COVID-19 And Lease Agreements Under Oman Law

Contractual force majeure


Under Omani law, parties are generally free to agree the contractual terms that will govern their relationship, so long as there is no conflict with a mandatory provision of Omani law or any contravention of public order or morals. The concept of force majeure is recognised and judicially well understood in Oman, and force majeure provisions are commonly included in commercial contracts in the region. In general terms, parties should expect that express contractual force majeure provisions, which may include exhaustive or non-exhaustive definitions of the scope of a force majeure event (that could potentially encompass epidemic or pandemic scenarios), will be enforceable in contracts governed by Omani law. Similarly, contractual notice requirements that must be satisfied before force majeure can be relied on will usually be upheld.




As it pertains to COVID-19, any broad force majeure clause language should apply as it is unlikely any court would decide that any tenant caused COVID-19. Many force majeure clauses specifically include "epidemic" or "pandemic" in its laundry list of qualifying events. Even without that specific reference, COVID-19 should qualify under most force majeure clauses, owing to the government-imposed travel bans and quarantines.




Tenants could have trouble proving damages if business was already down. Omani courts require the party claiming force majeure to show that the event was (a) not foreseeable; and (b) directly caused the failure to meet its contractual obligations.




As in any lease matter, strict compliance with the technical requirements of the lease may be necessary for a tenant to invoke a force majeure clause. Typically a lease requires prompt notice of a claim of force majeure. Several courts have refused tenants’ force majeure claims when they failed to provide adequate notice under the lease.




A common and particularly controversial clause in situations such as the present is one that contains wording along the following lines:



"Nothing in this Section, however, shall excuse Tenant from the prompt payment of any Rent or the obligation to open for business on the Commencement Date."




The intention of the parties appears to be that a tenant may be excused by force majeure of complying with a continuous operation clause in the event of a pandemic, but it still must pay rent. Under the current circumstances, one could perhaps try to make an argument that these clauses are unenforceable because they are unconscionable and against public policy.




Statutory force majeure


In the absence of (or supplementing) express contractual force majeure provisions, Sultani Decree 29/2013 Enacting the Civil Transactions Law (the "Civil Code") contains several articles that provide for relief in the case of force majeure and other exceptional circumstances. Unlike common law jurisdictions, where force majeure may result in the suspension of contractual obligations, the default consequence of establishing force majeure in Oman is termination.



Article 172(1) of the Civil Code provides that if a force majeure event supervenes that renders performance of a contract impossible, all contractual obligations will cease and the contract will be automatically cancelled. Under Article 172(2), in cases where the force majeure event renders only part of the obligations impossible to perform, only that part of the contract will be extinguished and the remainder will continue in effect. Article 172(2) permits the obligor, in respect of the partially impossible obligation, to cancel the entire contract on giving notice to the obligee. If a contract is cancelled under either Article 172(1) or 172(2), the parties are to be restored to the position they were in before they entered into the contract; if that is not possible, damages may be awarded by way of compensation to a party that has suffered a loss as a result of the inability to unwind the contract.

Even though Articles 172(1) and 172(2) of the Civil Code do not require notice to be given to effect cancellation of a contract (and Article 549 is silent on notice), a party seeking to rely on the Civil Code in force majeure circumstances would be well advised to provide notice of cancellation to its counterparty in order to avoid any allegation of breach of the general obligation under the Civil Code to perform the contract consistent with the requirements of good faith.

Article 177 of the Civil Code provides that:



"If a person can prove that a loss proceeded from an extraneous cause in which he played no part, such as a natural disaster, an unforeseeable accident, force majeure, an act by a third party, or an act by the injured party, he shall not be liable for compensation...."




In other words, a defendant will not be liable to compensate a claimant if he can show that the loss at issue was the result of an external cause in which he had no hand, such as an unforeseeable accident, or an act of (a) God, (b) a third party, (c) force majeure, or (d) the claimant himself.



Article 159 of the Civil Code provides that if exceptional circumstances of a public nature that could not have been foreseen occur, as a result of which performance of a contract becomes oppressive for a party, but not necessarily impossible, the judge (or arbitral tribunal in an arbitration) has discretion, after weighing the interests of each party, to reduce the obligation to a reasonable level if justice requires it. It is necessary for a party to commence court or arbitral proceedings if it seeks to obtain relief under Article 159. Unlike the Civil Code provisions that concern force majeure, the operation of Article 159, which is equivalent to the hardship doctrine available in other jurisdictions, does not result in the termination of the contract.




Although the Civil Code refers to force majeure and exceptional circumstances as the basis for relief from performance of contractual obligations, it does not provide any definition of what constitutes force majeure or exceptional circumstances. The starting point for any analysis of whether COVID-19 may constitute a force majeure event or exceptional circumstance is the contract in question and, in particular, whether there are any definitions that could encompass an epidemic or pandemic scenario. If the contract is silent or unclear, then it will be for the court or arbitral tribunal to determine whether the existence and effects of an epidemic or pandemic constitute force majeure or exceptional circumstances in the context of the Civil Code.



Omani courts have held that it was a settled principle that the determination of whether an “extraneous cause” (i.e., an event that was not caused by the parties) could permit a party to a contract to avoid liability was within the sole discretion of the court (or arbitral tribunal). To the extent that the effect of an epidemic or pandemic could be said to be a normal commercial risk that could be caused by other, less serious circumstances, this might be said to tend against a finding of force majeure. However, while a finding of force majeure can be a close call in, for example, weather-related natural disasters, it is hard to imagine a pandemic resulting in mass closures of all public events and schools being considered to be a close call. This is not a normal “risk of doing business.”




Summary




If the lease agreement in question does not contain a force majeure clause that could be invoked by the tenant in respect of COVID-19, it will be necessary to fall back on the statutory provisions in the Civil Code dealing with force majeure and/or "exceptional and unforeseeable circumstances of a public nature."



Omani courts have interpreted force majeure clauses very narrowly, stipulating that for an event to qualify as force majeure it must make performance of the contract literally impossible, unforeseeable and uncontrollable. An event judged to constitute mere hardship or uneconomic balance between the parties to a contract would not be sufficient.




Should the tenant be unable to argue that COVID-19 constitutes force majeure for the purposes of Article 172, it may be able to fall back on either Article 177 or Article 159, each of which provides for more nuanced relief than restitutio in integrum (as provided for by Article 172, set out above). If the tenant can show that its inability to pay a part of the rent owing to COVID-19, whether it qualifies as an "extraneous cause" for the purposes of Article 177 or as an "exceptional and unforeseeable circumstance of a public nature" for the purposes of Article 159, then the courts have the discretion either (a) to write off the loss to the landlord, if applying Article 177; or (b) to reduce the tenant’s obligation to a reasonable level, if applying Article 159.




At this stage, it is difficult to predict how the courts in Oman (or arbitrators considering contracts governed by Omani law) will deal with force majeure and the exceptional issues raised by COVID-19.




A key issue will be when the impact of COVID-19 is deemed to have become foreseeable. Was it 31 December 2019 when the WHO first warned of the threat of COVID-19? 30 January 2020, when the Director-General of WHO determined the outbreak of COVID-19 to be a Public Health Emergency of International Concern? Or 11 March 2020, when the WHO declared it a pandemic?


Tenants who entered into leases after the effects of the virus became foreseeable – whenever the courts deem that to be - will find it harder, if not impossible, to rely on the statutory provisions above.