Oman's Supreme Court unanimously held that a bank may refuse payment under an autonomous demand guarantee only where the beneficiary's demand is clearly and manifestly fraudulent — a standard requiring evidence that "leaps from the page." The decision, arising from a bitterly contested OMR 12.3 million performance bond dispute on the Duqm Refinery expansion project, is the most comprehensive judicial treatment of the fraud exception under Omani banking law and draws significantly on the international standard articulated in United City Merchants v Royal Bank of Canada [1983] 1 AC 168.
Muscat-based Al-Nahdha Contracting Company SAOC was the main civil works contractor for a petrochemical storage terminal within the Duqm Special Economic Zone. Under the contract, Al-Nahdha furnished an on-demand performance bond for OMR 12.3 million issued by Bank Dhofar SAOG in favour of the project owner, Duqm Petrochemical Industries LLC (DPI). Following prolonged delays attributed by Al-Nahdha to DPI's failure to provide agreed site access and revised engineering drawings, DPI terminated the contract and called the bond in full. DPI's demand certificate — which the bond terms required — stated that Al-Nahdha had "abandoned the works" and "wholly failed to perform." Al-Nahdha obtained independent engineering reports showing that at the date of termination, 47% of the works were completed and that DPI itself was in material breach of the contract. Al-Nahdha sought an injunction from the Primary Commercial Court restraining Bank Dhofar from paying, arguing the demand was fraudulent.
The Supreme Court identified three questions of principle: (1) Whether Omani law recognises a fraud exception to the autonomy principle of demand guarantees, and if so, what standard of proof applies; (2) Whether the fraud must be that of the beneficiary alone, or whether a beneficiary's reckless disregard for the truth suffices; and (3) Whether the issuing bank has an independent duty to investigate when faced with credible evidence of fraud — or whether the bank's obligation to pay remains absolute until a court order is obtained.
The Supreme Court, overturning the Court of Appeal, ruled that:
(1) Omani law does recognise a fraud exception, rooted in Article 163 of the Civil Code (prohibition of abuse of right) and consistent with the international banking practice codified in URDG 758 Article 9 and UCP 600. The autonomy of demand guarantees is not absolute.
(2) The standard is "manifest and obvious fraud" — the equivalent of the English United City Merchants test. The beneficiary's statement that Al-Nahdha had "abandoned the works" when 47% of the contracted scope was demonstrably complete constituted a false representation that was material to the demand, satisfying this standard.
(3) While the issuing bank has no freestanding duty to investigate, where it is put on clear notice of fraud by the account party before payment — as Bank Dhofar was here, having received independent engineering reports — the bank may be liable in damages to the account party if it pays out regardless. The Court stopped short of imposing a mandatory duty to refuse payment, but made clear that a bank that pays with actual knowledge of manifest fraud loses the protection of the autonomy principle.
This is the first published decision of the Omani Supreme Court to explicitly adopt the United City Merchants "manifest fraud" standard, bringing Oman into alignment with the DIFC Courts, the Qatar International Court, and the leading common-law jurisdictions on this issue. The ruling is expected to have significant implications for the Omani construction sector, where performance bonds and advance payment guarantees are routinely deployed on large-scale infrastructure projects under Vision 2040. Banking lawyers in Muscat noted that the decision substantially raises the bar for beneficiaries seeking to call on-demand bonds in circumstances where the underlying default is contested — and may lead to an increase in pre-payment injunction applications in the Omani commercial courts.
"The autonomy of the demand guarantee serves the vital function of ensuring liquidity in international commerce. But it was never intended to serve as an instrument of oppression. Where the beneficiary's call is founded on a representation it knows to be false — or is reckless as to its truth — the law will not lend its aid." — Chief Justice Dr. Khalid bin Salim Al-Saadi