Monday, February 12, 2018

"Best," "Reasonable" and "All Reasonable Endeavours" Clauses: Key Considerations

Many commercial contracts include the terms “best endeavours”, “reasonable endeavours” or “all reasonable endeavours”, particularly in connection with obligations in respect of which a party is unwilling make an absolute commitment, but where that party is nevertheless expected to “try” to fulfil the obligations in question. The effect of using endeavours clauses is widely misunderstood. It is not always clear in practice what level of effort is required by each of the various permutations (the above three are merely the most commonly-used in a wide spectrum of similar phrases).

“Best Endeavours” 
The meaning of the term “best endeavours” has been modified significantly over the years, but the starting point is that the phrase “means what the words say; they do not mean second-best endeavours” (Sheffield District Railway Co v Great Central Railway Co [1911] 27 TLR 451).

In other judgments courts have ruled that best endeavours impose an obligation:

  • to do what can reasonably be done in the circumstances; 
  • to leave no stone unturned; but 
  • that does not require actions which would lead to financial ruin of the company or undermine its commercial standing or goodwill. 

Best endeavours clauses are now judged by standards of reasonableness. “All a reasonable person could do in the circumstances” has become a short way of stating the rule. Importantly, the best endeavours obligation does not extend to a situation where a company is required to put itself at the risk of ruinous financial loss to fulfill its obligation, nor does it require a party to undertake steps that have no likelihood of success.

In practice, a company subject to a best endeavours obligation:

  • must take all commercially-practicable action having regard to costs and the degree of difficulty; 
  • may be required to incur significant expenditure; and 
  • may be required to divert resources elsewhere within the business. 

In Jet2.com v Blackpool Airport Ltd [2012] EWCA Civ 417, the airport entered into a 15-year contact with Jet2.com, a low cost airline. The contract included a general provision which contained an obligation on both parties to “… cooperate together and use their best endeavours to promote Jet2.com’s low cost services from Blackpool Airport”. The Court of Appeal held that this obligation to use best efforts to promote an airline’s low cost services gave rise to a specific duty on the airport operator to accept arrival and departures outside the airport’s normal operating hours. This was the case even though the contract did not make reference to operating hours and the Court was aware the airport operator would lose money as a result.

In a more recent case, Astor Management AG v Atalaya Mining plc [2017], Atalaya tried to argue that an obligation to use reasonable endeavours was only enforceable if:

  • “the object of the endeavours is sufficiently certain”; and 
  • “there are sufficient objective criteria by which to evaluate the reasonableness of the endeavours”. 

The judge disagreed, ruling:

“The role of the court in a commercial dispute is to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy.”

Reasonable Endeavours 
The obligations imposed by the term “reasonable endeavours” are less onerous than those of “best endeavours”. The contractual obligation to use reasonable endeavours requires the party:

  • to give it “an honest try” so as not to hinder the fulfilment of the objective; and
  • take all commercially practicable action, but only to the extent that such action is not detrimental to a party’s commercial interests. 

A party subject to a reasonable endeavours obligation may be required to incur limited expenditure, however as expressed above would not require the party to compromise its commercial interests. When determining what “reasonable endeavours” means the recent English case of Minerva (Wandsworth) Ltd v Greenland Ram (London Ltd [2017] EWHC 1457 suggested applying an objective approach where you should ask “what would a reasonable and prudent person acting properly in their own commercial interest and applying their minds to their contractual obligation have done to try?”

All Reasonable Endeavours 
The “all reasonable endeavours” clause is considered by the English Courts to sit somewhere between “best endeavours” and “reasonable endeavours”, implying something more than reasonable endeavours but less than best endeavours. In practice however, determining what is meant by “all reasonable endeavours” can be somewhat unclear. For instance, whether a party is obliged to incur expenditure in fulfilling its obligations or compromise its commercial interests, is invariably fact specific and determined on a case by case basis.

Endeavours Clauses in Omani Law Contracts 
In Oman, endeavours clauses frequently appear in a wide variety of contracts, including shareholders” agreements, joint venture agreements, agency agreements and supply agreements. When faced with an endeavours clause, the Omani Courts would probably interpret “best endeavours” as imposing more onerous requirements than a “reasonable endeavours” or “all reasonable endeavours” provision. All things considered, the facts and circumstances of a case are likely to take precedence in determining how an Omani court would interpret an endeavours clause in a contract governed by Omani law.

Conclusion 
If a party has agreed to a “best endeavours”, “reasonable endeavours” or “all reasonable endeavours” obligation in a contract, they should not treat it as a non-obligation. Otherwise, the risk for non-performance remains. Instead, they should understand that some real efforts will be required of them particularly if a course of action has been prescribed as part of that obligation. Equally, the parties need to be clear about what it is that they are trying to achieve in order to avoid an endeavours clause being ignored by a court or arbitral tribunal for uncertainty.

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Monday, February 5, 2018

Development of Real Estate Investment Funds in Oman

Real estate investment funds (hereinafter referred to as a “REIF”) are one of the primary ways to invest in real estate. A REIF owns income-producing real estate in a range of property sectors and is generally seen to have a number of benefits to investors. Investment in a REIF is now possible in Oman by virtue of the Capital Markets Authority (the “CMA”) Organisational Regulation of Real Estate Investment Funds No. 2 of 2018 (the “REIF Regulations”) and Ministerial Decision No. 95/2017 issued by the Ministry of Housing (“MD 95/2017”).

Prior to the enactment of the REIF Regulations and MD 95/2017, a fund wishing to invest in real estate was reliant solely on the CMA’s Executive Regulations of the Capital Markets Law promulgated by Decision No. 1 of 2009 (the “CML Executive Regulations”), which permitted funds to invest up to 30 per cent of their capital in real estate. The CML Executive Regulations however, proved unsatisfactory (as far as REIFs were concerned), and owing to the lack of regulatory framework for the governance of REIFs, the Ministry of Housing showed reluctance to approve funds investing in real estate.

In an effort to diversify the Sultanate’s economy, the REIF Regulations are seen to support the Sultanate’s National Program for Enhancing Economic Diversification or Tanfeedh, as it is better known. Such REIF Regulations are aimed to encourage both foreign and domestic investment in real estate in Oman. This aim is evidenced by the fact the REIF Regulations state that a REIF is required to offer at least 40 per cent of its capital to the public, upon issuing its investment units for public offering. In other words, at least 40 per cent of the investment units of a REIF must be available for public subscription and be traded on the Muscat Securities Market (“MSM”).

This article sets out: (a) the key points to establishing a REIF in Oman; (b) the key investment rules applicable to a REIF; and (c) the management responsibilities of a REIF.

Establishing a REIF 
Among other organisational requirements to set up a REIF, such as duly completing an application to CMA for initial approval and appointing a company licensed by CMA to be the REIF’s investment manager, the paid-up capital of the REIF must be no less than 10 million Omani rials (“OMR”). This requirement is a departure from the requirements set out in Part VI of the CML Executive Regulations, wherein it was stated that the capital of a fund at the time of establishment shall not be less than 2 million OMR.

Investment Rules 
The REIF Regulations set out parameters by which a REIF may operate in the Sultanate and have determined that a REIF is not permitted to: (a) provide loans of financial facilities; (b) develop properties, unless the development is to renovate, supply or expand existing properties within its investment portfolio; (c) buy a piece of land; or (d) invest more than 25 per cent of the total value of its assets outside of the Sultanate (unless otherwise approved by the CMA as explained further below).

A REIF is also prohibited from purchasing properties at an amount exceeding 110 per cent of amount stated in any property’s valuation report. A REIF is further prevented from selling any property for less than 90 per cent of the property’s valuation. All properties in the REIF’s investment portfolio are subject to an independent re-valuation at least once in every 3 years.

Conditions for Purchasing Properties 
It is specified by the REIF Regulations that 50 per cent of the total value of a REIF’s assets must be invested in income generating properties and/or special purpose vehicles (“SPV”). Any investments of the REIF in assets not related to real estate and/or cash, deposits and cash market instruments are not to exceed 25 per cent of the total value of the REIF’s assets.

Leased and non-leased properties 
When purchasing properties, a REIF is required to meet certain conditions, including that, subject to certain exceptions, a property be fully leased, have good historical records and/or promising prospects such that it will obtain a good level income; economical according to the MSM reports and be free from any obligations or rights of third parties at the time of purchase.

It is also usually a requirement that a REIF have a majority ownership and control over the purchased property. However, in certain instances, a REIF may purchase properties without having a controlling majority on the basis that:

  • the total value of the REIF’s non majority owned properties shall not exceed 25 per cent of the total value of the REIF’s assets after the acquisition;
  • the acquisition is in the best interest of the holders of a REIF’s investment units; and 
  • there is a clear disclosure in the REIF’s prospectus regarding the risks associated with its ownership of properties without having a controlling majority. 
A REIF may only purchase unleased properties on the condition that:
  • there is a strong probability of obtaining a tenant; 
  • any disbursements of capital to enhance the condition of the property will not materially affect the proceeds of the holders of the REIF’s investment units; and 
  • within a reasonable period of time, the holders of the REIF’s investment units will attain reasonable proceeds. 
Properties under construction 
A REIF is only permitted to purchase properties under construction if the criteria under Article 125 of the REIF Regulations are satisfied. By way of overview, some of these Article 125 conditions include that:
  • the REIF’s portfolio must be sufficient to ensure there is no significant decrease in the fund’s revenues during the construction period of the property in question; 
  • the purchase agreement is conditional upon the completion of the property construction; 
  • the total value of the properties under construction that are purchased by the REIF will not exceed 10 per cent of the total value of the REIF’s assets after purchase; and 
  • the REIF is prevented from selling the property under construction for at least 2 years from its completion. 
Properties with a usufruct contract 
As far as usufruct contracts are concerned, a REIF may purchase the rights from a usufruct contract. However, this is only permissible if the REIF has obtained the requisite consent of the competent authorities to transfer the usufruct contract to the REIF prior making the units available on the MSM. 

Special Purpose Vehicles 
In order to acquire a SPV with interest in property, an investment manager is required to consider, among other things, the following:
  • whether the acquisition is in the interest of the holders of an REIF’s investment units; 
  • whether there a valid commercial reason for the acquisition of the SPV rather than the properties; and 
  • whether the property owned by the SPV will be compliant with the conditions for purchasing properties, some of which are outlined under the relevant heading above. 
A REIF should purchase the entire SPV or otherwise must acquire ownership rights that guarantee the REIF majority ownership and control over the SPV.

Properties Outside the Sultanate 
As referred above, a REIF is permitted to purchase property outside the Sultanate, however investment abroad must not exceed 25 per cent of the total value of the REIF’s assets. Investment in property outside the Sultanate is further only permitted on the basis that it is considered in the best interest of holders of the REIF’s investment units. In assessing whether investment abroad is/is not in the best interest of holders of investment units some of the factors that must be considered include whether there are any:
  • contradictions imposed on foreign ownership, restrictions on foreign exchange, transfers and provisions relating to competition and monopoly; 
  • economic, political, legal, judicial and accounting factors including the real estate market; 
  • operational restrictions including the level of transparency with respect to accounting and financial reporting; or 
  • restrictions or barriers to tax, in those countries where the REIF is looking to purchase property. 
Loans and Debt 
It should be noted that a REIF is permitted to take a loan(s) for the purchase of properties and SPVs. Under the CML Executive Regulations, a REIF was not permitted to borrow more than 30 per cent of its net asset value, whereas the REIF Regulations state that the total debt of a REIF is not to exceed 6o per cent of the total value of the REIF’s assets at the time of borrowing. However that percentage may be exceeded if approved at an extraordinary general meeting of the holders of a REIF’s investment units.

Other Controls 
MD 95/2017 has further specified controls, including that a REIF is permitted to own property only if it is used in connection to commercial, residential, industrial and tourism purposes. Further, a residential complex may only be purchased by a REIF if the complex is 10,000 square meters or more in size. A REIF is prevented however from owning empty spaces and properties used for agricultural use.

Management of a REIF 
A REIF’s investment manager is required to ensure there is suitable and duly appointed fund management to supervise and control the work of the REIF and its service providers. Subject to certain restrictions as to who may serve as a member of fund management, management is to comprise of at least 3 but no more than 7 members, including 2 independent members. As part of the responsibilities of the REIF’s management, fund managers are required to ensure that a fair and accurate assessment of all REIF assets and liabilities are made.

A Shari’ah committee must also be formed of at least 3 members all of whom must be independent from the investment manager and whose functions include, but are not limited to:
  • providing real estate investment and fund management advice in accordance with the principles of Islamic Shari’ah and ensuring the REIF is in compliance with principles of Islamic Shar’iah and the CMA Regulations; 
  • providing expertise and legal advice on all matters, in particular on the REIF’s articles of association, prospectus, investment decisions and other operational matters of the REIF; 
  • reviewing the report of the investment manager regarding the REIF's compliance with its investment transactions in accordance with the principles of Islamic Shari’ah; and 
  • preparing a report to be included in the annual or interim report of the REIF that includes its opinion as to whether the operation of the REIF is conducted in accordance with the principles of the Islamic Shari’ah for the relevant financial period. 
In accordance with the REIF Regulations, an investment manager of a REIF must appoint an individual with suitable experience and knowledge in real estate investment and the investment strategy of the REIF in order to responsibly manage the REIF’s portfolio. If the REIF’s investments include properties situated outside the Sultanate, the investment manager must further have the requisite capabilities to manage the legal and regulatory requirements of the relevant state in which such properties are located.

Conclusion 
Although the concept of funds investing in real estate is not entirely new in Oman, it is understood that the comprehensive REIF Regulations will encourage the establishment of REIFs and be beneficial for the overall development of the real estate sector in the Sultanate. Investors of REIFs will see high returns of 90 per cent of any annual net profit on their investment and have access to a diverse portfolio of real estate which, prior to the REIF Regulations, had previously been largely unavailable to both foreign and domestic investors.

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Monday, January 29, 2018

Taking and Enforcing Security under Omani Law

Most financing transactions will involve the grant of a security or collateral by the borrower to secure the finance amount.  This involves the execution, registration, perfection and enforcement of security. Generally speaking, tangible and intangible assets, moveable and immoveable property, shares, securities and bank accounts are capable of forming collateral under Omani law.  The concept of a floating corporate charge comparable to the English system does not exist as such under Omani law.  Nonetheless it is possible to create a hypothecated charge over a company and its assets by way of a commercial mortgage excluding real estate rights and assets.  The difference between a commercial mortgage and a floating charge is that the corporate assets forming the subject matter of the charge must be identified.  It is also possible to provide real estate rights and assets as collateral to secure financing by creating a separate charge over those rights and assets.  Real estate assets owned or leased, including usufruct rights, can be charged as security by creating a legal mortgage over them.

Under Omani law, a commercial mortgage would be registered in the commercial register of the Ministry of Commerce and Industry (the “MOCI”).  A noting of the charge appears on its commercial registration information print-out.  A legal mortgage is registered with the Ministry of Housing (the “MOH”).  Accordingly, a noting of the charge will be marked on the title document of the real estate asset or the instrument establishing the right in rem.

In addition, banks and financial institutions may require the borrower to assign certain rights in their favour as part of the security package.  It is also possible to provide bank accounts as security.  The usual form of providing security over bank accounts is by assignment or creating a pledge.  A pledge may also be created over securities comprising shares in a company.  A share pledge in respect of a closed or public joint stock company is capable of registration with the Muscat Clearing and Depository Company (the “MCDC”).  Under Omani law, security cannot be created by granting a power of attorney.

As stated above, a commercial mortgage or a legal mortgage must be registered with the MOCI or the MOH, respectively, in order for it to be valid and enforceable.  A share pledge in relation to a joint stock company must be registered with the MCDC.  The MOCI, MOH and MCDC would require that the charge documents are signed before their designated officials, in addition to filing of prescribed forms and payment of fees.  In order to register a commercial mortgage, a fee of OMR 130 is payable.  A commercial mortgage is registered for a period of five years and is renewable for further periods on payment of a renewal fee.  A legal mortgage is subject to payment of a registration fee of 0.5% of the mortgage value subject to a cap of OMR 100,000.

Under the laws of Oman, if a particular charge is required to be registered in order to constitute valid security, that security must be registered in order for it to be enforceable as security.  An unregistered charge does not amount to creation of valid security.  It is hence unlikely that an unregistered charge would be enforced by the courts as security.

In order to enforce the collateral, the lenders would firstly be required to make a formal demand with the borrower.  The borrower’s failure to answer the demand would require the lenders to obtain an order or judgment from the court by filing a lawsuit.  Once a judgment has been obtained on the debt, the lenders would be required to seek the enforcement or execution of the judgment.  In respect of the collateral, the judgment would be executed by carrying out a sale of the charged asset or property by public auction.  Under the provisions of the Law of Commerce of Oman, issued pursuant to Royal Decree 55/1990 (as amended), an agreement between a creditor entitling the creditor to acquire the ownership or to dispose of the collateral without the intervention of the courts is null and void.  Accordingly, self-help remedies are not available under the law and are unenforceable.  The lender may not make recourse without the intervention of the court notwithstanding the fact that the borrower has granted a power of attorney to the lender to unconditionally enforce the collateral.


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Monday, January 15, 2018

Effect of VAT Law on Long-Term Contracts

While a value added tax law (“VAT Law”) was originally anticipated to be introduced at the beginning of January 2018, to date Oman has not issued the relevant Royal Decree or law.  It is widely anticipated, however, following a regional framework agreed by the Member States of the GCC that such a law will come into force in the near future.

The UAE has enacted a VAT Law effective from 1 January 2018 and, given the volume of trade between the states, it is difficult to see how trade and commerce will operate efficiently if other GCC members do not enact a similar law prudently.

The Ministry of Finance and Ministry of Legal Affairs (“MOLA”) are expected to draft, amend and review a VAT Law together. Other government bodies may be involved in the consultation process.  Upon approval by the MOLA, the State Consultative Council will add any additional amendments it deems necessary.  The amended draft is subsequently sent to the Cabinet of Ministers who further review and alter as it sees fit.  A final version is sent to the Sultan for his approval and, if granted, the Sultani Decree is published in the Official Gazette.  The law would come into effect upon publication.

VAT is a tax imposed on most transactions in the production and distribution process.  This consumption-based tax is ultimately paid by the customer in the final price for goods and services.  Applicable businesses are assigned the responsibility of collecting the tax when the good or service is produced and/or distributed.

It might be easy to think that the consequences of such a law can be dealt with once it has been promulgated.  Unfortunately, when it comes to entering into any long-term contracts, the time to act is now, if not before.

Before entering into any long-term contract that might span the date a VAT Law might come into force, it would be foolish not to ensure it contained provisions prescribing how to deal with VAT.  In simple terms, VAT provisions would typically allow the party that invoices for goods or services to charge an additional amount for the relevant VAT.  However, this can be complicated in practice, particularly where goods or services are provided over a period that spans the date a VAT Law came into force.  This is because the amount of VAT payable might depend on what proportion of such goods or services were supplied before or after the relevant date.  It becomes even more difficult where there is no draft of the VAT Law available for guidance.

Construction contracts are an example of a type of contract where careful consideration needs to be given.  Related contracts with subcontractors and suppliers may or may not contain clauses in relation to VAT.  Ideally, a head contractor should ensure that its contracts with each of its subcontractors and suppliers have substantially similar VAT clauses in order to enable VAT to be calculated in the same manner, and passed through.  Such a head contractor would of course need to ensure it had the appropriate clause in its head contract to enable the VAT to be claimed from the project owner.


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Tuesday, January 2, 2018

Time Limitations - Don't Allow Your Rights to be Extinguished!

Like most jurisdictions, Oman imposes time limitations within which parties must bring any claims before the courts or arbitral tribunals.  Also, as in most jurisdictions the strength of a claim is irrelevant if it has been brought out of time.  Generally, the courts will not examine the merits of a claim if it has been filed or notified outside of statutory or contractually prescribed timeframes.  It is therefore important to gather evidence and speak with legal advisors as soon as a potential claim has crystalised.

What is a time bar limitation?

A time bar limitation is a maximum period of time established by law or contract within which a party may bring a claim or enforce a judgment or right.  Any legal claim will lapse if it is not exercised within this time period.  Time bar limitations exist for reasons of business efficacy and certainty.

Omani law prescribes a variety of time bar limitations in relation to different types of legal matters.  A unique aspect of Omani law is that time limitations are hidden within many different laws, with the Civil Code providing an overall umbrella.  This article highlights several of these time bar limitations which are relevant to businesses, and discusses potential relief to the strict application of time bars by reference to the Civil Code.

The Law of Commerce

Many of the key time bars applicable to business-related claims in Oman are found under the Law of Commerce (Royal Decree 55/90).  Some examples include:
Carriage of goods claims

In case of damage to goods, a consignee must submit a contestation to the carrier immediately after discovering the damage and no later than seven days from the date of delivery.

The right to seek recourse against a carrier due to damage, partial destruction or delayed arrival shall lapse unless the consignee proves the condition of the goods and lodges an action against the carrier within 30 days from the date of delivery.

The time limitation to bring an action arising from a contract for the carriage of goods or persons or a contract of carriage commission agency shall be one year.  This is known as a long stop limitation.

Guarantees
Any claim in respect of a guarantee/warranty of defect-free goods is one year from the date of delivery of the item sold, unless a guarantee for a longer period has been given by the seller.

Bills of exchange
Claims against the person that accepted a bill of exchange must be brought within three years of acceptance.

General long stop limitation for claims between merchants
Ten years as from when the date for performance of such obligations lapses (unless the law provides for a shorter period).

Other Omani statutes

Certain key time bar limitations are prescribed by other Omani statutes.  Most frequently a subject of concern is liability under the Engineering Consultancy Law (Royal Decree 120/94) and the Labor Law (Royal Decree 35/2003) which impose strict decennial liability provisions.  An oft-overlooked issue is that all claims for defects shall lapse after three years from the time of discovery of the defect.

Engineering, procurement, and construction (EPC) contracts

It is a common for EPC contracts to contain time limitations applicable to related claims.  Some contracts will state that a claim must be brought within 28 or 90 days of having a request for an engineer’s decision refused or ignored.

It is all too common for a contractor to neglect to bring a claim in respect of delay and prolongation costs within contractually prescribed periods.  The question then arises as to whether a contractor's failure to notify claims in time in compliance with the EPC contract results in the contractor losing its right to claim.  The answer to this question is that the courts will carefully examine the facts and the course of dealing between the parties. 

When considering how the courts (or an arbitral tribunal properly informed under Omani law) will approach the issue of a claim brought out of time, it is useful to first understand the principles that the Omani courts must apply when interpreting contracts and the enforcement of contractual conditions.  The courts adopt the following hierarchy when deciding a dispute:

(i) Legislative provisions.
(ii) The terms of the contract.
(iii) Rules of custom and practice.
(iv) The provisions of Sharia law (however, usually only in the absence of provisions (i), (ii) and (iii) above is Sharia law considered in any dispute before the Omani courts).

Therefore, when interpreting a contract and its time limitations on related claims, a court or tribunal must examine the express terms of the subject contract.  However, where these are absent, their meaning is inadequate, or the parties’ course of dealing diverges from the contractual terms, the custom and practices established between the parties may also be taken into account.

The Omani courts will normally consider the enforcement of contractual time limits on a case-by-case basis, bearing in mind all the relevant facts and the exact wording of the clause.

The starting point as stated above and under Article 2 of the Law of Commerce is that the courts must recognise and give effect to agreed contractual terms.  However, the courts are prepared to examine whether any prejudice is caused by a failure to comply with contractual time limits.  If the court considered that there was no loss or prejudice caused by failing to comply with a time limit, or that the prejudice of applying the time limit outweighed the prejudice of allowing a claim, then it may decide to allow the claim despite the lapse of a contractual time limit.

The Civil Code makes specific reference to contracts of adhesion, which are standard form contracts that cannot be negotiated; Article 83 thereof provides that contracts of adhesion are to be treated differently.  Article 158 of the Civil Code (Royal Decree 29/2013) is relevant and provides:

If the contract is made by way of adhesion and contains unfair provisions, the court may amend those provisions or exempt the adhering party therefrom in accordance with the requirements of justice, and any agreement to the contrary shall be void.

Standard form construction contracts can potentially be considered contracts of adhesion as they are standard form contracts drafted by one party (the employer) and signed by a relatively weaker contract party (the contractor), who must adhere to the contract and does not have the power to negotiate or modify the terms of the contract.  In these circumstances, the Omani courts (and therefore an arbitrator properly instructed under Oman law) would potentially be entitled to conclude that the prejudice caused to the contractor by applying the strict time limits outweighs the employer’s right to impose the time limits, and apply Article 158, in order to allow justice to be done between the contract parties.  However, each case will be decided on its own merits, which again emphasises the importance of careful project record keeping.  The contractor would be assisted for example if it could identify and evidence instances where the employer has waived contractual time limitations during the course of the life of the contract.

We note that the issue of contractual time limits within contracts is not settled in Oman.  In certain circumstances, Article 158 of the Civil Code permits the court to amend or ignore the time limits if it considers this to be in the interest of justice.  The court may also examine the parties’ conduct during the life of the contract, and if a party has waived its rights or remained silent, then the court can deem this to be an amendment of the contract (Article 74 of the Civil Code).

The courts will however analyse the impact of the limitation, and may ignore a limitation if it leads to a miscarriage of justice, or if there is no prejudice to the parties by ignoring the reduced time limitation.  Finally, it should be noted that there is also a general reluctance under Sharia law to allow a party to benefit from a contractual time limitation.

Time limits underpin all commercial claims, and it is essential to comply with statutory or agreed limits.  Given that time limits are often hidden throughout contracts and legislation, it is a small but very important investment to seek advice from your legal advisor as soon as an issue is encountered which may give rise to legal recourse. 

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Wednesday, December 27, 2017

Environmental Law Framework and Developments in Oman

Like the other member countries of the Gulf Cooperation Council (GCC), Oman faces many environmental challenges. Some are well known, such as water scarcity, land desertification, and pollution of soil and water by the oil and gas industry. The GCC countries also face emerging and less regulated challenges such as increased demands for energy and electricity, urbanisation, climate change, increased construction, and unprecedented amounts of debris.

However, among the GCC countries and in the region Oman is considered progressive and highly engaged in the protection of its environment. Oman has been working to preserve its diverse flora and fauna for several decades, being the first Arab state in 1974 to create a special government body dedicated to environmental issues.

These initiatives are vital to maintain, as Oman’s economy is heavily reliant on the extraction and production of hydrocarbons such as crude oil and natural gas and liquefied natural gas, both industries which carry significant risks to the surrounding environment. Oman’s increasing participation in the tourism and hospitality sector also introduces environmental stressors.

Oman has ratified many international treaties related to environmental protection, including the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, the UN Convention on the Law of the Sea, the UN Framework Convention on Climatic Change, and the UN Agreement on Prevention of Desertification in Countries Facing Severe Arid Conditions. Oman has also confirmed its intention to sign the Paris Convention, adopted at the UN Framework Convention on Climate Change Conference held in Paris in December 2015. As part of this intention, Oman submitted an action plan to reduce greenhouse gas emissions by 2% from 2020 to 2030. 

Despite these international commitments, as a matter of law, industrial projects in Oman are not required to comply with international standards. Omani laws merely require that an activity must conform to the relevant domestic legislation, some of which may not necessarily conform to international standards. In the absence of domestic standards, the Ministry of Environment and Climate Affairs (Environment Ministry) can require compliance with international standards.

The Basic Law of Oman (Sultani Decree 101/1996, as amended by Sultani Decree 99/2011) sets out the protection of the environment and the prevention of pollution as a social principle, allocating it as a state responsibility. Oman’s environmental regime is primarily regulated by the Law on the Conservation of the Environment and Combating of Pollution (Sultani Decree 114/2001), while three Sultani Decrees and two Ministerial Decisions further regulate wildlife protection and nature conservation.

Oman’s laws mandate strict penalties for the release of environmental pollutants and discharge of effluents, both on the land and in the sea. Oman generally follows the “polluter pays” principle, with penalties imposed on the person or company directly causing environmental damage. For example, in 2012 the Oman Cement Company SAOG was required by the Ministry of Commerce and Industry to shut down a production line and to contribute OMR 2.25 million as compensation for villages that were environmentally affected by its operations.

It is noteworthy for companies that compensation may be ordered as a result of executive intervention, rather than through judicial determination, and that the Commercial Companies Law holds the directors and managers of a company personally liable for any infractions of the law by a company.

In May 2017, the Environment Ministry issued further rules governing its issuance of environmental permits, including provisions about the methods of securing environmental activity permits and the penalties for violators. The rules divide environmental activities into three categories:

  • Category A: Activities of great environmental effect, including 255 activities. Obtaining a permit in this category requires the preparation of a study of environmental effects by an approved consultation office in accordance with certain principles and regulations.
  • Category B: Activities located in industrial estates, industrial ports and free zones, comprising 504 activities. Obtaining a permit in this category also requires the preparation of a study of environmental effects.
  • Category C: Activities of minor environmental effect. Permit applicants in this category may be able to self-certify regarding potential environmental effects, though implementation is still unclear. 

Oman has taken several clear steps towards good environmental governance over the past few decades. However, the allocation of authority between executive and judicial branches is unclear, as is the liability within Oman of individuals and companies in contravention of international environmental laws. Strengthening the role of various stakeholders (NGOs, the private sector, local communities, etc.) would also improve monitoring and reporting, important steps in achieving Oman’s national strategy of environmental preservation.

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Monday, December 18, 2017

Key Differences between English and Omani Contract Law

Introduction 

Many of the corporate lawyers advising on cross-border transactions in the Sultanate of Oman will have been trained in common law jurisdictions. Often such transactions will be governed by English or New York law, irrespective of the origin of the parties involved. Occasionally, however, the relative bargaining power of one of the parties may result in the contract being governed by Omani law. And certain contracts must, by law, be governed by Omani law.

Common law practitioners should be wary of a number of pitfalls regarding instances in which Omani law differs significantly from English law and that of other common law jurisdictions. Below we set out some of the more common examples:

1. Agreements to agree

Under English law, agreements to agree are not generally enforceable (Associated British Ports v. Tata Steel UK Limited [2017] EWHC 694 (Ch)).

The position is very different under Omani law. Under Article 79 of the Civil Transactions Law promulgated by Sultani Decree 29/2013 (the “Civil Code”), the parties may agree on the essential elements of the contract, but leave matters of detail to be decided later.

However, in the event of a dispute the court may, unless the parties have stipulated that the contract shall not be regarded as having been entered into in the absence of agreement upon such matters, rule that the contract has been concluded.

Further, the court may adjudicate on any missing terms in accordance with the nature of the transaction, the provisions of the law, and custom.

In Oman, the matter is further complicated in that the courts may rule that a party has failed in its obligation to perform in good faith if it hasn’t taken sufficient steps to reach final agreement with the other party.

In contracts to be governed by Omani law, the parties would be advised to include terms clearly providing that Article 79 of the Civil Code is not intended to apply until the agreement has been duly executed.

2. Misrepresentation in Omani law must involve fraud

“Misrepresentation” is a concept of wide importance in common law jurisdictions. In English contract law and tort law, a misrepresentation is a false statement of past or present fact made by one contracting party to another, which has the effect of inducing the other party to enter into a contract. 

It is often used as an alternate cause of action to breach of contract, because the remedies for a successful claim for misrepresentation are different from those available for breach of contract. Importantly, among the possible remedies for misrepresentation is rescission, where the contract is annulled and the parties restored to the position they were in before the contract was entered into.

Misrepresentation, under English law, does not necessarily require intent to deceive. “Negligent” and even “innocent” statements may constitute misrepresentation if they are false and their effect was to induce the other party into the contract.

Entire agreement clauses in common law jurisdictions typically aim to exclude liability for misrepresentation, but carve out liability for fraudulent misrepresentation. In other words, the parties agree not to claim for “negligent” or “innocent” misrepresentation in connection with the agreement, but also state expressly that they are not seeking to limit or exclude claims for fraudulent misrepresentation.

Such distinctions are not, however, meaningful under Omani law. Article 103 of the Civil Code defines misrepresentation as follows:

Misrepresentation is when one of the two contracting parties deceives the other by means of trickery of word or deed which leads the other to consent to what he would not otherwise have consented to. Deliberate silence concerning a fact or set of circumstances shall be deemed to be a misrepresentation if it is proved that the person misled thereby would not have made the contract had he been aware of that fact or set of circumstances.

Omani law does not recognise negligent or innocent misrepresentation: there must be an intention to deceive. The onus is on the party alleging misrepresentation to establish that (a) they were deceived by the misrepresentation; and (b) the deception was intentional.

Accordingly, the wording relating to misrepresentation in standard entire agreement clauses should be drafted bearing in mind the more narrow definition of the term under Omani law. Any attempt to limit or exclude liability for negligent or innocent misrepresentation would be at best superfluous and at worst confusing; and any attempt to exclude liability for fraud would be void under Article 183 of the Civil Code.

3. Liquidated damages 

Liquidated damages clauses are used in common law jurisdictions to protect a party’s “legitimate interests” and are generally enforceable so long as the “penalty” stipulated is not exorbitant or out of proportion to the interests the party is trying to protect (Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67).

Article 267 of the Civil Code deals with liquidated damages as follows:

(1) If the subject matter of obligation is not a sum of money, the contracting parties may determine the amount of compensation in advance by making a provision of same in the contract or in a subsequent agreement. 

(2) In all cases, the court may, upon the application of either of the parties, amend such agreement to make the compensation equal to the damage, and any agreement to the contrary shall be null and void.

Article 267(1) determines that the contracting parties may agree to a liquidated damages amount but Article 267(2) gives certainty to the generally accepted position that, regardless of the liquidated damages amount included in the contract, the Omani courts are specifically permitted to re-open liquidated damages clauses and adjust the amounts so that they are commensurate with the value of the actual damage incurred.

 Article 267(2) is obviously in direct conflict with the freedom to contract for which Oman has previously been well known. However, this provision of the Civil Code merely follows established precedent applied by courts of the UAE, Qatar and Saudi Arabia who all take a similar position in that they are also not opposed to re-opening pre-agreed liquidated damages clauses.

4. Good faith 

Good faith under Omani contract law can be interpreted as a requirement to act reasonably and moderately, not to use the terms of a contract to abuse the rights of the other contracting party, and not to cause unjustified damage to the other party.

In Omani law an act of bad faith by one party may constitute a cause of action for the other party to the contract. Accordingly, the duty of good faith is overarching, in contrast with the position at English law.

Under English law the extent of the obligation depends on the context and how explicitly it is defined. However, it is clear that the English courts are reluctant to construe a good faith obligation as imposing a positive obligation on a party to act against its commercial interest, or to give precedence to such an obligation over an express contractual right.

5. Indemnity 

The Arabic language – and consequently Omani law – does not distinguish between the terms “indemnity” and “compensation.” Consequently, an obligation on one party to a contract to indemnify the other in specified circumstances is not likely to provide a full indemnity in the English law sense of the term.

This difficulty should not be insurmountable, however, and it ought to be possible to achieve the effect of an indemnity by explaining carefully how the concept is intended to work in the relevant provisions of the contract.

6. Termination for convenience 

Typically, under English law there are no restrictions on one or more parties being allowed to terminate a contract “for convenience” or “without cause.”

However, under Omani law, Article 133 of the Civil Code suggests that the inclusion of such a provision would render the contract voidable:

A contract shall not be binding on one or both of the contracting parties despite its validity and enforceability if it contained a condition that such party may terminate it without mutual consent or legal proceedings. Either party may act unilaterally in terminating the contract if by its nature the contract is not binding on him or if he reserved to himself the right to terminate it.

In the UAE, there is an exception to this principle, but only in relation to “muqawala,” or construction, contracts.

A recent UAE Court of Appeal judgment, citing the Egyptian Civil Code, ruled that employers in construction cases could be entitled unilaterally to terminate a contract, on the grounds that “muqawala contracts often take a long time to complete and circumstances may change in the period between contract formation and completion of the contract work.”

No such exception exists in Omani jurisprudence. In the section of the Civil Code dealing specifically with muqawala contracts, Article 646 provides:

A contract of muqawala shall terminate upon the completion of the work agreed or upon the cancellation of the contract by consent or by order of the court.

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Monday, December 11, 2017

Counterparts Clauses and Virtual Signing

The possibility of all parties to a contract being available in the same place at the same time for signing and execution of an agreement is increasingly limited, especially where transactions involve multiple parties. Accordingly, the practice of “virtual signing” has developed in recent years. In light of this, a joint working party of the Law Society Company Law Committee and the Company Law and Financial Law Committees of the City of London Law Society has published a guidance note (the “Guidance”) to overcome some of the practical hurdles of virtual signing.

Virtual signings 

Practically, it may be both: (a) problematic for everyone who is required to sign an agreement to be physically present for signing; and (b) difficult to post an agreement due to time constraints. Accordingly, the practice of “virtual signings” has developed whereby an agreement can be executed without the parties meeting and in which signature pages to a relevant agreement are executed in advance of the final agreement and subsequently transferred to the final form. As English case law has shown, in the case of R (on the Application of Mercury Tax Group Limited and another) v HMRC [2008] EWHC 2721 (“Mercury”), a signature on an incomplete draft deed or contract, as the case may be, cannot be transferred to execute the final form. Following the decision in Mercury, the Guidance provides various options for effectively executing English law-governed agreements at virtual signings. Such options are non-exhaustive, however, and each transaction should be considered according to its own facts. By way of example, some of the options included in the Guidance provide as follows:

1. Where a document is signed in counterparts by each party, the following steps may be taken:

  • parties should make arrangements for signing ahead of finalising the document; 
  • when the documents are finalised, the final execution copies of the documents are emailed (as pdf or Word attachments) to all absent parties; 
  • each absent signatory prints and signs the signature page only; 
  • each absent party then returns a single email attaching (a) the finalised document; and (b) the signed signature page or, in the absence of attaching the final document, the absent party should give authority to attach the signed signature page to the final approved version of the document; and 
  • a final version of the document, together with copies of the executed signature pages, may be circulated to the parties to evidence the execution of the final document. The printed execution version of the document with the attached signed signature pages will constitute an original signed document. 

2. Where the signature pages of a document are pre-signed before the document is finalised, the following steps may be taken:

  • parties should make arrangements for signing ahead of finalising the document; 
  • before signing, the signature pages relating to the document still being negotiated should be circulated to each absent party; 
  • the absent signatories sign the signature page which should be returned and subsequently held until authority is given for it to be attached to the document; 
  • the finalised document should be emailed to each absent party and confirmation should be sought from the party (or its advisors) that the final version is agreed; the pre-signed signature page may be attached to the final document once authorisation has been given by the absent party (or its advisors) and the document may be released and dated. 

The printed final agreed document with the attached pre-signed signature pages will constitute the original signed document.

Counterparts clause 

As referred in option 1 above, it is possible to sign a contract in counterparts. An English law-governed agreement may not be invalidated by the fact that it does not contain a counterparts clause, although a contract that does contain one clarifies that separate copies of an agreement may be executed by different parties and each copy will be considered to be an original. It is considered prudent to include a counterparts clause if there is a possibility that the agreement will be executed by counterparts. Including such a clause will limit a party claiming that an agreement is not binding because there is no one copy of the agreement that is signed by all parties.

Omani legislation 

Omani legislation provides for the legal formalities of the signing and execution of contracts in Oman. In particular, Sultani Decree 48/76 on the Signing Foreign and Domestic Financial Deals in the Sultanate of Oman (as amended), for example, sets out which individuals may sign and execute an agreement concluded in the name of His Majesty the Sultan or on his behalf or in the name of the Government of the Sultanate. However, in the absence of any note from the relevant Omani authorities detailing options for the signing and execution of Omani law-governed contracts in counterparts, it may be worth consulting with the Guidelines.

Conclusion 

Executing an agreement in counterparts involves the various parties to the agreement signing separate (but matching) copies of the same document. Together, the various signed copies will form a single binding agreement, without the need for all the parties to sign the same copy of the agreement. Although not essential, it is usual practice to include a boilerplate clause specifically providing for an agreement to be executed in this way. Further, in order to avoid a similar situation as in the case of Mercury, where agreements are executed by “virtual” signing, it is useful to reflect upon the Guidelines.

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Monday, December 4, 2017

Does State Audit Law or the Law for Safeguarding State Property Apply to You?

The State Audit Law promulgated by Sultani Decree 111/2011 (the “State Audit Law”) is applicable to:

• all companies wholly owned by the Government of the Sultanate of Oman (the “Government”); and

• companies in which the Government holds more than 40% of the share capital.

Each such entity is deemed to be a “Supervised Company.” It should be noted that, pursuant to the law on safeguarding of public property and preventing of conflict of interest promulgated by Sultani Decree 112/2001 (the “Law for Safeguarding State Property”), all employees of companies in which the Government holds more than 40% of the share capital would be considered government officials.

What does being a Supervised Company mean? 

Any entity which falls within the meaning of a Supervised Company should carefully consider the provisions of the State Audit Law. A Supervised Company, for example, has certain obligations including, pursuant to Article 5 of the State Audit Law, to provide State Audit with all draft regulations and systems prepared by it in relation to the Supervised Company’s financial and accounting affairs, taxes and charges.

State Audit also has the right, by virtue of Article 9 of the State Audit Law, to conduct financial and administrative control in all areas including control over investments and all accounts of a Supervised Company. In exercise of this right, under Article 10 of the State Audit Law, State Audit may review without prior notice:

(i) the investments of the Supervised Company;

(ii) any financial irregularities of its employees; and

(iii) any documents or records of the Supervised Company.

A Supervised Company is further under an obligation under Article 21 of the State Audit Law to provide State Audit with the following:

(1) its balance sheets and financial statements;

(2) final accounts and any adjustments or amendments thereto; and

(3) board and auditor reports and management letters approving them.

It should be noted that a Supervised Company has certain reporting obligations including to inform State Audit within one week of any discovery of any financial or administrative irregularity or occurrence of an incident that results in financial loss to the State or any matter than may lead to such loss without prejudice to the other legal procedures that shall be taken.

A Supervised Company should further be aware of the penalties for non-compliance with the State Audit Law. By Article 32 of the State Audit Law, anyone restricting the State Audit from reviewing any of the accounts, papers, documents or other things that State Audit has a right to review or anyone concealing the information, data or documents or submitting incorrect ones shall be penalised by imprisonment for between six to 12 months and/or a fine of between OMR 1,000 and OMR 2,000.

What does being a government official mean? 

A government official has certain responsibilities to prevent misuse of public property (i.e., any property or moveable assets owned by a Supervised Company), as provided by Article 5 of the Law for Safeguarding State Property, and is under a duty to inform State Audit immediately of any violations related to such public property.

Specifically, government officials should be aware that they are prohibited from the following:

(i) using their positions of work to realise a benefit for themselves or others or using their influence to facilitate others obtaining any interest or preferential treatment – this is particularly important when considering the awarding of tenders or contracts;

(ii) using public properties for personal reasons or in ways not intended for such property;

(iii) combining their positions or work and any other work in the private sector which relates to their positions or work; and

(iv) having any share in any company, establishment or profit-generating business directly or indirectly related to their positions or work (this prohibition extends to such government official’s minor children).

Further, government officials should be aware that, pursuant to Articles 12 and 13 of the Law for Safeguarding State Property, if requested by State Audit, they shall be required to disclose to State Audit all moveable monies and properties owned by them and their spouses and minor children and the monetary source of such ownership; and if they become aware of any secrets by virtue of their positions, they undertake not to disclose such secrets, even after the end of the employment relationship with the Supervised Company.

Any failure by a government official to comply with the abovementioned provisions or any other article as may apply under the Law for Safeguarding State Property could result in a government official being imprisoned for up to three years as well as being sacked from his/her position and confiscation of any amounts received in violation of the Law for Safeguarding State Property.

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Monday, November 20, 2017

Decennial Liability for Contractors and Architects in Oman

Many of those familiar with the construction industry in the Middle East region will be familiar with the term “decennial liability.”  In particular, many will be familiar with a requirement that, in relation to works performed under a construction contract:

(a) a contractor and an architect remain legally liable for a period of 10 years after the completion of the works; and

(b) each of the contractor and the architect are required by contract to take out insurance covering the works for that 10-year period.

A number of countries in the Middle East have similar legal provisions in that regard.  Generally, neither a contractor nor an architect can contract out of the liability.  Depending on the circumstances, the liability does not extend to subcontractors, suppliers or subconsultants.  The insurance is readily available in the relevant jurisdictions in the Middle East. 

The liability is a form of strict liability.  There are some differences of opinion among the legal profession as to what extent (if any) a claimant needs to prove fault or causation against a contractor or architect, but it is clear that there is no obligation on a claimant to prove negligence, or a failure to achieve an industry standard, etc.  To put it another way, there is no requirement to demonstrate the contractor or architect was “negligent,” but there are some differing views as to what extent (if any) there is a need to show that some action or inaction by the contractor or architect caused or contributed to the loss and damage.

In most parts of the Middle East, where there is a law imposing decennial liability, it only applies where the relevant structure has collapsed or suffers a major structural defect.  The law in Oman is far more extensive.  Article 634 of Royal Decree 29/2013 (the “Civil Code”) reads:

(1)  Both the engineer and the contractor shall be jointly liable for a period of ten years for any total or partial collapse of the buildings or other fixed facilities constructed thereby, and for any defect which threatens the stability or safety of the building, unless the contract specifies a longer period.  The above shall apply unless the contracting parties intend that such installations should remain in place for a period of less than ten years.

(2)  The warranty set forth in the foregoing Article shall include any defects existing in the buildings and facilities, which endanger the safety and endurance of building.

(3)  The period of ten years shall commence as from the time of delivery of the work.

This Article is typical of what might be found in other jurisdictions in the Middle East, in that liability is limited to total or partial collapse, and defects affecting the stability or safety.  However, Article 22 of the Engineering Consultancy Law promulgated by Royal Decree 27/2016 (the “Engineering Consultancy Law”) provides:

The licensee [i.e., the architect/engineer] shall be jointly liable with the contractor for the faults and flaws that may occur in the project designed by or executed under the supervision of his office, even if such faults and flaws are attributed to the land on which the project is constructed or the owner had approved the flawed installations, for (10) ten years from the date of the handing over of such installations.

If the work of the office is limited to making the designs only without being charged with supervision, the office shall only be responsible for the defects that may be attributed to the design process.  Every agreement and condition meant to exempt the designer and/or the supervisor from this liability or to limit such liability shall be null and void.  Also, claims of responsibility on liability filed after the lapse of (3) three years from the date of discovering the fault or flow without instituting an action within the aforesaid period shall not be considered.

When read literally, the words suggest that decennial liability extends to any defect, not just defects leading to collapse or those affecting stability or safety.  This would suggest that the contractor and the engineer remain liable for ten years for even minor defects.  This wording is not new.  It replaced Article 16 of the old Engineering Consultancy Law, promulgated by Royal Decree 120/1994, which contained near-identical terms. 

We do not know of any reported case that has interpreted Article 22 of the Engineering Consultancy Law to include liability for even a minor defect.  We suspect the Omani courts would be likely to approach the matter from a commonsense perspective, to exclude normal wear and tear, and issues that should be addressed as part of the overall maintenance of a structure.  Also, the limitation period of three years commencing from the discovery of the defect does rule out many likely claims for minor defects, and most that may be visible at the time of completion of the works.  Nevertheless, the law as set out does in principle allow for claims for minor defects.

In summary, decennial liability is broader in Oman than elsewhere in the Middle East, and can cover defects that are not structural or safety-related.  It is important that, when drafting contracts, contractors and consultants consider how best to allocate risk and protect themselves from claims.  It is also critical that parties to construction contracts keep good records to protect themselves from such claims, including photographs of works, and any relevant warranties given by manufacturers and suppliers.


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