Thursday, April 23, 2015

Managing Contract Risk - Preparing for the Worst

In this fifth and final part of our ‘managing contract risk’ series we consider contractually minimizing risks for when things go wrong or, making sure to be in the best position in case the contract cannot be performed.

Although some contracts may seem to be complex, their rationale is relatively straightforward: they reduce the agreement of the parties into writing (and are, therefore, evidence that the parties have entered into a legally binding relationship); and, importantly, sets out the terms of the parties’ obligations in the performance of the contract.

A written contract also meets the purpose of facilitating the best bargain obtainable between the parties.

Most importantly, a contract is enforceable once it has been signed and the parties commence the performance of their respective obligations under it.

It is of critical importance that the relevant contract manager, contract holder or project manager is well aware of the terms agreed between the parties as set out in the contract. He/she should execute the contract in order to make sure that all benefits under the contract are fully realised and, further, that all potential risks inherent in the project are fully understood. Failing to know how the contract “works” is considered to be one of the main reasons why parties end up in litigation.

Contract management specialists in most cases prepare for the worst case scenario by having thorough understanding of, give careful consideration to, and include terms in the contract covering the following question:

  1. What should the governing law of the contract be?
  2. Who has jurisdiction to deal with any disputes arising between the parties which they cannot resolve themselves?
  3. How can the parties terminate the contract, if it comes to that, and what is the resulting effect of doing so?

Governing law and jurisdiction

Governing law and jurisdiction are usually covered in the same clause of a contract although they are two separate and distinct subjects, which can involve some complex issues of law. The reason why they are included in the same clause is because they are invariably inextricably linked and are, therefore, usually considered together (as is the case in this article).

However, it is vital that those entering the contract actually give full and thorough consideration to these two issues as getting it wrong (which unnecessarily happens time after time) usually results in long drawn out and costly side arguments between the parties before the real reason why the dispute has arisen is actually substantively addressed and, subsequently, determined.

Governing law

An important issue (although not the only one) when considering which law the contract should be governed by is which law is considered to be the most favourable or appropriate to the parties and the particular project to be performed by them.

In order to explain why, take the following example.

In many major utility projects being undertaken in the Sultanate today, particularly Engineering, Procurement & Construction (EPC) Contracts, it is usual to find English law expressed by the parties as being the governing law of the contract.

The reasons are many, a few of which include: the parties (usually international) are ‘comfortable’ with English law; English law has ‘been around for a while’ and, therefore, considered to be ‘established’ (although, that said, English contract law is always considered to be ‘in a state of flux’); and the drafting of such technical contracts have developed considerably under English law.

However, is English law most favourable to the local contractor tasked to build the office administration block for the power and water plant, and to do so within a tight deadline?

In such circumstances, if you were the local contractor, would you readily agree to English law as the governing law of the contract?


And what about jurisdiction? Would you want to have to commence an action in the High Court in London over a payment dispute?

Without delving into the intricacies and specifics of international law and its conflicts one should always keep in mind where the resulting judgment or arbitral award will be required to be enforced against the other party.

This is an important question to answer when deciding upon jurisdiction because, unless there is an ‘agreement’ between courts of different jurisdictions or between governments of the two relevant jurisdictions which have specifically agreed to reciprocally acknowledge and enforce the other’s judgments (UAE and France, for example) or, in relation to arbitration awards, those countries which have ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, such judgments or awards are unlikely to be enforced in the foreign jurisdiction in which the defaulting parties’ assets are located or held.

So, it is considered imperative that the parties appreciate which jurisdiction to agree to and why: the courts of either one of the party’s jurisdiction; or arbitration elsewhere, for example? The law of those jurisdictions will then come into play, particularly with regard to procedure of how the claim is to be pursued and, as mentioned above, the enforcement of the resulting judgment or award.


Prior to the enactment of the Oman Civil Code in August 2013, there was a great deal of debate between lawyers and jurists as to whether, in order to terminate contractual relationships, the parties were required to seek the permission of the court in the form of an order. The accepted position was that it was considered likely so but, in practice, a party would proceed to terminate a contract and, were it aggrieved at such termination, the terminated party would commence a claim before the courts where the defendant could then seek the court’s agreement retrospectively.

The Oman Civil Code provides a far more modern approach on the issue of termination. Article 167 provides that (as translated):

“If the contract is valid and binding, neither of the contracting parties may terminate or amend thereof, save by mutual agreement or litigation.”

In other words, if the contractual terms are silent as to termination, the parties will be required to seek the permission of the court to terminate.

As such, comprehensive termination provisions should always be included in contracts. Such terms should include how each party can terminate the contract and upon what basis as well as what the desired outcome will be for both parties.

Further, Article 173 of the Civil Code provides that (as translated):

“If the contract is terminated automatically or by the parties, the two contracting parties shall return to the state that they were before the contract was made but rights resulting from same shall be performed, and if that is not possible, compensation shall be ordered.”

As such, it is now generally accepted that the termination of contracts is not limited to in circumstances where a party has a just reason for doing so, termination for cause. An agreement for termination for convenience, where the parties agree what is, and how to calculate, a reasonable level of compensation for so doing, is considered to be a valid termination under Oman law.

With regard to the Civil Code, and returning briefly to the proper law of the contract agreed between the parties, it should be noted that most of its provisions are considered to be matters of public law (public order/policy) and, as such, are mandatory. Accordingly, such mandatory provisions of Oman law will override any applicable foreign law provisions expressed to the contrary. This is so regardless of the general Oman law position that allows for the freedom of the choice of law in contracts.

Conclusion to the Managing of Risk in Procurement Contract series

Getting it right

The fundamental point in managing contracts for contract management and procurement specialists is that a clear and detailed understanding of the particular contract is required. In addition, full, frank, transparent and concise understanding by both parties as to the specific contractual terms is essential in order for risk to be minimised and to ensure the smoothest operation of the performance of the contract as possible.

In order to make sure that all your contracts perform as required you should be obtaining as much information as possible by asking questions, such as:

  1. How often are your standard contracts reviewed and, what do you discover and ascertain from such a review?
  2. How do you obtain, and from what source, the required information to manage your suppliers and sub-contractors?
  3. How do you monitor and contractually manage matters such as: price increases; quantity adjustments; variations; and scope creep throughout the life of the particular project which has altered the particular contract?

The experience gained on each contract allows a business to continually develop by fine-tuning its contract management and procurement activities and strategies which, in turn, places the business in a highly competitive position to secure and efficiently perform future contracts.