United States: New Developments in the Law of Guarantees

The use of guarantees to support debt obligations is reasonably widespread in the Sultanate of Oman. A legal framework regulating guarantees is set out in the Law of Commerce, promulgated by Sultani Decree 55/1990, as amended (the Law of Commerce). An amendment was recently made to one of the provisions of the Law of Commerce relating to guarantees.

Sultani Decree 75/2010, which was issued on 12 June 2010 and came into effect on 16 June 2010, amends Article 238 of the Law of Commerce. Pursuant to Article 238 of the Law of Commerce (which replicates Article 77 of the Law of Commerce), guarantors are jointly and severally liable for the guaranteed debt, amongst themselves and with the debtor. Upon default by the debtor, the creditor has a right to claim payment from the guarantors or any one or more of them or from the debtor, as the creditor may determine. A guarantor cannot raise a defence that the debtor should have been pursued first, or that the debtor should be joined with the guarantor in proceedings relating to payment of the debt.

Sultani Decree 75/2010 adds a new paragraph to Article 238 that applies to commercial guarantees of personal loans (consumer loans) from banks. The amendment allows the guarantor of a personal loan granted to the principal debtor from a bank to request the inclusion of a condition in the guarantee to the effect that the bank cannot claim payment under the guarantee until and unless the bank obtains a judgment against the principal debtor and enforces such judgment to the point at which the principal debtor's available assets are exhausted (which is referred to as "Tajreed" in Arabic). The amendment does not apply to guarantees for commercial loans (that is loans to corporate entities) or for loans made by creditors other than banks.

It is worth noting that the amendment to Article 238 of the Law of Commerce does not provide a statutory right of inclusion of this provision in all guarantees of personal loans from banks. It simply provides that the guarantor may request inclusion of such a condition in the terms of the guarantee, and it is for the bank to agree to the request at its discretion. If the bank does not agree to such a condition being included in the guarantee, and notwithstanding this the guarantor signs the guarantee, the bank may claim payment from the guarantors or any one or more of them, or from the principal debtor. Prior to the amendment to Article 238 of the Law of Commerce, any condition in a guarantee requiring the bank to obtain a judgment against the principal debtor prior to pursuing the guarantor for payment of the debt is likely to have been declared void by a court on the basis that it was contrary to public order.

Notwithstanding this recent amendment to Article 238, guarantors in relation to both personal and commercial loans are able to continue to exercise their rights under Article 246 of the Law of Commerce to request, at any time before being sued, that the creditor make a claim for payment from the principal debtor (where it has not already done so) within one month. Under the terms of Article 246, if at the end of the one month, the creditor has not claimed payment of the debt from the principal debtor, the guarantor shall be released unless the principal debtor provides adequate security to the guarantor. In contrast to the amendment to Article 238, there is no requirement for the bank to obtain and enforce a judgment against the debtor under Article 246. Pursuant to Article 246 of the Law of Commerce a guarantor may release himself from the guarantee if the creditor has granted to the principal debtor time for payment without the agreement of the guarantor.

Article 246 of the Law of Commerce has been the subject of litigation in the Sultanate in relation to guarantees on several occasions. In reported decisions of the Supreme Court of Oman the judges have upheld the provisions of Article 246 particularly where it is clear that the guarantor gave the requisite notice to the creditor to take action against the debtor.

Banks in Oman often sue both the principal debtor and the guarantor to obtain a judgment rendered against them jointly, which minimises the risk of the guarantee falling away pursuant to Article 246. In addition, many creditors in Oman seek to specifically disapply the provisions of Article 246 in the terms of the guarantee. The enforceability of such an attempt to contract out of Article 246 has not, to our knowledge, been tested in the courts in Oman. In our view, there is a good chance that Article 246 will be interpreted by the Omani courts as a matter going to public order and therefore be strictly enforced and the reported cases indicate that this is the approach taken to date. Therefore, we recommend that even where creditors have sought to expressly disapply Article 246 in the terms of the guarantee, they make every effort to comply with the provisions of it.

At this early stage it is difficult to gauge the impact of the amendment to Article 238. Given the obvious benefit to the guarantor and additional obligation on the bank, it remains to be seen how willing banks in Oman will be to agree to a request from a guarantor to include a provision in a guarantee supporting a personal loan to the effect that the bank cannot claim payment under the guarantee until and unless the bank obtains a judgment against the debtor and enforces such judgment to the point at which the debtor's available assets are exhausted. Much is likely to depend on the relative bargaining power of the parties involved.

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