Division), 1/11/

1982, reproduced in Majallat al-Qadd' wa al-Qdnfin (1985), no. 2, p. 2 3 9 at p.241; also case 214/1984 of the Omani Authority for the Settlement of Commercial Disputes, 17/5/1984, reproduced in Majmfi'at a'-9awd'd a1-Qdniniyyah (1984-1985), p. 7 1 .

See, e.g., case no. 359 of the Appeal Court of Abu Dhabi of 28/11/1992, reproduced in Al-'Addlah (1993), January issue, p.74 at p.78; also see the Jordanian Court of Cassation Judgment, case no. 313/85, 18/5/1985, reproduced in Majallat al-Muhmah, nos. 11-12 (1985), p. 1865 at p. 1868.

64 See, e.g., case no. 708 of the Syrian Court of Cassation, 25/7/1976, reproduced in Majallat al-Qdni! n, nos. 5-6, p.498; also see Zaki, al-Waitz, op. cit., note 22, p. 4 16 .

65 A subject of an article under preparation by this author. 66 This principle has been promulgated in the Arab civil codes. Thus, for example, Article 297 of the

Jordanian Civil Code provides that "a payment which has been made in the performance of an obligation the cause of which has not materialised or has ceased to exist may be recovered". To the same effect see Articles 321 of the United Arab Emirates, 182 of the Egyptian, 185 of the Libyan, 144 of the Algerian, 183 of the Syrian and 83 of the Qatari Civil Codes. One further relevant rule is articulated in the Arab civil codes. For example, Article 185 of the Egyptian Civil Code reads as follows: "When a person has received in good faith that which is not due to him, he is bound only to restitute that which he has received. If he has received it in bad faith, he is bound to return in addition the interest and profit that he has gained or that he has failed to gain by neglect or the thing unduly received from the date of payment or from the date from which he could be said to have acted in bad faith. In any case, a person who has received that which is not due to him, is bound to restitute the interest therein from the date of a claim in the courts". To similar effect see the following Articles from various Arab civil codes: 188 of the Libyan, 147 of the Algerian, 267 of the Kuwaiti, 186 of the Syrian, 233(2) of the Iraqi, 86of the Qatari, 324 of the United Arab Emirates and 300 of the Jordanian.

67 See, e.g., al-Sanhtiri, al-Wasit, vol. 1, p.793; 'Abd al-B-qi, op. cit., note 10, p. 6 2 4 . 68 Zaki, op. cit., note 22, p. 406. 69 To the same effect see Articles 274 of the United Arab Emirates, Egyptian, 162 of the Libyan, 161

of the Syrian, 131 of the Sudanese, 180 of the Iraqi, 211 of the Kuwaiti, 63 of the Qatari and 122 of the Algerian Civil Codes.

TERMINATION FOR BREACH IN ARAB CONTRACT LAW 29

There are three points which need to be added here. First, there are certain types of contracts to which the general restrospective effects of termination do not apply, such as long term contracts 70 and contracts which provide for divisible obligations. Cases in point include contracts relating to certain types of work, leases and partnerships; in these and similar contracts, termination will apply not to past but only to future performance and the past obligation will remain unaffected.7 '

Second, it is a well established rule of Arab contract law that termination and damages for the injury or loss suffered by the aggrieved party can be combined.72

But there is some uncertainty concerning the legal grounds upon which such damages will be assessed. So far the available authority indicates that damages due in case of termination for breach are to be calculated on the basis of tortious liability and not on the basis of contractual liability, since the contract in question has been terminated.73

Finally, in Arab contract law parties to a contract can agree, at the time of its conclusion, on a liquidated amount of damages to be paid in case of breach.74 Such an agreement, however, does not deprive the aggrieved party of his right to invoke termination.7 5 But such termination, if granted, renders the liquidated damages ineffective, since it becomes terminated along with the rest of the contract. Even here damages are generally calculated according to the rules of tortious liability.

76

CONCLUSIONS

(1) Although it is a general principle of Arab contract law that a contracting party has the right to terminate a contract if the other party fails to honour his obligation, the right cannot in principle be exercised without a judicial order.

(2) The court of fact enjoys a wide discretion in deciding on whether to grant or refuse termination for breach.

70 That is, contracts which are successive or which have to be performed on continuous bases. 71 Article 212 of the Kuwaiti Civil Code, to which reference is made in Article 211, provides: "In

continuous contracts, termination has no effect except from the time it has been implemented". See also, e.g., case no. 509 of the Egyptian Court of Cassation, 7/2/1979, reproduced in Mahkamat al-Naqd, vol. 1 (1979), p.491 at p.494 ; also see case no. 415/77 of the Iraqi Court of Cassation, 1/4/1978?, reproduced in Majallat al-'Ahkdm al-'Adliyyah, no. 1 (1977), p.45.

72 The Syrian Court of Cassation Judgment, case no. 991/708, 25/7/1976, reproduced in Majallat al- Qdnan, vol. 5-6, 1976, p.259; also case no. 58 of the Egyptian Court of Cassation, 19/1/1978, reproduced in Mahkamar al-Naqd, no. 2 (1978), p.265 at pp.272-273.

73 See, e.g., Judgment no. 58 of 19/4/1078 of the Egyptian Court of Cassation, reproduced in Mahkamat al-Naqd (1978), vol. 1, p.273. Also see Zaki, op. cit., note 22, p. 4 17 .

74"A subject for a forthcoming article by this author. 75 See, for example, case no. 1300 of the Syrian Court of Cassation, 13/6/1983, reproduced in

Majallat al-Qdniin, nos. 1-2, p. 9 7 at p.98. 76 The Egyptian Court of Cassation Judgment, case no. 343, 2/3/1971, reproduced in M. al-

Thahabiyyah, vol. 7, p.823; see also case no. 663, ibid., p.8.

30 ARAB LAW QUARTERLY

(3) The judicial analysis preceding the decision whether or not to order termination of contract for breach hinges on two interrelated processes: (a) balancing the interests of the contracting parties in the light of the

contractual terms; and (b) establishing whether the breach in question has attained a certain

minimum degree of seriousness. (4) Courts are more likely to grant termination for the breach of commercial

contracts, which fall within the domain of the commercial code, than when the contract is one governed by the civil code.

(5) If contracting parties desire to deprive courts of their wide discretionary powers in this context, they will be well advised to stipulate their intention in very clear terms.