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Omani Law of Contracting and Damages

Heinrich Köllisch

Author: Heinrich Köllisch

Guiding Principle
Contracting has been a major focus of foreign companies in the Sultanate of Oman. The project market in the country provides a steady source of activity to many foreign companies active throughout the Middle East.

Hence, in the framework of lex arabiae’s series on articles about the Sultanate of Oman we take the opportunity to shed light on the contracting structures of Omani law. These have been subject to major changes some time ago as Oman decided to shift its civil law from sharīʿa to a civil code system in 2013.

As part of the same reform, the general law of damages was incorporated into the civil code removing it from sharīʿa and giving it its own legal basis. As the system of damages frequently is a core subject in any kind of legal system and contractual relations, we incorporate it into this article and show its interdependency to contractual relations.

A. General
During his reign in the Sultanate of Oman, Sulṭan Qabūs initiated a number of legal reforms especially by continuously codifying laws and thus replacing Islamic religious law (sharīʿa) in practice. Amongst these codifications are the Commercial Companies Law of 1974 (CCL), the Commercial Law (CL) introduced by Sultani Decree 55/1990 and most recently the Civil Transactions Law (CTL) introduced by Sultani Decree 29/2013 issued on May 6, 2013 and entered in force three months after publication.

The CTL is the Omani Civil Code that comprises a general part, the general and special law of obligations and property law. Family and inheritance law are codified in different laws. The CTL is largely modelled on the example of the Emirati Civil Transaction Law from 1985.

Since its enactment, the CTL contains:

  • the general principles of obligations including the conclusion and rules of contracts (Art. 66 et seq. CTL.),
  • the regime of damages (contractual in Art. 264 et seq. CTL and torts/delict as well as some general rules in Art. 176 et seq. CTL),
  • the general rules for limitation of claims (Art. 340 et seq. CTL) and
  • a number of standard contracts amongst them the Works Contract (muqāwala) in Art. 626 et seq. CTL.

As special law for merchants, the CL might overrule some stipulations of the CTL for commercial transactions.

B. The Works Contract (muqāwala)
In the context of common law and English language legal terminology, the description of the contract in context here resembles special challenges. Whereas most civil code systems do have a defined term of a contract for specific work to be completely performed in consideration for monetary remuneration, Common Law mostly uses the term “Contracting” for these kind of activities. This however, leads to the challenge to differentiate between contracts and contracting in general and the specific contract outlined above. Therefore, we chose to make use of the term “Works Contract” (muqāwala) in the context of this article. This short example can also illustrate how difficult it sometimes can be to employ common law concept in a civil law environment like the GCC and how many difficulties it might embody for only English speaking common law qualified lawyers to actually assess communicate and develop these kind of concepts.

Art. 626 CTL defines a Works Contract (muqāwala) as a contract (ʿaqd) based on which the contractor of the Works Contract (muqāwil) produces a good (shay) or completes a service (adā’ ʿamal) in consideration for remuneration. The main differentiation to a Service Contract (ʿaqd ʿamal) as per Art. 651 CTL is that the latter has the delivery of a service (yaqūm bi-ʿamal) as its object, which will occur in another person’s interest and under supervision.

I. Conclusion of the Works Contract (muqāwala )
In basic, Omani law needs three elements for a valid contract: consent (riḍā), object (maḥall) and cause (sabab). Consent consists of coherent offer and acceptance in correct form. Concerning the Works Contract (muqāwala), no special stipulations about contractual form have been made. As per Art. 627 CTL, it can be agreed that the necessary materials for the Works Contract (muqāwala) may be provided by either party and the obligation of the contractor reduced to its work only. As however, the law does not state one of these options as the rule and one as the exception, it is advisable to include these regulations in the contract. Furthermore, Art. 628 CTL states it as mandatory to individualize (taʿyīn) the object of the contract by outlining the features and kind, the way it should be worked, the time in which it should be completed and its remuneration. In case the contractor provides the material, it is recommended to outline its features in quality and quantity in the contract.

II. Relevant Duties in the Contractual Relation
The contractor is especially obliged to complete the work as per the conditions of the contract and in the given time (Art. 631 CTL). In case the material has to be provided by the contractor, it has to be provided in the way outlined in the contract or as the incumbent custom prescribes (Art. 629 Para. 1 CTL). If the material is provided by the ordering party, the contractor has a contractual duty to guard and treat it with the necessary professional care (Art. 629 Para 2 CTL). By default, the contractor is requested to provide tools and means for his work (Art 630 CTL).

On the other hand, the ordering party is obliged to accept the handover of the ordered work (Art. 638 CTL) and to pay the agreed price (Art. 639 CTL) Moreover, Art 640 et seq. CTL provide for a number of rules allowing to deviate from the agreed price in specific circumstances and setting a default price for the work.

III. Sub-Contracting
Unless conditioned by the kind of the work itself or by an agreement, Art. 644 Para. 1 CTL allows for the contractor to make use of sub-contractors wholly or in part. However, this does not relieve him from any responsibility (Art. 644 Para. 2 CTL). The subcontractor himself is by default not entitled to approach the ordering party directly (Art. 645 CTL) for any claims.

C. Applicable Regime of Damages – Especially Liquidated Damages
Omani Law differentiates between two different kinds of liability: contractual and tortious/delictual liability. A special case might be argued for certain cases of strict liability (ḍamān) that might be triggered by the conclusion of a specific contract but has legally prescribed consequences.

In general, Omani law follows the French model of a strict separation between contractual and tortious/delictual liability, meaning that a specific occurrence can only be subject to one or the other.

I. Strict Liability
The above mentioned type of strict liability special to the contractor of a concluded Works Contract (muqāwala) can be found in Art. 632 et seq. CTL. Art. 636 CTL clearly states that any contractual condition easing the liability of the contractor or engineer as per the preceding Articles is considered void. The general rule of strict liability is stated in Art. 632 CTL by stipulating that the contractor guarantees for whatever damage or loss results from his services or works, however this liability finds its limits in case of results that cannot be checked out (in advance).

Art. 634 Para. 1 CTL establishes a joint strict liability for the engineer and the contractor of a building or fixed structure for ten years from its handover (Art. 634 Para. 3 CTL) in case of a full or partly collapse thereof. This liability is excluded in case of the reason for the destruction resulting from the ground itself or if the ordering party approved the structure or building and unless the construction has been intended to exist for less than ten years. This includes a strict liability for any defects resulting in a threat to the strength/durability of the building or its integrity (Art. 364 Para. 2 CTL).

In case of an engineer who is assigned to design the building only without a supervision duty in execution, his liability is limited to faulty design. Claims from strict liability as outlined above are limited to be heard by the courts for a period of three years from the time the collapse of the building or the discovery of the fault or defect (Art. 637 CTL).

II. Contractual Liability
Apart from the strict liability outlined above, contractual covenants and obligations are subject to standard contractual liability.

In the case of a termination of a Works Contract (muqāwala) the party suffering from damages due to termination/withdrawal of the other party, will be entitled to damages as per applicable customs (Art. 650 CTL). The damages can be material and immaterial, but have to be proved by the damaged party.[1]

The CTL establishes a default of contractual liability for several constellations. The most prominent one of them, enshrined in Art. 264 CTL, establishes a liability for cases of inability to perform an obligation in kind as long as there is no external reason outside the obligee’s control for the nonperformance. The same applies for any delay in performance. Both kinds of liability require a legal notice by default of the law (Art. 265 CTL). Art. 266 CTL lists cases that exclude the necessity of a legal notice the most relevant for them are in case of impossibility or loss of purpose, in case the obligee knows of the object of the contract to be stolen or to be acquired without legal base, and if the obligee states in writing that he is not willing to perform. The parties can agree to relief the obligor from his notification duty in writing either in the contract itself or subsequently and vis-a-vis a certain object of the contract or not.[2]

Other reasons for contractual liability are set out in Art. 259 Para. 2 CTL stating that if the obligee does not perform his due service, the obligor is entitled to ask for a judgement for performance and in cases of necessity is even allowed to ask for performance without the judgment all on expense of the obligee.

If performance occurs based on a judgment or if the obligee insists to not perform, the court will determine the compensation to be paid to the obligor (Art. 263 CTL).

In case a contractual obligation is not an amount of money, parties can determine the amount in the contract or in a subsequent agreement (Art. 267 Para. 1 CTL). This would be the regulation of Omani law, closest to liquidated damages. However, as set out in Art. 267 Para 2 CTL, the court has upon request of one of the contractual parties full discretion to review the actual amount of damages and adjust the compensation accordingly.

The default method to calculate damages in these cases are to grant material and immaterial direct (mubāshir) damages. Direct damages in Omani legal scholarship and jurisdiction are defined as “natural outcomes of the damaging act” (Art. 181 CTL) or more precisely it does not include, what the obligor could reasonably not expect as damages. In principle, parties are free to reduce the amount of liability in a contractual context. However, this principle of freedom of contract seems to have its boundary at least in cases of intent and grave mistake/negligence (khata’ jasīm) as illustrated in Art. 261 CTL. Furthermore, the court might make use of its discretionary authority e.g. established by Art 267 Para 2 CTL as mentioned above in an extensive way. As per our knowledge of Omani judgements, this happens and the exact motives for the amount of damages found by the courts are rarely explained. On the other hand, the underlying principles of sharīʿa, that are frequently used to interpret the new CTL are very reluctant in granting damages that cannot be proved with a high element of certainty and contain a considerable element of speculation, as Islamic law does not allow speculation (gharar).

III. Tort/Delict Based Liability
Tort/delict liability covers all damages not causally based on a breach of a contractual obligation or covenant. In consequence, tort/delict liability has a far wider scope of application then in other jurisdictions e.g. Germany or Common Law. This is most clearly illustrated by Art. 138 CTL, stating that any condition easing tort/delict liability is void.

In general, Omani CTL follows an approach, where all damages caused to someone else must be compensated by the committing person (Art. 176 Para. 1 CTL).

Special regimes apply with regards to personal actions resulting in damages inflicted to body or life (nafs) (Art 186 CTL), destruction of assets (itlāf al-māl) (Art 187 et seq. CTL), conversion or assault on things (al-ghaṣb wa-l-taʿaddī) (Art. 191 et seq. CTL), responsibility for the actions of other people (Art. 196 CTL) and for animals or things (Art. 197 CTL) as well as when exercising public rights (al-ḥaqq al-ʿāmm) (Art. 200 CTL).

In general, if the damage happens by direct infliction (bi-l-mubāšara) it must be compensated even without any culprit element. If it only happens by way of causation (tasabbub) a culprit element in form of intent or negligence is required (Art 177 CTL) (c.f. CCTL Vol. 2, p 699).

The infliction can be a positive action or a refrain thereof, though the law only talks about the first one (c.f. CCTL Vol. 2, p 699). Furthermore, the word damage implicates that the infliction has to be illicit; however, it has been intentionally left open what kind of examples would be covered by this in order to leave this to the discretion of the concerned judge (c.f. CCTL Vol. 2, p 698 et seq.). The law nevertheless provides for a number of situations that would not be considered as damages e.g. cases outside control of the concerned person such as natural disasters, force majeure, sudden and unexpected happenings as well as interferences of third parties or the damaged himself (Art. 177 CTL). Additionally, states of legitimate self or foreign defence omit responsibility (Art. 178 CTL).

The damages in case of tort/delict liability would be calculated in accordance with the same principles as contractual ones, as most of the provision on damages are regulated in the tort/delict parts of the CTL and analogously applied to contractual damages. Therefore, the concept of direct damages as “natural outcomes of the damaging act” (Art. 181 CTL) applies in this context even more.

Tort/delict liability would usually be limited to claim after five years in accordance with Art. 185 CTL.

IV. Liability Related Aspects, especially Interest
Based on sharīʿa considerations, interest will only restrictively be granted under Omani law. One of the major exemptions can be made in the context of commercial transactions where loans or obligations can be subject to interest (Art. 80 CL). A loan would then be considered commercial, if it is taken by a merchant in connection with its business or for the purpose of using it in a commercial transaction (Art. 79 CL). The interest itself must be agreed upon by the parties (Art. 80 CL). The maximum applicable interest rate is determined yearly by the Ministry of Commerce and Industry in agreement with the Chamber of Commerce and Industry based on the term, purpose and risk of the credit (Art. 80 CL). Interest can be taken for a delayed payment during the period of delay (Art. 80 CL). Damages exceeding the interest can be claimed if the damaged person suffered greater damages. These damages will be estimated by the court (Art. 81 CL).

D. Termination/Withdrawal from the Contract
Shaped on an initially French model, Omani law still maintained the rule of termination/withdrawal from a contract either to be mutually agreed (Art. 169 CTL) or in case of mutually obliging contracts to be initiated by a judge in case of non-performance after legal notice (171 CTL). As per Art. 170 CTL, there is also the possibility to agree upfront in the contract upon certain situations, where the contract should be deemed self-terminating without the need for a court order. This however can only apply to situations of nonperformance of one of the contractual obligations and the party affected by this non-performance is not relieved from its duty to give legal notice. Practically speaking, a unilateral termination/withdrawal from a contract totally being subject to the discretion of the concerned party becomes possible by this institute. However, the situations when applicable must be put in writing in the contract and the notification procedure duly observed. As per our regional experience, courts also regularly put an emphasis on the contractual clause itself and can frequently be very formalistic about this.

As per Art. 90 CL commercial contracts can be structured including an option to cancel the contract (in remuneration for money). This is however limited in exercise to the point, where the party itself has started its own performance or accepted the performance of the other party.

Art. 646 CTL sets out that a Works Contract (muqāwala) will come to an end in one of the following cases:

  • Success
  • Termination/withdrawal either by agreement of the parties as well as by a judge’s order.

As per our understanding, the abovementioned way of self-termination should also be applicable here as well. Firstly, as an agreement on reasons for self-termination is an anticipated agreement demanded as per Art. 646 CTL. Secondly, as the termination/withdrawal regulations of the Works Contract (muqāwala) are just understood as an expression of the commonly applicable principles.[3]

E. Limitation of Claims
Like in most other jurisdictions, in Oman a right shall not be extinguished by limitation of claim but the claim will not be heard by a court if the other party will claim limitation (Art. 340, 353 CTL).

The general scheme of periods for limitation of claims as per the CTL contains three different intervals. The general interval is 15 years as long as no special other period can be applied (Art. 340 CTL). The general period of limitation of claims between merchants is ten years (Art. 92 CL). Another period of ten years will be applicable in cases of periodically recurring rights with the exception of benefits claimed due to possession in bad faith and certain rights in connection with religious foundations (waqf) which are subject to a period of limitation of 15 years.

The second period of limitations of claims is set at five years. It includes a number of claims e.g. remuneration and expenses of engineers and experts (Art. 342 No. 1 CTL) as well as unlawfully paid fees and taxes (Art. 342 No. 2 CTL) and any rights of merchants from commerce and industry given to persons not trading these objects (Art. 342 No. 3 CTL). Any of the aforementioned periods of limitation of claims will be extended to 15 years, if a written (muḥarrar) acknowledgement (iqrār) or title (sanad) with regards to these rights is issued (Art. 343 CTL). The begin of the limitation period is the day on which an obligation becomes due, a suspensive condition realizes or in case of an action on a warranty/guarantee, from the date its maturity is established (Art. 344 CTL). The default limitation period between merchants, starts with the day an obligation can be fulfilled (Art. 92 CL).

The limitation period can be subject to suspension (Art. 346 CTL) and restart (Art. 350 et seq. CTL).

It is forbidden to waive the possibility to defend by limitation of claims, before the respective right has been established; likewise it is forbidden to agree on a period of limitation of claims exceeding the legally established ones (Art. 354 CTL).

F. Summary
In general, it can be stated that since the introduction of the CTL, the general law of obligations in Oman as well as the Works Contract (muqāwala) have a new legal basis. This in parts has brought about a number of material changes to the direct application of sharīʿa utilized before. The increase in precision of legal provisions however has a number of limits.

The first of these is the large amount of discretionary authority given to judges with regard to the factual requirements of certain legal provisions as well as their legal consequences. As stated above, this is intended by the Omani legislator and legal precedent, though persuasive is difficult to establish in a number of cases, as judges would usually not give an in-depth written insight of how they were motivated to use their discretionary authority.

A second limit can be seen in the CTL being introduced after the CL. As in other jurisdictions in Oman a later law even implicitly repeals an earlier law. Thus, a number of rules that might even be explicitly or implicitly spelled out by the CL might now be overruled or repealed by the CTL. This becomes particularly true in respect of Art. 5 CL stating that where no legal text exists commercial law shall be governed by custom with the more precise custom and a locally common custom between parties overruling the general custom. Only if customs do not exist, sharīʿa would have to be applied. As per this Article a number of customs have been overruled by the change from sharīʿa to CTL. On the other hand however, special law also overrides the general law, so if a certain special custom between merchants exists within the scope of any of the matters tackled above, it might well be, that a judge would apply this in a special case rather than resorting to the CTL, or he might interpret the CTL in the light of this custom.

As the CTL is still relatively new, not all of these issues have been tackled or fully solved yet. The future evolution of Omani law in these very essential topics hence remain an issue of constant interest.

[1] c.f. al-Muṭawwal fī sharḥ qānūn almuʿāmalāt al-madanīya li-Salṭanat ʿUmān (CCTL) – Long Commentary on the CTL of the Sultanate of Oman Vol. 7, p 243

[2] c.f. CCTL, Vol. 3, p 391.

[3] c.f. CCTL Vol. 7, p 218 et seq.

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