Wednesday, May 5, 2021

Good Faith: English Law v the Oman Civil Code


The English courts’ historic reluctance to imply a term of good faith into agreements negotiated between two commercial parties at arm’s length is well known and is based on the long-established doctrine of freedom of contract. In contrast, in civil law countries, such as Oman, performing obligations in a manner consistent with good faith is a fundamental part of the contract.

Those working with international contracts, particularly construction standard forms such as those in the FIDIC suite, need to keep these very real differences in mind as they can have a significant impact on how some provisions operate in practice.

Summary of recent English case law on good faith

A series of English cases on good faith in early 2013, notably a High Court judgment in Yam Seng Pte Ltd v International Trade Corporation Limited, had raised the prospect that the English courts may be on their way to recognising an overarching duty of good faith, but this prospect now seems to have receded.

Several subsequent judgments have made it very clear that the English courts are not ready to imply a general doctrine of good faith. The judgment of the High Court in Yam Seng appears to have been sidelined (if not directly overruled) by the Court of Appeal, and in later cases.

If the parties want to have an express duty of good faith, they need to create one and they should think very carefully about its scope. The English courts will not allow good-faith-type wording to overrule an absolute contractual right such as the right to terminate for convenience. The parties will need to expressly provide that a good-faith obligation operates in relation to such a provision.

Good faith in Omani contracts

In most jurisdictions in this region, including Bahrain, Kuwait, Qatar and the UAE, the parties to a contract are expressly required by terms of their respective civil codes to perform their contractual duties towards each other with good faith. For example, article 246 of the UAE Civil Code provides:

“The contract must be performed in accordance with its contents and in a manner consistent with the requirements of good faith.”

This in effect is a requirement not to use the terms of a contract to abuse the rights of the other contracting party, not to cause unjustified damage to the other party and to act reasonably and moderately. 

Even though the Oman Civil Code (Sultani Decree 29/2013) contains no equivalent provision, Omani lawyers generally accept that, as a matter of Omani jurisprudence, an identical principle applies in the Sultanate.

So, can the doctrine of good faith be used as a tool to adjust, erode or dilute the effect of clear contract terms? Simply put, no. If good faith could override contractual terms, that could leave parties uncertain as to whether or not adherence to an agreed (but onerous) term is mandatory. It would undermine the fundamental principle of contract law that the contract means what it says. Article 155 of the Oman Civil Code provides that a contract is the law of the parties and (except in very limited circumstances) prevails over all else. As such, parties are bound by the terms to which they have agreed, and the duty of good faith does not alter their contractual rights or obligations. Indeed, it could be argued that a party seeking to circumvent agreed terms through the application of a good-faith argument may itself not be acting in good faith in seeking to do so! 

An act of bad faith by one contracting party may provide a cause of action for the other, and the duty of good faith is therefore overarching, unlike at English law. In deciding whether an act constitutes bad faith the court may also look at article 59 of the Oman Civil Code which provides that a party is prohibited from exercising its rights if: 

  • it is intended to infringe the rights of another party; 
  • the desired interest is unlawful;
  • the gain is disproportionate to the harm that will be suffered by the other party; or 
  • it exceeds the bounds of custom or practice.

There are some potentially wide-ranging ramifications of this, including:

  • Good faith is most likely to be applied to evidence, or to support, an allegation of breach. Where, for example, building materials are found to be defective a breach will be easier to establish if there has been some attempt to conceal this or cover up the materials once incorporated into the works.
  •  Reliance on a time bar notice (e.g., FIDIC’s clause 20.1) is likely to be restricted where a party seeking to rely on it knew about that breach previously (for example, if notification of the claim was made informally and is recorded in meeting minutes or similar but was never formally made). In other words, denying a claim due to the time bar when it had already been communicated, albeit informally, would be an act of bad faith. 
  • Avoiding liability for a very substantial claim due to a time bar may also be unlawful where the losses were serious and unequal with the employer’s contractual claim to be notified in a required time period (for example, 28 days under clause 20.1 of the 1999 FIDIC contracts). Article 59(1) of the Oman Civil Code provides that “a person shall be held liable for an unlawful exercise of his rights” and this, together with the good-faith obligation, may be used to challenge the effectiveness of a time bar in such circumstances. 
Whilst the Oman Civil Code does provide (in article 267) that parties may fix a pre-agreed compensation mechanism or amount in their contract, the court may also vary the pre-agreed amount of compensation or damages to equal the actual loss in any event, regardless of whether there was any “act of prevention” on the part of the employer.

  • Good faith is also applicable in relation to termination for convenience clauses although it is worth noting that the duty of good faith is not applicable to the obligation itself but to the performance of the obligation. Accordingly, the parties’ agreement that the employer may terminate the contract for convenience is a valid agreement and the Oman courts will normally uphold this. Although this employer’s right might be looked at as contradicting the good-faith principle, it would be an enforceable contract term as it was freely entered into.
However, if the employer relies on this contract provision to terminate the contract in circumstances that give rise to performing the contract in a manner that is inconsistent with good faith, then the court might have a different view.

 For example, if the contract provides for termination for convenience and limits the liability of the employer to compensate the contractor for the work done until the date of termination, but excluding mobilisation cost, the employer who terminates the contract for convenience immediately after mobilisation and before the contractor has done any work is performing the contract in bad faith. In this case, the contractor might rely on article 59 (abuse of right) and 267(2) (claiming actual loss) of the Oman Civil Code to recoup its losses.