The Oman Civil Transactions Law, Royal Decree 27/2013 (Code) also contains provisions dealing with the termination or dissolution of contracts.
Termination of contract is an important aspect of commercial contracts. Circumstances that existed at the time that the contract was made can change, and the parties may, at a later stage, find it commercially unfeasible to remain committed to perform the duties and obligations originally agreed in a contract.
Termination of contract refers to the act of putting an end to the obligations created by the contract. Termination has the effect of ceasing the obligation of the parties from the time the contract is terminated, unless the parties specifically agree that certain duties and obligations will continue to remain in force despite termination of the contract.
Generally, termination of contract can be either unilateral, by agreement of the parties, or through order of the court.
Article 99 of the Code provides that if a contract is valid and binding, it shall not be permissible for either of the parties to terminate or amend it, save by mutual consent or order of the court.
Let us break down Article 99 to understand its requirements and implications.
The first requirement of Article 99 is that a valid and binding contract cannot be terminated or amended unless both parties agree to the same.
The parties can agree, at the time of contract formation, as to how and when they can terminate or amend their contractual obligations. This can be done in several ways: One or both parties can have the right to terminate the contract in defined circumstances such as when there is a ‘material breach’ (normally a defined term in a contract) or when either or both parties go insolvent or bankrupt or when there is an event of force majeure i.e. unforeseen circumstances such as war, earthquakes, famine, flood etc.
Generally, there is no limit on the circumstances of contract termination that may be agreed between the contracting parties.
In our experience as practising counsel in the Sultanate of Oman, it is not unusual to find instances whereby, at the time of contract execution, contracting parties did not foresee termination and incorporate robust termination clauses. It is advisable for contracting parties to visualise ‘exit’ from contracts no matter how commercially promising contracts may seem, because circumstances can and do change and the last thing a contracting party would want is to remain bound by a contract that it is unable to perform.
Article 99 of the Code provides for another circumstance when a valid and binding contract can be terminated or amended: By order of court Although it is to be noted that Article 99 does not define or elaborate on the circumstances when the court may deem it proper to pass an order terminating or amending a contract.
Article 100 of the Code covers another circumstance when a contract comes to an end: Through assignment.
Assignment of a contract occurs when one party to an existing contract hands off or passes on the contract’s obligations and benefits to another party. Assignment is the stepping into the shoes and assuming of all contractual obligations and rights of the assigning party by another party to whom the rights and obligations are assigned.
It is important for contracting parties to make provision for assignment of contractual rights and obligations in the contract, failing which either or both parties will not have the right to assign their duties and obligations to a third party. Contracts that prohibit assignment will specifically refer to the prohibition on the parties from assigning their duties and obligations either in whole or in part to a third party.
Assignment of a contract as a means of termination of the contractual relationship is important in the context of mergers and acquisition of business. In our experience, it is not usual for contracting parties to pay scant attention to assignment clauses and without knowing the implications, to agree to a general prohibition on assignment of their contractual obligations. This may create an issue at the time of sale or acquisition of business by a contracting party because (a) assignment by a party of its rights and obligations to a third party may be outright prohibited; or (b) the assignment may be subject to the consent of the other contracting party and such party may, unreasonably, refuse to provide consent. In other words, an assignment clause in a contract that prohibits assignment or subjects it to consent of the other contracting party can impede the sale or acquisition of business and ‘exit’ from the contract.
The next in the series of articles on this subject with talk about the remaining provisions in the Code dealing with termination of contracts.
The author heads the Corporate & Commercial Practice at ARAB Advocates & Legal Consultants, Oman.
HASSAN SHAD
hassan.shad@arab-law.om
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