The Civil Transactions Law, promulgated by Sultani Decree 29/2013 (the Code) will have implications for all types of business conducted in the Sultanate of Oman. The purpose of this bulletin is to provide a brief overview of the potential impact of the Code in relation to commercial banking and finance transactions. In our previous bulletin we touched upon an introductory overview of the Code and that article can be accessed here.

We are of the view that the applicability of the Code is limited to a large extent by Article 1 of the Code, which provides that where an issue is governed by "special" laws , (which in our view includes pre-existing laws such as the Banking Law and the Law of Commerce), those special laws will continue to apply and that the Code will be largely irrelevant.

Whilst the following list is not intended to be exhaustive, we highlight some of the key areas which we believe may be of particular relevance to banking and finance transactions and of interest to those working on such transactions:

1. Interest Due to the effect of Article 1, interest is still able to be charged under the terms of an Oman law governed loan agreement within the parameters of the existing law and regulation. However, the levying of interest is prohibited in the Code in relation to loans between individuals.

2. Acceleration The right of a lender to demand repayment of a term loan prior to the maturity date of that loan upon an event of default is commonly written into commercial term loan agreements. Likewise, in relation to commercial overdraft facilities, a lender's right to demand repayment at any time will be included in the terms of the contract with the borrower. Those involved in financing transactions should be aware that Article 501 of the Code provides that a term loan is not recoverable before the expiry of its term and that the court shall set a date for repayment of a loan (such as an uncommitted on-demand overdraft) which is made without a specific repayment date. This could be relevant in the enforcement, acceleration and on-demand repayment provisions in loan agreements entered into going forward.

3. Foreign choice of law Many contracts related to banking and finance transactions in Oman are regularly governed by a foreign law, for example English law, particularly in international syndicated deals or where one or more of the parties is a non-Omani entity. The Code permits the parties to choose the governing law of an agreement. If the parties are not domiciled in the same state, the governing law is that of the state in which the contract was concluded unless the parties agree otherwise.

Under Article 28 of the Code, a foreign law will be recognised by the Oman courts only if it is not contrary to Islamic Sharia, public order and morality in the Sultanate. Consequently, there may be a possibility that the Oman courts decide not to enforce provisions of a contract governed by foreign law or a judgment from a foreign court or arbitral award in relation to such contract where its provisions are deemed contrary to Islamic Sharia, such as the charging of interest, even if it is permitted by the chosen governing foreign law.

4. Real securities Book IV of the Code covers charges by way of security (mortgages) and possessory charges (pledges). In commercial transactions, in our view, the existing "special" laws covering this will continue to apply by virtue of Article 1 of the Code. However, any issue not specifically regulated by such special laws will be regulated by the Code.

5. Guarantees The position with respect to the application of the provisions of the Code relating to guarantees in a commercial context is less certain.

Despite the effect of Article 1 and that many aspects relating to guarantees in a commercial context are specifically dealt with under the existing Law of Commerce, Article 744 of the Code provides that guaranteeing a commercial debt shall be deemed a civil act even if the guarantor is a merchant. It remains to be seen what the significance of deeming the act of guaranteeing as a civil act even if it takes place in a commercial context.

Note also that the code contains provisions which contradict those contained in the Law of Commerce, such as a creditor needing to take recourse against the debtor first and only having recourse to attaching the property of the guarantor after exhausting its claim against the debtor's property. In addition, Article 758 of the Code provides that a creditor has six months to take action against the debtor following notification by the guarantor and that the creditor can give an extension of time to the debtor without the consent of the guarantor. This is not consistent with Article 246 of the Law of Commerce.

6. Derivative style agreements Article 733 of the Code provides that a contract of gambling or wager shall be void and that a party that loses a gamble or wager may recover what he/she/it originally paid within a period of three years commencing on the date such payment was made. In addition, the Penal Code imposes criminal sanctions in relation to gambling. No definition of the terms "gambling" and "wager" are provided which would assist in how the courts will interpret whether a derivative transaction would fall within the ambit of these provisions, especially one that has been entered into for genuine commercial reasons as opposed to speculative purposes.

7. Power of attorney Previously, it was possible under Oman law for a power of attorney to be revocable, regardless of its terms. Pursuant to Article 695 of the Code, a power of attorney may be now be irrevocable where the principal has issued that power of attorney for the benefit of the agent or where the nature of the power of attorney, and the agency relationship created thereunder, has third party rights attached to it. This is likely to work in favour of banks, subject to Oman law restrictions on self-help enforcement remedies, where powers of attorney are commonly used in financing transactions.

 8. Assignment

Until the introduction of the Code, the law relating to assignments was not codified in Oman. While the Code regulates the assignment of debts, it is important to note that the assignment of rights is not covered and this should be considered when dealing with an assignment of rights, such as the right to receivables, as part of a financing transaction.

9. Enforcement of contracts The Code contains some provisions relating to contracts generally which the courts could apply in the context of banking and finance transactions, for example: 

    (i) if an event of force majeure occurs such as to render the performance of an obligation impossible, then the obligation may be extinguished and the contract terminated. Alternatively, to the extent performance of an obligation is only partially or temporarily impossible, then such an obligation can be varied or extinguished but the contract may still be terminated by the creditor by serving notice on the debtor; 

    (ii) if an exceptional event that could not have been foreseen on the date of execution of a contract occurs such as to render the performance of an obligation, whilst not impossible, so oppressive to the obligor so as to threaten him with an exorbitant loss, then the obligation may be varied or extinguished by the courts - i.e. it may now be possible for specific performance to be granted by the courts; 

    (iii) a contract must be performed in accordance with not only its terms but also the law, custom and justice applicable in relation to the nature of the transaction. Clearly this very wide and general provision will be subject to interpretation by the courts; and 

    (iv) the remedy of specific performance of contractual obligations relating to claims for breach of contract is recognised in the Code.

The Code has taken thirteen years in the drafting and implementation into Oman law. The full extent of the application of these, and other provisions of the Code, have therefore yet to be tested by the courts in Oman. Accordingly, we anticipate that parties to financing documents may need to address some of these issues in the drafting of new deal documentation or consider a review of their existing standard form documentation to address any potential areas of risk and take steps to mitigate those risks.