Tuesday, October 27, 2009

Agents and Defense Contracts

In April 2001, the Omani Ministry of Defense ("MOD") issued a circular to overseas defense manufacturers, stating that the Ministry would not allow such entities to have an Omani agent, except in exceptional circumstances approved by the Ministry.

However, in 2003, both Oman's Appeal and Supreme Courts ruled that the MOD letter had no legal effect, as it was not a promulgated Omani statute. These Courts stated that Oman's Law of Commercial Agencies still applied.

Then, in 2005, the Law of Commercial Agencies was amended by Royal Decree. The wording of the amendment stated that contracts for the purchase of weapons or ammunition or all types of military equipment could be entered into directly between the MOD and the overseas defense manufacturer.

However, the amendment to the law did not prohibit an overseas defense manufacturer from having an Omani agent. The true construction of the relevant sentence shows that the law is simply saying that an agent is no longer mandatory for defense contracts.

Nonetheless, regardless of the law, the practical truth is that, unless the MOD agrees in advance, it prefers agents not be involved in such transactions.

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Monday, October 26, 2009

Enforcement of Court Judgments and Arbitral Awards

There is often a lot of confusion about the effects of Oman Court judgments and Oman arbitral awards rendered in Oman. This post should provide some clarity.

First, there is a distinction between court judgments and arbitral awards.

A final, non-appealable Oman Court judgment should be automatically enforced in any of the other GCC states, by virtue of the 1996 Treaty for the Enforcement of Judgments, Judicial Delegation, and Courts Summons between the Arab Gulf Countries Cooperative Council (AGCC).

Outside the GCC, it is unlikely that a final Omani court judgment would be automatically enforceable. Almost certainly, the case would have to be heard again by the courts of that country.

Second, there are two relevant types of arbitral awards in Oman. The first type is an arbitral award rendered in Oman. This award should be automatically enforced in any country which, like Oman, has signed the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards (the “NY Convention”). Under the requirements of the NY Convention, any country that is a member of the convention is required to give effect to private agreements to arbitrate disputes. In addition, member countries are required to recognize and enforce arbitration awards made in another contracting country. Oman signed the NY Convention in 1999 and currently there are 144 member countries worldwide.

A second type of arbitral award involves those awards rendered in a fellow member state of the NY Convention. If the respondent to the claim fails to pay the award, the claimant may seek to enforce the award in an Omani court.

This particular scenario has not yet been tested in Omani courts, but the terms of the NY Convention would require the Omani court to enforce the arbitral award, just as the courts of all signatories to the NY Convention.

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Monday, October 19, 2009

H1N1 Workplace Readiness Plans

Globally, businesses are preparing plans for dealing with outbreaks of H1N1 at work. Businesses in Oman should also consider implementing readiness plans for dealing with an outbreak and for complying with the Omani Labour Law.

Article 87 of the Labour Law requires employers to provide a clean and safe workplace. H1N1 readiness plans for companies may include:

  • A communicable disease policy, that requires sick employees to stay home from work without fear of losing their jobs;

  • Employee education regarding the spread of flu and how to recognize symptoms;

  • Other methods for reducing the spread of disease, including air ventilation and purifying systems, hand sanitizers, etc.;

  • Work arrangements such as telecommuting which reduce personal contact, as well as other limitations on non-essential travel;

  • A plan for how essential business operations will continue if there is an increase in employee absence.

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Wednesday, October 14, 2009

Corporate Ownership of Real Estate

Companies in Oman seeking to own land are subject to a number of restrictions under Omani law. The land or real property owned by a company in Oman must be used only for the limited purpose of furthering the objects of the company such as for building the administrative office, warehouse, staff residences, etc. An exception has been made in relation to wholly owned Omani companies whose business objects include owning, developing, and disposing of real property. Additionally, certain wholly owned GCC companies with real estate development objects have also been exempted from this legal stipulation for restricted use of land.

Corporate ownership of real estate is subject to the following restrictions:

  • The land must be used for furthering the company's objects;
  • Prior governmental approval must be obtained for its usage; and
  • The owner may not dispose of the land before the completion of the legally stipulated number of years from the time of acquiring title to it.
One option available to non-GCC companies in Oman that are interested in real estate development is to obtain usufruct rights over the land. Usufruct is a right in land acquired from the owner of the land to exploit and benefit from the land. Usufruct can be obtained for a maximum initial term of fifty years extendable for further terms. The owner of the land must obtain the mandatory governmental approvals before granting usufruct rights. A company can obtain rights to beneficial use of the land by entering into a usufruct agreement with the owner which is subject to government approvals for the usufruct and for the development plans.

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Monday, October 12, 2009

Liability Period for Engineering Work

An important consideration for companies seeking to undertake construction or engineering projects in Oman is potential liability for that work. The Law on Engineering Consultancy Offices (Royal Decree 120 of 1994) states that engineering consultancies in Oman shall be jointly responsible with the contractor who executes the work for flaws in the project for ten years from the handover date.

Design defect vs. construction defects
The law does include a limitation on this joint responsibility, stating that if the engineering consultant performs design work only, without supervision or execution, the design office will be responsible only for the design defects.

Oman's Standard Documents for Building and Civil Engineering Works are also useful in clarifying the scope of liability for engineering designers and contractors. The standard construction contracts which are used in government projects, state in Article 62(4), that the entity executing the construction will be liable for 10 years as regards "unsound construction, other than design defects". In other words, the normal standard contract would appear to exclude any liability falling upon the construction entity for design flaws.

For companies planning to complete projects by dividing engineering design and construction work, one option for limiting the liability of the constructing entity to construction flaws only is to procure a back to back indemnity from the designer on the project. The indemnity would state that the designer will indemnify the construction company for any design defects.

What is engineering work?
The law does not define what constitutes engineering work. The law suggests that the design and construction of buildings and structures constitute engineering work, but this should not be narrowly construed as there are many aspects to engineering services in Oman, from feasibility studies through to architectural services and civil works which may be captured by this law.

Insurance issues
It is sometimes not practical to obtain insurance cover for such work for the entire ten years. Some reasons for not obtaining the insurance for ten years are that:

  • It is not always possible to agree to insurance that matches such a long liability period in instances where the work is a non critical item in the project;
  • It is too expensive to maintain insurance for the ten years; and
  • It makes little sense when the reports produced will be superseded by subsequent developments.
In such instances, it ultimately depends on the commercial arrangements between the parties.

Another insurance issue is the type of insurance policy which needs to be obtained. The Insurance Law (Royal Decree 12 of 1979) stipulates that except for life insurance, contracts of insurance shall not be effected with foreign insurance companies which operate outside Oman. Companies taking out insurance policies for their engineering work need to ensure that the insurance company they contract with has a corporate presence in Oman which can receive and respond to any claims.

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Tuesday, October 6, 2009

Authorised Managers and Signatories

The Commercial Registration Certificate of an Omani company (such as a limited liability company and a joint stock company) is available from the Ministry of Commerce and Industry for a small fee. It sets out certain information on the company including the names of the authorised managers and signatories of the company.

The Commercial Registration Certificate specifies the type of authorisation for the authorised managers and signatories - the options are full, financial, technical and/or administrative. The authorisation can be for one person to act individually or jointly with another person. It can also include an authorisation limit for financial matters which can be a set monetary amount or unlimited.

Under Article 153 (Binding effects of manager’s acts) of the Commercial Companies Law, a limited liability company shall be bound by all acts performed by its managers acting in the company’s name and within the scope of their authority. Any bona fide third party shall be entitled to assume that any act done by the managers of the company in the course of its business comes within the scope of the manager’s authority, and the company shall be bound thereby unless the limitation of the manager’s authority is registered in the Commercial Registration Certificate. Article 104 (Binding effect of acts of the company) of the Commercial Companies Law sets out a similar requirement for joint stock companies for the board of directors, chairman, and managing directors of the company.

Therefore when doing business with an Omani company, the most prudent course of action is to ensure that all documents signed by that company are signed by an authorised signatory or signatories with the relevant authority as set out in the Commercial Registration Certificate. This will avoid the situation where the authority of the signatory or signatories signing on behalf of the company may be challenged at a later date.

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Thursday, October 1, 2009

International Projects Update: IWPP Finance in Oman and the GCC

After years of remarkable expansion followed by a precipitous decline in the wake of the global financial crisis, the credit market for international water and power projects (IWPPs) in Oman and the GCC appears poised for a recovery.

While 2008 saw a project volume in the Middle East of about US$50 billion, nearly six months passed before the GCC saw its first IWPP financing of 2009. Bahrain’s Addur IWPP closed on 29 June, raising US$2.1 billion and bringing the overall project volume for the region to US$6.7 billion for the year.

The financial crisis forced project lenders to write down the value of project debt, driving up the cost of borrowing. Further, it wiped out the secondary market for project loans as banks shunned the formerly popular practice of packaging debt in off-balance sheet vehicles.

The capital that commercial banks were willing to lend came at a higher cost and decreased tenor. Whereas tenors running from 15 to 20 years at 100 bps over Libor were once common, the Addur project received debt at a tenor of eight years at 350 bps over Libor. Today, the cost of capital averages at 250 bps over Libor.

The revival of IWPPs in the region has been driven by loosening credit conditions linked to new trends in IWPP finance. Specifically, banks are making increasing use of hard or soft mini-perm structures. In a hard mini-perm, debt is offered at a short tenor, in the range of seven years, requiring early refinancing. In a soft mini-perm, a longer tenor is used, but incentives are used to encourage the lender to refinance well before maturity.

Another key trend has been the rising profile of export credit agencies and international development banks. Export credit bodies provide access to large amounts of relatively inexpensive capital and offer added confidence to commercial banks. Development banks have also played a key role by providing an additional source of capital and a backstop for project debt.

Finally, banks have been favoring government supported projects. For instance, an IWPP with a concession or off-take agreement is a stronger candidate for financing given its relatively secure future cash flows. Additionally, governments may guarantee the obligations of state-owned parties entering into such agreements.

Increasing electricity and water demand has led the government of Saudi Arabia to tender projects in form of engineering, procurement, construction (EPC) contracts, rather than build, own, operate (BOO) or build, own, transfer (BOT) contracts.

Oman aims to avoid such a measure. Continuing on its program of privatization, Oman expects to see the close of a club financing of an IWPP in Salalah this year. RFPs have been released for projects at Barka, Sohar, Duqum, and Ghubrah, with another for an IWPP in Mirbat on the way. Additional projects are being studied, including a solar plant in the south of the country.

In past projects, the Oman Power & Water Procurement Company (OPWP) has entered into off-take agreements. In the case of the Barka and Sohar IPPs, the OPWC will purchase the output under a 15-year agreement.

IWPP finance and execution in Oman implicates a range of complex legal issues, including:

  • Licensing – procurement of generation and desalination licenses and exemptions from the Authority of Electricity Regulation;
  • Financing – the creation and registration of security interests in Oman, as well as review of loan and facilities agreements;
  • Land Issues – entering into a concession agreement with the Government and or any usufruct agreements as may be required;
  • Environmental – Compliance with the Environmental laws of Oman in coordination with the environmental authorities;
  • Labor and Employment – Fulfilling the Omanisation requirements during the life of the project.
In addition, it is often necessary to put in place all the project agreements in order to obtain IWPP finance. Depending on the project, these agreements may include:
  • Power and/or Water Purchase Agreement;
  • Electrical Connection Agreement;
  • Water Connection Agreement; and
  • Gas Supply Agreement.
As the credit market revives -- and as the oil prices rebound -- Oman grows increasingly likely to meet its goal of increasing output through an ambitious program of privatization.

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