KP insights [8]

Termination of Bilateral Agreements Under Egyptian Law – A Sensitive Subject Having Ambiguous Nuances

In the globalized world in which we live today, business in Egypt is becoming of greater magnitude. As a result, Egyptian legislation and government bodies are seeking to facilitate foreign direct investments and international trade activity. Among the most important factors for investors is ‘legal security’.

This article provides a glimpse into the termination of bilateral agreements under Egyptian law and the distinction between two main hypotheses – judicial termination and consensual termination.

Under Egyptian law, termination of bilateral agreements is a right granted to a party (the “Creditor”) who wishes to cease a contractual relationship in the event that the other party (the “Debtor”) fails to perform its obligation. Having said that, such right of termination is meticulously regulated and varies depending on the existence and wording of the termination clause, as discussed in further detail below.

I.?????Judicial Termination: Where the Agreement Does Not Include A Termination Clause

Article 157 of the Egyptian Civil Code No. 131 of 1948 (“Civil Code”) states that:

“In bilateral agreements, in the event that one of the parties does not perform his obligation, the other party may, after serving a formal notice to the Debtor, demand the performance of the agreement or its termination, with damages, if due, in either case. The judge may grant additional time for the Debtor, if necessary as a result of the circumstances. The judge may also reject the termination claim when the part of the agreement which the Debtor has failed to perform is of little importance in comparison with the obligation in its entirety.”

As a general rule, in the absence of a termination clause in an agreement (which is practically the case in some bilateral agreements) and when the Debtor of the obligation fails to perform his contractual obligation(s), the Creditor, shall at first officially notify the Debtor via a bailiff notice compelling him to execute his obligation within a specific timeframe. Following such notice, in the event Debtor fails to comply, the Creditor shall file a termination lawsuit before the competent court demanding the termination of the agreement for non-execution.

Once the case is transferred to the court, the judge has the full authority to grant or dismiss the termination, as well as grant the Debtor an extension to execute his contractual obligation to avoid termination. In this regard, the Egyptian Court of Cassation clearly states that:

“According to Article 157 of the Civil Code, the tribunal (first instance) has the right to refuse the termination claim in the event that the Debtor’s non-execution is partial, meaning that what was not executed is not important or minimal in comparison to the entire obligation; the tribunal has absolute discretionary power as per the extraction of the result when its judgment is based on reasonable grounds.” [1]

II.????Consensual Termination: When the Agreement Includes a Termination Clause

When an agreement contains a termination clause, it may be enforced when its conditions are fulfilled in accordance with the terms of agreement. It is important to note the effects of such consensual termination clause.

Article 158 of the Egyptian Civil Code states that:

“The parties may agree that in case of non-performance of the obligations stipulated in the agreement, the agreement shall be deemed to have been terminated ipso facto without a court order. Such an agreement does not release the parties from the obligation of serving a formal notice, unless the parties expressly agree that such a notice shall be dispensed of.”

The Doctrine established what is known as the ‘the gradation of power in consensual termination’. It sets four (4) degrees of termination clauses, starting with the first degree (the weakest) and ending with the fourth degree (the strongest) in terms of their power and the effects of the termination.

1.????First Degree: the Agreement Shall Be Terminated

In the event that the wording in the agreement is that “the agreement shall be terminated” and the provision ends here and the Creditor wishes to terminate the agreement due to non-performance of the Debtor, the Creditor shall notify the other party via bailiff notice and then file a termination lawsuit.

It is worth mentioning that this degree of termination clause is not as effective as the higher degrees, since it is enforced in accordance with Article 157 of the Civil Code which involves the discretion of the judge.

2.????Second Degree: the Agreement Shall Be Terminated Ex Officio

Under the second degree of termination clause, the Creditor shall officially notify the Debtor of the termination. This does not prevent the Creditor from filing a termination lawsuit in case Debtor protested the termination.

In this instance, the judge shall rule on whether he accepts or rejects the termination and have the authority to grant the Debtor a delay to execute its obligations. In the event that the judge orders in favour of the termination, the judgment shall be an ‘establishing judgment’, meaning that termination shall take immediate effect from the date of the judgment.

3.????Third Degree: the Agreement Shall Be Terminated Ex Officio Without the Need of A Court Order

Under the third degree of termination clause, after serving an official bailiff notice to the Debtor, termination shall occur ex officio in the event that the Debtor breaches its obligations. In such instance, there is no need to file a termination lawsuit nor the need to obtain a judgment establishing such termination.

However, the Debtor may contest such termination by filing a lawsuit before the competent court to prove that it executed its obligations, and thus demand non-application of the termination clause stipulated in the agreement. In such an event, the judge shall assess the Debtor’s non-performance. In the event that the judge establishes non-execution by the Debtor of its obligation(s), it shall render a termination judgment. The judgment rendered shall be a confirmative judgment, in other words, the termination shall be deemed valid from the date of the official notification sent by the Creditor to the Debtor informing it of such termination.

4.????Fourth Degree: the Agreement Shall Be Terminated Ex Officio Without the Need of A Court Order nor An Official Notification

The fourth degree is the strongest among the termination clauses in terms of its effect. Under this degree, the agreement shall be terminated once the Debtor fails to execute its obligations as per the agreed terms, without the need for notification from the Creditor nor file a termination lawsuit, except for confirming the application of the termination clause if needed.

In case a termination lawsuit is filed by the Creditor and accepted by the Court, the judgment shall be deemed confirmative and has no impact on the occurrence of the termination.

The fourth-degree of termination clause is most common in bilateral commercial agreements for the following reasons:

·??????It is legally the most powerful, as termination occurs at the time that the Debtor breaches its contractual obligations, without the need of a notice nor court order;

·??????It is practically the most efficient, as it saves time and money for the Creditor; and

·??????It protects the Creditor from a default by the Debtor in a bilateral agreement.

In light of the above, we strongly recommend parties to pay attention to the drafting of the termination clause in agreements, noting that a poorly drafted termination clause may have dram

[1] Cassation 14/10/2006 Challenge No.10733 of the judicial year 75