Limited duration contracts under UAE law and their premature termination
July 19, 2010
A brief overview for rent cases, labour contracts and consultancy agreements
Lease Agreements, Service Agreements and Labour Contract have one thing in common: They naturally cover a certain period in time during which the service is to be delivered or the lease object to be provided. Further that period in time can be explicit. In such case we speak of a limited duration contract. If the period is not explicitly specified in the contract (open end) we speak of an unlimited duration contract.
Whilst commercial agreements, be it for example a commercial tenancy contract or a consultancy agreement for their commercial nature are likely to warrant a limited duration in any case, the same is not necessarily the case for residential tenancy agreements and labour contracts. The question whether a specified time limit for the duration of a contract should be chosen or not, normally lies within the discretion of the contractual parties. In some instances however, the law may foresee requirements in favour of one of the options. The UAE law has a different approach than many European jurisdictions, when it comes to residential tenancy agreements and labour contracts.
In Germany for example, due to the high level of regard for the material interests at stake for the tenant as well as the security the law secures the same to a high level with the consequence that by default such agreements are unlimited not to mention further provisions protecting against arbitrary terminations by the landlord or the employer.
Not quite so in the UAE. Here unlimited duration contracts are rather the exception. The Dubai rental law prescribes the limited duration for any tenancy agreement. Even if limited duration was not expressly agreed the law assumes simply the agreed payment period as the limited duration. Unlimited duration contracts therefore, practically only exist in the UAE with regards to labour contracts, but even there the preferred choice of the employer is the limited duration contract.
The reasons are of course specific. For once the objectives of the UAE legislator are slightly different than in European jurisdictions. It is an open secret that due to the demographic composition of the UAE residents the legislators have to take into account the specific interests of the local minority. The majority of tenants and employees in the UAE are foreigners whose residence permits and hence their stay in the UAE is by definition of a limited nature warranting a limited nature of rental and employment arrangements. Secondly in the past and quite recently the rental as well as the labour market has seen high volatility and a high pace of development, requiring a degree of flexibility from the point of view of employers and landlords, best served by way of choosing contracts limited to a relatively short duration.
Whether a contract is of limited or unlimited duration has a bearing on the relevant rules for its termination. A limited contract normally does not foresee an ordinary termination with a standard termination notice period. Naturally the same is not needed as the contract will expire at the end of the specified period.
However, what happens, if one Party wants to terminate the contract prematurely? When neither the contract nor the law provides for an extraordinary termination right, the contract technically cannot be terminated unilaterally. According to UAE law the aggrieved Party can only resort to Court and apply for termination by way of judgment. However, in practice the “terminating” party often has the power to withdraw from its contractual obligations, with the effect that the other party incurs a damage: The tenant moves out and stops paying the rent, the employee remains absent from work or the employer denies him access to the work place and stops paying salary; the consultant withholds his advice or the other party denies the consultant access to the necessary information.
In a limited duration contract both parties have a material interest in the contract lasting throughout the specified period, i.e. anticipations of rent or the right of usage; the salary or the workforce; the advice or the fees. Such protected anticipated interests often lead to further dispositions. If against the contractual obligations the duly anticipated interest becomes frustrated the aggrieved party ordinarily suffers damages and has a right to claim compensation where a claim for specific performance becomes meaningless or unreasonable. Especially in employment situation often specific performance is rendered unfeasible given the loss of trust in such a situation. .
The size of the damage and the compensable amount, however quite contrary to some common perceptions and unfortunate precedents in the UAE does rarely comprise of the entire lost contract value. The UAE law contains general and specific provisions on this issue. In any case the individual circumstances have to be considered as well as the individual contractual provisions. Moreover it is pertinent to distinguish between different types of contracts but the general principle that has to be considered is the duty to mitigate damages.
The duty to mitigate damages
Under normal circumstances any limitations of the damages as a result of reasonably expectable efforts by the aggrieved party will have to lead to a decrease in the amount of compensation to be rightfully claimed from the “terminating” party. For example, a landlord normally can find a new tenant for the tenant that moved out prematurely. His damage then would only be the loss of rent during the period of time which he needed to find a new tenant. However, if the rent has dropped significantly the damage could be higher. The damage therefore can rely as much on the market situations as on the efforts that the aggrieved party is making to mitigate the damage.
However, it would appear that for example a landlord resting on the contract not making any efforts to find a new tenant, and thereby suffering a higher damage should not be privileged over another who diligently aims to fill up the empty space again. Therefore the true determining factor for the compensable damage is the test as to what efforts the aggrieved party diligently and reasonably could have been expected to make.
The size of the damage as well as the limitations of the duty to mitigate damages is to be determined on an individual case by case basis. The UAE practice yet appears to wait for the establishment of some clear precedents. But a view to some specific types of contracts and their provisions in law can be fruitful.
UAE labour law give very precise coordinates. A premature termination without good cause leads to a compensation claim for the damage suffered that is limited by law on either sides: Should the employer sack his employee arbitrarily the latter has a compensation claim in the maximum amount of three months salary which will stand cumulatively to his rights of gratuity. In the contrary case where the employee terminates prematurely, the employer’s damage claims is limited to a maximum of one and a half months of salary, next to the fact that the employee in most cases will forfeit his right to gratuity. His right to gratuity only survives a premature termination by the employee if the total time of his continuous service to the employer has reached at least five years.
The topic of premature terminations is very explosive when it comes to tenancy contracts, because the practice in the UAE is distinguished by the fact that annual rents are usually secured by way of post dated cheques submitted to the landlord at the begin of the rental period. Facing a potential criminal charge for a dishonoured cheque a tenant will think twice before prematurely moving out of the premises. On the other hand we have sees case in which the cheques had not been delivered but the agreement signed and the tenant then decided to take another apartment or villa or we there are constellations in commercial tenancy agreement where the premises may not be fit for type of business, due to changed or previously unclear regulations, or other reasons.
The rules and regulations on tenancy do not include express provisions on how to deal with premature terminations. It is worthwhile however, to take a look at the practice of the Dubai Rent Committee, a special judiciary body with exclusive jurisdiction over tenancy disputes. Though the conduct of its proceedings appears to be neither very transparent nor consistent, there seems to be a tendency that a tenant has to pay penalty of two to three monthly instalments in case of premature termination. It appears reasonable to assume that such period would normally be sufficient for the landlord to find a new tenant. In the case of a premature eviction claim by the landlord against the tenant, however, there are further protective measures in place which are not subject to this article.
Other limited duration contracts
In all other contracts the general rules and principles of UAE civil law have to be applied. In any case the principle of the duty to mitigate damages will have to be applied especially in commercial cases. With regards to consultancy agreement it would not appear unreasonable to use the provisions of the labour law as guidance in determining the limits of such duty. An amount of maximum of three monthly fees may be regarded as just and reasonable compensation for a premature termination. However, it will remain for the UAE Courts to set some standards.
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