Termination of Civil Works Company Formation Agreement in the UAE

Starting a civil works company in the UAE requires various legal and regulatory steps to be fulfilled. However, not all business ventures always go as they are planned. In some cases, due to financial problems, a change in strategy, or disputes between partners, it may become a necessity to terminate a company formation agreement.

This article deals with the legal framework of the termination of a civil works company formation agreement in the UAE and how Notary Public Dubai could assist you in this process.

What is a Civil Works Company Formation Contract?

An agreement for the formation of a civil works company is legally referred to as a muqawala contract in the UAE. The term comes from Arabic and essentially means a “contract to perform work for a fee.” The agreement binds one party, known as the contractor, to undertake a specific job in construction or engineering for the other party, namely the employer, in exchange for money.

Such contracts are governed by the UAE Civil Code (Federal Law No. 5 of 1985), particularly Articles 872 to 896, which detail about the termination of muqawala contracts.

Muqawala contracts are widely accepted in the thriving construction sector within the UAE, ranging from buildings, infrastructure, and other types of civil engineering works. Circumstances may arise in which either or both of the parties may desire to terminate the contract before it is completed. Let's look at how such a process works under UAE law.

Legal Grounds for Termination

A civil works company formation agreement can be terminated on legal grounds, of which the following are some:

According to Article 892 of the UAE Civil Code, the termination of any Muqawala contract may be determined in three ways in law:

• Upon the completion of the work agreed upon

• Mutual agreement between both parties

• Cancellation by a court order

Through these types, both parties may point out the termination of the agreement in a lawful and fair way.

Termination Due to Impossibility of Completion

Sometimes, force majeure situations arise that hinder the performance of any of the obligations set under the contract. Article 893 of the law states:

“If any cause arises preventing the performance or completion of the contract, either of the parties may request its cancellation or termination.”

This means that if any unforeseen events arise within the contract, such as financial hardship, natural disasters, or legal restrictions, the parties are entitled to request the termination of the contract—even when the work has not been fully completed.

Contractor Unable to Complete the Work

Furthermore, under Article 894 of the UAE Civil Code a contractor who starts the agreed work remains eligible for payment even if they cannot finish it because of uncontrollable circumstances. The extent of payment and reimbursement will, however, depend upon how much benefit has accrued to the employer from the partially performed work.

For instance, if a contractor builds only half of a building but has to stop the work due to reasons beyond his control-for example, because he has been seriously ill or has gone bankrupt-he is entitled to the amount for the work he has done so far as long as this has been of any benefit to the employer.

Compensation for Damages

In case one party terminates the agreement and thus causes a loss to another, Article 895 gives the party suffering the injuries the right to:

"Make a claim for compensation to the extent allowed by custom."

This compensation is based on custom and practice, which is generally accepted in the industry for losses incurred due to delays, unfinished work, or extra expenses incurred by either employer or contractor.

Death of the Contractor

In case of the death of a contractor during a project, the termination of the contract depends upon these two things: whether personal skills were integral to the agreement or not.

(1) When Personal Performance Is Required: If the contractor was employed because of personal skills or it was agreed that the work to be carried out was to be solely by him or her, the death of that contractor in itself automatically terminates the contract.

(2) When Personal Performance Is Not Required: If the personal skill was not important, the employer may terminate the contract if the heirs of the contractor do not give reasonable guarantees to continue the work.

In both cases, the value of work executed and the costs incurred would be settled from the estate of the contractor.

Termination Procedure

The legal termination of a civil works company formation agreement in the UAE requires the following steps:

Step 1: Reviewing the Agreement

The muqawala contract and the company’s Memorandum of Association (MOA) contain termination clauses together with notice periods and penalty provisions. The majority of agreements contain established procedures for termination and related consequences.

Step 2: Draft Termination Agreement

When all parties wish to end the agreement they should create a formal termination document which requires signatures from every involved party. This should include:

● Reason for termination

● Settlement of financial obligations

● Distribution of assets or liabilities

● Waiver of future claims

Step 3: Notarization

A licensed notary public in the UAE must notarize the termination agreement to achieve legal validity according to the UAE Commercial Companies Law (Federal Decree-Law No. 32 of 2021) and Civil Code requirements.

Step 4: Cancel Licenses and Permits

The Department of Economic Development (DED) and Dubai Municipality and free zone authority must receive notification to cancel trade licenses and construction permits and registrations. Mainland companies need to work with the DED for license cancellation but free zone companies should contact their respective authority for this process.

Step 5: Settle Financial Obligations

All outstanding debts together with employee dues and supplier payments need to be settled. The banks together with utility providers and Ministry of Human Resources and Emiratisation (MOHRE) need to issue clearance certificates. Tax-registered companies must resolve their obligations with the Federal Tax Authority (FTA).

Step 6: Publish a Notice

The Commercial Companies Law requires mainland companies to publish dissolution notices in two local newspapers (one Arabic and one English) for 45 days to let creditors file objections. Free zone companies need to follow different requirements as per their authority's established rules.

Step 7: Liquidation and Deregistration Finalization

The DED or free zone authority may require the appointment of a liquidator to create a liquidation report. The DED and FTA (if applicable) require final audit reports before the company can deregister through their respective applications.

Key Legal Considerations

• Unilateral Termination: Unilateral termination under UAE law is not generally allowed until the actual act is in the contract; however, courts may allow it in very exceptional cases.

• Compensation: A party may claim compensation for any expenses or profit lost in case of early termination of the contract operations by the opposite party.

• Contractual Procedures: Always follow the procedures mentioned in the agreement to eliminate legal disputes.

How Notary Public Dubai Can Help

Termination of an agreement to set up a civil works company in the UAE requires legal, financial, and administrative steps. Notary Public Dubai provides assistance in the following areas:

● Drafting and notarization of termination contracts

● Legal compliance advice on the UAE Civil Code and Commercial Companies Law

● Coordination with DED, Dubai Municipality, and other authorities.

● Facilitating hassle-free liquidation and deregistration.

Whether it’s a partnership dissolution or withdrawal from a construction venture, we ensure that your interests are secured while keeping everything legal.

Contact Notary Public Dubai today and schedule a consultation to get that first step towards terminating your civil works company agreement with no hassle.