Monday, December 18, 2017

Key Differences between English and Omani Contract Law


Many of the corporate lawyers advising on cross-border transactions in the Sultanate of Oman will have been trained in common law jurisdictions. Often such transactions will be governed by English or New York law, irrespective of the origin of the parties involved. Occasionally, however, the relative bargaining power of one of the parties may result in the contract being governed by Omani law. And certain contracts must, by law, be governed by Omani law.

Common law practitioners should be wary of a number of pitfalls regarding instances in which Omani law differs significantly from English law and that of other common law jurisdictions. Below we set out some of the more common examples:

1. Agreements to agree

Under English law, agreements to agree are not generally enforceable (Associated British Ports v. Tata Steel UK Limited [2017] EWHC 694 (Ch)).

The position is very different under Omani law. Under Article 79 of the Civil Transactions Law promulgated by Sultani Decree 29/2013 (the “Civil Code”), the parties may agree on the essential elements of the contract, but leave matters of detail to be decided later.

However, in the event of a dispute the court may, unless the parties have stipulated that the contract shall not be regarded as having been entered into in the absence of agreement upon such matters, rule that the contract has been concluded.

Further, the court may adjudicate on any missing terms in accordance with the nature of the transaction, the provisions of the law, and custom.

In Oman, the matter is further complicated in that the courts may rule that a party has failed in its obligation to perform in good faith if it hasn’t taken sufficient steps to reach final agreement with the other party.

In contracts to be governed by Omani law, the parties would be advised to include terms clearly providing that Article 79 of the Civil Code is not intended to apply until the agreement has been duly executed.

2. Misrepresentation in Omani law must involve fraud

“Misrepresentation” is a concept of wide importance in common law jurisdictions. In English contract law and tort law, a misrepresentation is a false statement of past or present fact made by one contracting party to another, which has the effect of inducing the other party to enter into a contract. 

It is often used as an alternate cause of action to breach of contract, because the remedies for a successful claim for misrepresentation are different from those available for breach of contract. Importantly, among the possible remedies for misrepresentation is rescission, where the contract is annulled and the parties restored to the position they were in before the contract was entered into.

Misrepresentation, under English law, does not necessarily require intent to deceive. “Negligent” and even “innocent” statements may constitute misrepresentation if they are false and their effect was to induce the other party into the contract.

Entire agreement clauses in common law jurisdictions typically aim to exclude liability for misrepresentation, but carve out liability for fraudulent misrepresentation. In other words, the parties agree not to claim for “negligent” or “innocent” misrepresentation in connection with the agreement, but also state expressly that they are not seeking to limit or exclude claims for fraudulent misrepresentation.

Such distinctions are not, however, meaningful under Omani law. Article 103 of the Civil Code defines misrepresentation as follows:

Misrepresentation is when one of the two contracting parties deceives the other by means of trickery of word or deed which leads the other to consent to what he would not otherwise have consented to. Deliberate silence concerning a fact or set of circumstances shall be deemed to be a misrepresentation if it is proved that the person misled thereby would not have made the contract had he been aware of that fact or set of circumstances.

Omani law does not recognise negligent or innocent misrepresentation: there must be an intention to deceive. The onus is on the party alleging misrepresentation to establish that (a) they were deceived by the misrepresentation; and (b) the deception was intentional.

Accordingly, the wording relating to misrepresentation in standard entire agreement clauses should be drafted bearing in mind the more narrow definition of the term under Omani law. Any attempt to limit or exclude liability for negligent or innocent misrepresentation would be at best superfluous and at worst confusing; and any attempt to exclude liability for fraud would be void under Article 183 of the Civil Code.

3. Liquidated damages 

Liquidated damages clauses are used in common law jurisdictions to protect a party’s “legitimate interests” and are generally enforceable so long as the “penalty” stipulated is not exorbitant or out of proportion to the interests the party is trying to protect (Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67).

Article 267 of the Civil Code deals with liquidated damages as follows:

(1) If the subject matter of obligation is not a sum of money, the contracting parties may determine the amount of compensation in advance by making a provision of same in the contract or in a subsequent agreement. 

(2) In all cases, the court may, upon the application of either of the parties, amend such agreement to make the compensation equal to the damage, and any agreement to the contrary shall be null and void.

Article 267(1) determines that the contracting parties may agree to a liquidated damages amount but Article 267(2) gives certainty to the generally accepted position that, regardless of the liquidated damages amount included in the contract, the Omani courts are specifically permitted to re-open liquidated damages clauses and adjust the amounts so that they are commensurate with the value of the actual damage incurred.

 Article 267(2) is obviously in direct conflict with the freedom to contract for which Oman has previously been well known. However, this provision of the Civil Code merely follows established precedent applied by courts of the UAE, Qatar and Saudi Arabia who all take a similar position in that they are also not opposed to re-opening pre-agreed liquidated damages clauses.

4. Good faith 

Good faith under Omani contract law can be interpreted as a requirement to act reasonably and moderately, not to use the terms of a contract to abuse the rights of the other contracting party, and not to cause unjustified damage to the other party.

In Omani law an act of bad faith by one party may constitute a cause of action for the other party to the contract. Accordingly, the duty of good faith is overarching, in contrast with the position at English law.

Under English law the extent of the obligation depends on the context and how explicitly it is defined. However, it is clear that the English courts are reluctant to construe a good faith obligation as imposing a positive obligation on a party to act against its commercial interest, or to give precedence to such an obligation over an express contractual right.

5. Indemnity 

The Arabic language – and consequently Omani law – does not distinguish between the terms “indemnity” and “compensation.” Consequently, an obligation on one party to a contract to indemnify the other in specified circumstances is not likely to provide a full indemnity in the English law sense of the term.

This difficulty should not be insurmountable, however, and it ought to be possible to achieve the effect of an indemnity by explaining carefully how the concept is intended to work in the relevant provisions of the contract.

6. Termination for convenience 

Typically, under English law there are no restrictions on one or more parties being allowed to terminate a contract “for convenience” or “without cause.”

However, under Omani law, Article 133 of the Civil Code suggests that the inclusion of such a provision would render the contract voidable:

A contract shall not be binding on one or both of the contracting parties despite its validity and enforceability if it contained a condition that such party may terminate it without mutual consent or legal proceedings. Either party may act unilaterally in terminating the contract if by its nature the contract is not binding on him or if he reserved to himself the right to terminate it.

In the UAE, there is an exception to this principle, but only in relation to “muqawala,” or construction, contracts.

A recent UAE Court of Appeal judgment, citing the Egyptian Civil Code, ruled that employers in construction cases could be entitled unilaterally to terminate a contract, on the grounds that “muqawala contracts often take a long time to complete and circumstances may change in the period between contract formation and completion of the contract work.”

No such exception exists in Omani jurisprudence. In the section of the Civil Code dealing specifically with muqawala contracts, Article 646 provides:

A contract of muqawala shall terminate upon the completion of the work agreed or upon the cancellation of the contract by consent or by order of the court.