Wednesday, August 5, 2009

FAQ: When is a Contract Formed?

When entering into contracts in Oman, complications may arise when the parties begin performing the obligations under a “contract” while the final terms are still being negotiated. What happens under Omani law when a dispute arises over the incomplete “contract”? When does a contract become a contract that is binding on both parties?

In some cases, the Oman Court (or arbitrator, if there is an arbitration clause) will be willing to impute the existence of a contract even when the parties do not have a signed agreement. For example, if an employer in Oman does not sign a written contract with his employee, the Oman Courts would still impute a contractual relationship based on evidence such as pay slips, or transfers made regularly to the employee's bank account by the employer.

In a more standard commercial context where two parties have a substantially negotiated but unsigned agreement, or even a verbal agreement that is never fully formalized in writing, the answer is not as clear. In these cases, the Oman Courts will most likely look to any documentation pertaining to the deal in deciding whether there is a contract. This is in accordance with Oman’s Commercial Code which states that contracts “may be proven by all means of so doing...”, and not only through a signed agreement.

The Oman Courts may recognize the existence of a contract, even though there is no final written agreement signed by both parties. The Court should recognize the contract based on exchange of letters, or on verbal offer and acceptance, or on the mutual trading conduct of the parties.

The ability of an Oman Court to recognize a contract is supported by Article 89 of Egypt’s Civil Code, which states that a contract is created from the moment that two persons have exchanged two concordant intentions. Article 90 of Egypt’s Civil Code adds that an intention may be declared verbally, in writing, or by conduct. The Egyptian Civil Code is the bedrock of Arabic legal justice and is heavily influential in Oman.

Nonetheless, despite the ostensible security afforded by the Egyptian Civil Code, parties seeking to prove the existence of a contract or finalize an agreement should seek legal advice. At a minimum, it is important for the party seeking to prove the existence of a contract to detail in writing to the counterparty, on a contemporaneous basis, those elements which have been agreed upon. In this respect, it is noteworthy that Oman’s Supreme Court has ruled that silence can amount to consent. In other words, uncontested letters can prove vital in dispute resolution scenarios.