Terminating the Sale Purchase Agreement before the performance date - is there a law of anticipatory breach in UAE?

TLG victorious in procuring judgment against a defaulting developer before the performance date.

The recent wave of global financial crisis paralyzed the Dubai property and construction market after enjoying almost a six year period of rapid boom. With many construction sites left abandoned or breathing only minimal progress, the suspense mounts for an ardent investor thinning its confidence in to a trickle albeit the sale and purchase agreement stipulates a time period which is yet to expire. Eventually the investor is dawned with the possibility of never receiving possession of his property on the date expressly and mutually agreed between both parties. While a delay in construction is aggravating in itself, the question is whether an aggrieved purchaser can ask for a termination of the contract before the performance is due?

There may come a time when one party to the contract expresses the unwillingness to perform its obligations under the contract. Owing to the bilateral and reciprocal nature of a contract, the innocent party may be severely prejudiced and burdened with the obligations under a contractdue to intention of non-performance by the other party. Hence instead of waiting for the time period to expire, the other party may terminate the contract before the performance is due to mitigate its losses.

The above scenario is addressed by the common law principle of anticipatory breach which was first established in the case of Hochester v De la Tourdating back to 1853. According to the doctrine of anticipatory breach, an aggrieved party can ask for the termination of the contract before the time for its performance has arrived provided the ingredients of a repudiatory breach are present. The fundamental element in establishing an anticipatory breach is the communication of an expressed statement from the promisor that he does not intend to perform his obligation under the contract.

In a recent decision, SK Shipping (S) Pte Ltd v Petroexport Ltd [2009], the UK Commercial Court provided additional guidance as to when the innocent party can claim that there has been renunciation and/oranticipatory breach. To establish the intention of the defaulting party, it is enough that the party acted in such a way so as to evince a clear and absolute intention that it would not perform its obligations, and that the words or conduct of the party would be clear and absolute intention that it would not perform its obligations, that the words or conduct of the party would be clear and absolute to a reasonable person taking into consideration all circumstances at the time of termination. In addition to this, in order to terminate the contract, the innocent party must subjectively belief that the other party will fail to honor its contractual obligations in order to terminate the contract.
Based on the above, it is arguable that a delay in construction of a property by a developer may constitute as clear, unequivocal and absolute intention of the developer to not to complete the property in the given time period; hence establishing the necessary constituents for anticipatory breach.

While,the contract law is governed by the Civil Code in UAE which is influenced more by the Civil Code Napoleon along with Sharia law filling the gaps and serving as the basis of authority, the question of the presence of an equivalent doctrine remains a moot point. In sharp contrast, Article 1186 of the French Civil Code expressly provides that the performance of an obligation to be due on a certain event or stipulated date cannot be claimed before the occurrence of such time period. Similarly, according to Sharia law, termination can only be granted when there is real or actual breach. In this sense, the incidenceof the breach is most essential requirement for the availability of the remedy of termination. Strictly speaking, an anticipatory breach does not constitute an actual breach but only an anticipation that the promisor will not live up to the contractual terms whereby granting the innocent party an accelerated remedy to mitigate its losses.

Article 272(1) of the UAE Civil Code provides that: ‘In contracts binding upon both parties, if one of the parties does not do what he is obliged to do under the contract, the other party may, after giving notice to the obligor, require that the contract be performed or cancelled.'
The Article expressly grants the remedy of termination in view of the default of either party to the contract; however, it does not elucidate whether such termination can be granted before the performance of the obligation is due.Nonetheless, deriving its roots inIslamic law which is based onprinciples of equitability, such a remedy should not be considered impossible in UAE law.

In a recent bold and sweeping ruling from the Dubai Court of Appeal, the judge established that a contract for a sale and purchase of a property can be terminated before the completion date resulting from developer’s breach of its obligation of not achieving the requisite milestones of construction. The Claimant was an investor in a property in Dubai to be constructed by the Defendant latest by 2 April 2011. The Defendant reserved the right to extend the completion date not more than 12 months. Hence the date of completion was effectively set at April 2012.

In January 2011, the Claimant visited the construction site and noticed that only 13% percent of the construction had been achieved proving a very minimal and indolent progress by the Defendant.

TLG argued that even though the defendant had effectively extended the date to April 2012 and still had time to complete the property, the level of progress and consequentially the delay in construction constituted a breach in itself in terms of the stage of development that ought to have been achieved by such time.

The judge, in its remarkable judgment concluded that the developer did not have any reasonable reason to justify the delay and the slow construction of the property; and since the Claimant had been duly making payments according to the payment plan corresponding the estimated levels of development, the developer stood in breach of its obligation for carrying out the construction in a delayed manner.
It is interesting to see that the in delivering this judgment, the judge has hinted on the possibility of operation of anticipatory breach in UAE contract law or a species of the same doctrine. Altogether, it is worth applauding that the Dubai courts are not shy to exercise creative and teleological interpretation of the civil code and the Islamic law, setting up a new dynamics in the contract law in wake of the modern economic needs of the society.

A word of caution, even though the judgment reflects similarity with the doctrine of anticipatory breach, the ruling is one of its kind and unique in its disposition. The fact that the completion of the property was only 13% by January 2011 meant that the construction of the unit was not possible even on the extended completion date of April 2012, thus effectively establishing the required intention of the Defendant that they will not honor their obligations under the contract. However, the Judge was careful in stating that the act of Defendant not completing the required level of construction in a timely manner stands as an actual breach of the contract.

This leads to the conclusion that under a sale and purchase agreement to develop a property, the developer has levels and stages of obligations rather than the wholesome duty of completing the property in the agreed time. The court has hereby set a stringent test of performance in a contract to construct a property.This is also reflected in Dubai Law No.8 of 2007 (the “Escrow Law”) whereby the payments made by the Purchaser should be linked with the construction levels. Provided that the purchaser duly made payments according to the payment plan, it is the duty of the developer to utilize the monies received solely for the purpose of developing the relevant real estate project.The fact that the payments made by the Claimant did not match the required construction milestone meant that the Defendant had defaulted in its obligations constituting a material breach of the contract.This is a favorable and welcomed interpretation of the law in light of the new property law and regulations, and a step towards strengthening and complementing the same. Amidst the pressures of an ailing real estate market, UAE is resolute in protecting investors and ensuring smooth development in the Emirate.

While the judgment sheds light on the likelihood of a defaulting party standing in breach of a contract before the date of performance is due, the existence and scope of the doctrine of anticipatory breach in UAE law is left open for speculation and debate.

Shadha Zawawi
Associate

Dubai, UAE
Tel: +971 4 4477044
Fax: +971 4 4477088
Email: Shadha.zawawi@tlg.ae