Friday, April 29, 2011

Courts versus Arbitration

The below article was featured in

There is often a lack of understanding about how Oman’s Arbitration Law (Royal Decree 47/97 as amended) works. The truth is that this law provides a viable alternative to having a dispute heard by the Omani courts.

The fundamental difference between the Omani court system as opposed to the Omani arbitration system is that an Omani court case may go through three tiers of justice (Primary, Appeal and Supreme), whereas an arbitral award is final, with no right of appeal, and it is extremely unlikely that the Omani Courts would nullify an arbitral award. This means that almost certainly an arbitral award will lead to the end of the dispute, without any ability to appeal or overturn the arbitral award.

The best time to agree on arbitration is in the contract at the start of the relationship with your counter-party. For instance, if party A desired to have any dispute heard by an arbitral panel, using Omani Arbitration Law as the procedure for such arbitration, it is best for the contract to state: “Any dispute will be finally settled via arbitration in accordance with Omani Arbitration Law (Royal Decree 47/97 as amended).”

However, the above clause can be further fine-tuned to states how many arbitrators will be on the arbitral panel. Article 15 of Oman’s Arbitration Law states that if the parties have not agreed on the number of arbitrators, the number of them will be three. Accordingly, if the parties wanted a sole arbitrator to hear any dispute, they should say so in the contract.

It is worth bearing in mind that with a panel of three arbitrators, a majority 2-1 decision is sufficient, unless the parties had agreed otherwise in writing before the commencement of the arbitration.

Article 17 states that the Court would decide the identity of the sole arbitrator, if the parties cannot agree on whom it should be. If the panel is to consist of three arbitrators, one party states his nominee as arbitrator, and the other party must then state his nominated arbitrator within the following 30 days. The two arbitrators thus chosen should select a third arbitrator within 30 days after the nomination of the second arbitrator. However, either party can apply to Court if these 30 day deadlines are breached.

An important part of the Omani Arbitration Law is what it states about the time procedural framework for an arbitration case. It is often forgotten that Article 27 says that – unless the parties have agreed otherwise - the arbitration clock starts ticking on the day the defendant receives a letter from the claimant stating that a dispute exists and that, as per the contract, it must be resolved via the agreed arbitration procedures. Article 45 requires that the arbitral award must be forthcoming within 18 months after the clock started to tick, unless the arbitral panel and the parties agree otherwise.

Another salient aspect of Omani arbitration is that the arbitral panel can appoint one expert or more to present a written or verbal report. The Law states that the parties will be afforded the opportunity to present their views on the expert reports. In addition, each party has the right to examine the documentation upon which the expert based his report. The parties are also granted the right to bring their own experts to an arbitral hearing, to present their views on the contents of the reports prepared by the expert appointed by the arbitral panel.

As mentioned at the start of this article, an arbitral award should be viewed as final as there are no rights of appeal and very limited scenarios where an application can be made to the Omani courts to try to have the arbitral award nullified. To the best of my knowledge, the Oman courts have never nullified an Omani arbitral award.

What, then, drives certain parties to agree in their contract to arbitration? The decision may be due to enforceability issues or due to a desire to have the dispute heard by specific arbitrators. The time frame is perhaps also more certain in arbitration as compared with Omani court cases. But weighing up the advantages and disadvantages of the courts as opposed to arbitration is always a complex matter which can only be determined after careful legal study of the specific facts in question at the time of contract preparation.

-James Harbirdge, Partner (Oman)


Monday, April 25, 2011

Oman Cybercrime Law

The Law for Combating Cybercrime (the Law) issued by Sultani Decree 12/2011 last month seeks to address a wide array of illegal activities involving a computer device, computer system or network. A cybercrime can be two-pronged: (i) a crime that targets a computer device or network; or (ii) a crime that is facilitated by a computer device or network.

The Law does not attempt to offer a ‘capture-all’ definition of ‘cybercrime’ but merely states that each crime listed in the Law would constitute a cybercrime. The designated authority for combating cybercrimes is the Information Technology Authority established a few years ago.

The Law defines each form of cybercrime and prescribes a penalty which ranges from a fine to imprisonment from a month to fifteen years. The cybercrimes described below are defined in the Law.

Crimes targeting computer networks or devices

Hacking: is described as intentional and unauthorised access of a website, computer system, or computer network. Varying levels of punishments are prescribed depending on the severity of the crime. For example, the following instances of hacking evoke heightened penalties:

  • introduction of a virus, data interference or an intrusion that results in modification, damage, destruction or reconfiguration of a data or an information system
  • hacking of a computer system or database of a governmental agency, bank or financial institution for theft of classified information
  • unauthorised access, alteration or destruction of electronic medical data
  • unauthorised modification or destruction of a website
  • illegal interception or transmission of data or information
  • denial of service (DoS) attack attempting to make a computer resource unavailable to its intended user or deactivating access to a service provider
Malicious Software or Malware: The production, sale, purchase, import, distribution or display of software or a computer resource (widely termed ‘Malware’) designed to access a computer system for committing a cybercrime is a punishable offence under the Law.

Crimes facilitated by computer networks or devices

Phishing: The Law appears to have treated rather lightly this important tactic of obtaining vital information from internet users by persons masquerading as a trustworthy source in the cyberspace. It is typically carried out using bogus emails or instant messaging and most of these mails can be tracked to sources outside the country. Some of these bogus emails manage to elude the spam filters installed by service providers in individual email accounts for filtering out these emails. Recently, Oman’s premier telecom service provider, Omantel, issued an alert to internet users to be watchful of suspicious emails, particularly those seeking personal or sensitive information such as username, password, credit card or account details. An attacker could use the information caught using these baits for accessing and using the victim’s account for fraudulent purposes or for spamming. Many affected authentic sources now consequently deem it necessary to add a line to their emails and messages stating that they will never seek ‘password’ or ‘billing information’ from their customers via emails.

Internet Fraud and Forgery:  is defined as a fraud or forgery committed via a computer device or network would be classified as cybercrime.  This would include modifying electronic data or information with the intention of committing forgery, which attracts the highest punishment under this Law of fifteen years of imprisonment when committed against the government.

The Law defines an electronic fraud as intentional and unauthorised introduction, modification or cancellation of data or information or deactivation of a computer system or network with the intention of committing fraud or causing damage to an end-user or for an illegal gain.

Identity Theft: is defined as the forgery or unauthorised use of a credit card or debit card or the use of a computer resource for gaining illegal access to information in a financial card or unlawful gains made through any of these means are all classified as cybercrimes.

The Law also characterises the following ‘real-world’ crimes are cybercrimes when committed via cyberspace:
  • money laundering
  • unlawful dealing in drugs and psychotropic substances
  • gambling
  • copyright infringement
  • theft of art and cultural artifacts
  • illegal arms dealing
  • human trafficking
  • illegal trading of human body parts
  • dealing in pornographic materials
  • cyber-stalking
  • cyber bullying
  • breach of privacy
  • obscene or offensive content
  • cyber-terrorism
The Law also addresses ‘white-collar’ corporate crimes facilitated by computer devices or networks.  While it is difficult for lawmakers to anticipate and address every conceivable crime, this Law constitutes a much-needed beginning to stave off superficial attempts to extrapolate existing criminal laws to apply an increasingly complex cyber-world.  This Law also exemplifies the need for individual states to legislate for computer and internet crime laws to facilitate an overarching international treaty for combating multi-jurisdictional cybercrimes.


Thursday, April 21, 2011

Procedures of the Omani Courts

The below article was featured in

People often ask me about the various stages of an Omani court case.

They usually begin with a statement of claim filed at the Primary Court.

The Claimant grants a power of attorney in favour of their lawyer so that the latter can file the case.

The power of attorney needs to be signed in front of a Ministry of Justice notary.

The Court staff usually want to see - on the statement of claim - the exact physical location details of the defendant's premises.

It therefore makes sense to always obtain the full physical location details of the parties with whom you contract, including your employees, right at the start of a relationship.

The court serves the statement of claim on the defendant and also sets a date for the first hearing.

It is quite common for the defendant's lawyer to attend the first hearing and request an adjournment. The Courts normally grant such an adjournment, especially if the defendant hasn't at that point provided a power of attorney to its lawyer.

When, later, the defendant's defence is filed, it is important that the document should include any procedural defences. For instance, the defendant may allege that the claim is time-barred or that the Courts lack jurisdiction owing to an arbitration clause in the contract. These procedural arguments must always be raised by the defendant in the first court submission lodged on its behalf (ie, in the Defence).

The Primary Court usually orders the Claimant to file a written reply in response to the defendant's Defence.

Soon after that, the Primary Court takes a view on whether or not to appoint an expert to assess the case.

The expert is normally working in the private sector and receives a mission letter from the court telling him the scope of work to be performed.

The expert will normally then hold separate meetings with the claimant and defendant, who can also bring their lawyers to such meetings.

Some experts ask many questions and others prefer to hear a verbal explanation of the litigant party's position.

My view is that lawyers should always be involved in helping their clients prepare for meetings with experts. I also firmly believe that the lawyers should be present at all times when discussions are being held by the expert with each litigant party. This strategy best protects the client and also ensures that they have meaningful back-up when the expert talks about any legal issues.

Also, the lawyer should be working hard on the client's behalf and should help in collating all necessary documents so that the entire scenario is explained in full and accurately to the expert.

The lawyer should also be ensuring that the client will be able to answer any and all questions which the expert may pose.

The lawyer's role, in part, is therefore to help the client explain their position eloquently to the expert, with proper documentary evidence which leaves the expert feeling that all his concerns and questions have been answered.

It is all too easy for an expert to reject an argument if the required paperwork is not provided.

Ultimately, the expert files his report at court, with the claimant and defendant receiving copies.

The Primary Court normally affords each litigant party the right to file a submission, commenting on the expert's report.

The Primary Court, having seen those submissions, may order the expert to provide an additional report, which should address all the concerns about the first report which have been raised.

Sometimes, the Primary Court agrees to appoint another expert if one party is unhappy with the first expert.

But usually the Primary Court reaches its own judgment decision after one expert has filed two reports.

It is not a fait accompli that the Court will agree with the expert whom they have appointed.

It is the lawyer's job to continue to file robust, convincing and persuasive submissions even if the expert's findings are in favour of the other party. This is especially true as the Court may agree that the expert is wrong.

Once a Primary Court judgment is pronounced orally at a hearing, each party has 30 days in which to file an appeal.

During those 30 days, the lawyer can first peruse the court file to see the draft Primary Court judgment and, after that, the written Primary Court judgment will become available.

Any appeal filed with the Appeal Court should document any and all alleged defects in the Primary Court's analysis and the expert's reasoning.

The Appeal Court has the right to appoint one or more additional experts to investigate the issues in dispute.

Once the Appeal Court orally pronounces its judgment at a hearing, each party has 40 days to file an appeal to Oman's third and final tier of justice, the Supreme Court.

It is very rare to have any hearings in the Supreme Court. This is partly because the Supreme Court looks at matters of law only, and is not designed to look at evidential issues.

The Supreme Court, once it has its judgment ready, normally calls both parties to court to hear their judgment. A Supreme Court judgment cannot be appealed.

Sometimes the Supreme Court refers the case back to a different panel of the Appeal Court. In such scenarios, the Supreme Court instructs the Appeal Court to look at the matter again in the context of the Supreme Court's instructions.

So, it is possible for a case to be the subject of two Supreme Court judgments - but the Supreme Court will only once refer the case backwards to the Appeal Court.

This article has hopefully given you a brief but helpful "helicopter view" of the Omani court system.

At times, litigation can be frenetic and it is always best to obtain legal advice long before a dispute arises. In this way, many court cases could be avoided.

-James Harbirdge, Partner (Oman)


Monday, April 18, 2011

Omani LLCs: The Optimum Approach To Drafting Constitutive Documents

Key features of the Oman LLC - is it the appropriate corporate form for a particular business venture and investor relationship?

An “LLC” is probably in practice the form of limited liability Omani company (whether wholly Omani, or mixed Omani/foreign owned) most frequently chosen by investors for the conduct of business in Oman. The reasons for this choice are typically the lower minimum capital requirement of an Oman LLC, and a perception that an LLC is generally simpler and cheaper to operate, with fewer regulatory requirements, in comparison with an Oman joint stock company (an SAO) (either closed or public).

However, if an LLC is the chosen corporate vehicle, it is important for its founding shareholders to recognise at the outset the key differences between an Oman LLC and joint stock company, to be sure that the LLC form is in fact the optimum form of corporate vehicle for their proposed shareholder relationship and the achievement of the proposed corporate objective. Key LLC features which differ from those of an Oman SAO are as follows:

  • a “shareholder”, or more accurately a “partner”, in an LLC should be regarded as having more of a “participating interest” in the LLC than as holding “shares”, since under the Commercial Companies Law promulgated by Sultani Decree 4/74 (the CCL), an LLC’s shares may not be represented by negotiable instruments;
  • under the CCL, unlike an SAO’s shares, an LLC’s shares are not mortgageable, so an LLC is not an appropriate corporate form if company shares need to be charged to lenders as security for debt finance;

  • an LLC’s shares must be fully paid up on subscription, unlike an SAO’s shares, the value of which is only required to be paid as to 50% on subscription with the remaining 50% payable within three years of incorporation;

  • the sale of existing LLC shares are subject to a mandatory pre-emptive purchase right of the other partners, which probably cannot be effectively waived in advance of the proposed sale;

  • an Oman LLC, by law, may not be managed by a board of directors. The CCL prescribes that an LLC’s management function is divided between managers (i.e., natural persons) appointed in this capacity by the partners, and the partners themselves, with the managers generally responsible for the LLC’s day-to-day management decisions and the partners for the LLC’s more strategic management decisions. Accordingly, if investors wish the company they incorporate to be managed by a board in the manner of a common law limited liability company, an SAO is likely to be a much more appropriate form of Omani company than an LLC. If an LLC is the chosen corporate form, the partners need to be alive to the fact that certain management decisions will need to be approved by a partners’ resolution rather than a decision of the manager(s).

Having said this, if the statutory features of an Oman LLC as described above are considered by investors to be generally appropriate for their purposes, the law applicable to an LLC allows its partners significant flexibility as to the terms on which they contract with respect to the LLC.

An LLC’s corporate agreements - constitutive contract and partners’ agreement

An LLC’s primary corporate document is its constitutive contract which is required to be registered with the Oman Ministry of Commerce & Industry (MOCI). LLC founders often elect to use the MOCI’s standard short form constitutive contract (which contains the bare minimum of corporate terms, e.g. the agreed corporate name, address, capital, partners and their participating interests, objects, etc). In accordance with its terms, the short form contract will be supplemented, where it is silent, by the applicable provisions of the CCL. In addition, LLC founders typically further supplement the short-form constitutive contract by an unregistered partners’ agreement, which may contradict the registered constitutive contract or mandatory provisions of the CCL.

We would not recommend that LLC founders adopt this approach to the incorporation of their LLC for the following reasons. Firstly, the standard terms of the CCL, which will as a matter of law be incorporated into the short-form constitutive contract, may not reflect the founders’ intentions as to their relationship as LLC partners and the operation of the LLC. Secondly, terms of a partners’ agreement which contradict those of a registered short-form constitutive contract, as amplified by the CCL, will not be enforceable. The CCL, although containing some mandatory requirements, allows much greater flexibility to founders as to the terms of their constitutive contract than might be initially thought. Accordingly, contracting on the basis of an expanded and “customised” constitutive contract in the manner permitted by the CCL, together with a partners’ agreement that merely amplifies and does not contradict this form of constitutive contract, is much more likely to provide an LLC’s founders with enforceable corporate contracts on terms which reflect their mutual intentions.

Customising a constitutive contract - key areas where the CCL permits flexibility in constitutive contract terms

As mentioned above, the CCL imposes some mandatory (including some minimum) requirements with respect to an LLC’s constitutive contract. However, the CCL also permits a substantial degree of flexibility as to constitutive contract terms. The following are three key areas in respect of which the CCL permits flexibility, and which can therefore be provided for in a constitutive contract in a manner which reflects the founders’ intentions as closely as the CCL permits.

Partners’ meeting approvals

The CCL prescribes the minimum quorum for an LLC’s partners’ meetings. This minimum quorum can however legitimately be increased in a particular constitutive contract, if the founders wish to ensure that a certain percentage (including 100%) of the “shareholding” is required to constitute a valid partners’ meeting.

The CCL also prescribes minimum percentage approvals for various kinds of partners’ resolutions. Once again, a constitutive contract can legitimately require increased approval percentages for particular types of partner resolutions, if this reflects the founders’ intentions as to partner decision-making.

Partners’ participation in LLC profits and losses and net assets on dissolution

The CCL does not require an LLC’s partners to participate in the LLC’s profits and losses in the same proportions as their capital participations. The CCL merely provides that a constitutive contract may not deprive a partner from any profit/loss participation. Accordingly, under both law and practice, a constitutive contract may specify each partner’s profit/loss participation as agreed by the founders, even down to a very small percentage participation, so long as it does not amount to nil.

Management control

The CCL provides that an LLC’s mangers will be appointed by or pursuant to its constitutitve contract, provided that the same does not contravene mandatory provisions of law. The MOCI’s standard short-form constitutive contract actually names the first managers, incidentally requiring an amendment to the constitutive contract (and thus 75% capital approval) on each change of manager. However, naming the individual managers from time to time in the constitutive contract is not a mandatory requirement of law. A constitutive contract can legitimately be drafted so that, for example, a manager may be appointed either by the partners’ meeting (on majority approval of those attending a quorate meeting) or by the decision of one partner only. As regards dismissal of a manager, the only mandatory CCL provision is that the partners’ meeting cannot be deprived of its statutory right to dismiss a manager. However, once again, providing in a constitutive contract that one partner only may also be so empowered is not contrary to mandatory law. Accordingly, by customising in this way the management provisions of a constitutive contract, it is possible to ensure, if desired, that in almost all circumstances an LLC’s management is within the control of a named partner.


In conclusion, we would recommend the following for investors considering the incorporation of an Oman LLC as the vehicle for their conduct of business within Oman. First, investors should consider whether the statutory characteristics of an LLC as described at the beginning of this article are compatible with their objectives, particularly in terms of their relationship as corporate shareholders/partners. If so, investors should seek to expand on the MOCI standard short-form constitutive contract and additionally customise it to achieve their mutual objectives in a manner permitted by law. In so doing, investors will be ensuring that their mutual agreement regarding the LLC is to the greatest extent possible enshrined in a registered contract which complies with the law, thus rendering its enforceability more certain. Finally, to be enforceable, any additional partners’ agreement should merely amplify matters agreed in the constitutive contract, and in particular should not contradict matters of Oman law as agreed under the constitutive contract.


Thursday, April 14, 2011

The Complexity of Jurisdiction

The below article was featured in

An issue which is often overlooked when drafting a contract is the clause about jurisdiction.

“Jurisdiction” refers to the entity which will hear any dispute between the two parties. Dispute resolution is normally performed by the courts or via an arbitration panel. However, it is not uncommon to read legally inaccurate contractual provisions, which state something such as: “The Oman Courts will settle any dispute via arbitration.” Sentences such as these can lead to confusion as regards what the parties’ intention actually was; one party will argue that it is clear that the Oman Courts have jurisdiction to hear the dispute, whereas the other party might argue that the Oman Courts cannot hear the dispute, as the Oman Courts are only empowered by the clause to decide who will act as arbitrator. The confusion arises because resolution via the courts is something different to resolution via arbitration.

Strictly speaking, when the parties agree in a contract that the Courts of a certain country will have jurisdiction, the ensuing case is known as “litigation” and the ultimate decision by the judges is known as the Court’s “judgment”.

In contrast, when the parties agree in a contract that the dispute will be settled by arbitration, the ensuing proceedings are known as “arbitral proceedings”, and the ultimate decision of the arbitrator(s) is known as the “arbitral award”.

It is vital, before entering into a contract, to think very carefully about the entity which would have jurisdiction to hear any later dispute. Let us say that an Omani entity is considering entering into a contractual relationship with an English company. The Omani company may want the jurisdiction to be “Omani Courts”, on the basis that the procedures, etc of the courts here are well-known and familiar to that entity. However, what happens if the two entities later have a dispute which is settled by a final, non-appealable Omani court judgment? The difficulty may only be faced by the Omani entity at that juncture, because obtaining a court judgment is not the same as actually receiving the monetary damages/compensation in your company’s bank account.

The truth is that one has to think, before even entering a contract, as to what might happen if you have a dispute at a later date with your contractual counter-party. Let us say, in the example above, that the English company simply decides not to abide by the final Omani court judgment and, frankly, tries to disregard and avoid it. Let us also suppose that the English company has no assets in Oman and no presence in Oman.

The Omani company has a paper final Omani Court judgment in its favour, but how will it enforce that judgment (ie get the money which the English company has been ordered to pay)? The fact of the matter is that the Omani company may then have to start fresh court proceedings in England, where the Omani court judgment may only have evidential, rather than binding, weight. This could lead to extra cost and years of dispute, at the end of which the Omani company may not get what was decreed by the Omani Courts.

But what would have happened if the contract in question stated that any dispute between the Omani company and the English entity would be settled by arbitration in Muscat? The answer is that the Omani arbitral award would be automatically enforceable in England against the English entity. The reason for this is because both Oman and England have signed the New York Convention on the recognition of foreign arbitral awards. In the above specific circumstances, an Omani arbitral award would have much greater value to the Omani entity as compared with an Omani court judgment.

To conclude, legal advice is always recommended as regards the drafting of the jurisdiction clause. The decisions made pre-contract in this respect could be crucial to your business in a few years’ time.

-James Harbridge, Partner (Oman)


Tuesday, April 12, 2011

Focus on Litigation: Employment Letters

An issue in Oman which can cause many problems is the simple letter offering employment. To minimise these problems, it is important to bear several points in mind.

First, it can be helpful to make offers of employment time-limited, so that the recipient of the offer must decide whether to accept the offer within a reasonable timeframe, and cannot argue that the offer is still existing many months after the offer was made.

Furthermore, it is important to explicitly state in the offer letter that the offer of employment is subject to the fulfillment of certain standard conditions, such as the employee’s completion of a three-month probationary period (as set out in Oman’s Labour Law, Sultani Decree No. 35/2003), a reference check by the employer, and the employee’s passing of a medical examination.

In addition, it may be helpful to explicitly list in the employment offer letter examples of employee misconduct which would be grounds for fair and justified dismissal of the employee pursuant to the Labour Law.

The employment offer letter should be signed by both the employer and the employee before the employee begins work.


Friday, April 8, 2011

Events of Default in a Loan Agreement

There is typically an ‘events of default’ clause in every loan agreement, except for those loan agreements relating to an overdraft facility only. (An overdraft facility is simply repayable on demand by the lender so no events of default are required.)

The events of default clause sets out the events or circumstances that will give the lender the right to accelerate the repayment of the loan (i.e., declare the loan due and payable before the scheduled repayment date), cancel any further loan installments due under the loan agreement and/or declare the loan immediately due and payable. In addition, the lender will have the right to enforce any security. These are clearly drastic powers which should only be exercisable while a default is continuing, and should cease once the default has been remedied or waived.

There may be a large number of triggering events or circumstances – perhaps twenty or more – listed in the events of default clause. Typically, the clause would include at least the following as events of default:

  • non-payment of any amount due under the loan agreement;
  • breach of the financial covenants or any other obligation in the loan agreement or any security documents;
  • cross-default (a default between a third party and the borrower in relation to any other financial indebtedness);
  • insolvency; and
  • material adverse change.

This article explores two key events of default from the above list – cross-default and material adverse change – in further detail.


A cross-default provision allows the lender to call a default under the loan agreement when there is a default between a third party and the borrower in relation to any other agreement, even if such third party does not choose to exercise its right to call a default under the other agreement. The lender could be in a difficult position if the borrower defaults under other agreements (particularly other facility agreements) and the lender is unable to protect its own position. The lender will clearly need to know that the borrower is in default under the other agreements, therefore, the information undertakings in the loan agreement should include requiring the borrower (i) to notify the lender if there is a default under the loan agreement, and (ii) to confirm to the lender (following a request from the lender) whether there is a default at such time.

For the borrower, it is important to ensure that the scope of this provision is limited appropriately because a technical breach of one agreement could trigger cross-defaults in other agreements, creating a domino effect with serious consequences. The borrower should ensure that the provision is subject to a threshold de minimis amount (which amount would depend on the borrower, the size of the loan and the other agreements). The cross-default provision should also be limited to other agreements relating to borrowings, or perhaps to a wider class of financial indebtedness, but should exclude trading contracts where there could be late payments or other breaches in the ordinary course of performance of those contracts. There should also be no default if the relevant debt is being disputed in good faith, or is paid within applicable grace periods, and there should be time to pay amounts repayable on demand.

Material Adverse Change

However, from the borrower’s perspective, the uncertainty that a material adverse change provision introduces can be problematic and, while it may rarely be used by the lender to call an event of default, there are occasions where such provisions have been used to freeze facilities. At the very least, it can give the lender leverage (e.g., to impose a tough deal or higher pricing) in negotiations with a borrower which is in a difficult situation. Generally, a borrower should seek to ensure that any material adverse change provision (i) is not triggered by deterioration in the condition of individual companies, but only by deterioration in the condition of the group as a whole, and (ii) is limited to something which materially affects the ability of the borrower to comply with its payment obligations under the loan agreement.

The material adverse change provision is usually very broadly drafted to protect the lender from any unforeseen adverse change. There will often be specific events of default to cover the areas of concern that the lender can foresee. The broad nature of this provision means that a lender is often reluctant to call a default based on it, as it is not clear-cut whether it has been breached or not. Lenders usually prefer to call a default following a non-payment as there is no room for discussion as to whether the payment has been made or not – it is just a question of fact.


Tuesday, April 5, 2011

Sharia Law in Oman

Companies that are new to Oman often ask us about Sharia law (Islamic religious law) and its influences on Omani law. This article provides a brief introduction to Sharia law and highlights some key points that companies doing business in the Sultanate should bear in mind.

What is Sharia law?

Sharia law is the divine law of Islam. The Arabic word sharia literally means ‘way’ or ‘path’.

Traditionally, there are two primary sources of Sharia law. The first is the Qur'an, the holy book of the Islamic religion. The second is the Sunnah, which records the sayings and deeds of Islam’s founder, the Prophet Mohammed.

In addition to these two primary sources, Islamic jurisprudence (figh) recognises a number of secondary sources, which may include consensus analogical deduction and reasoning by religious scholars. As there are a number of schools of Islamic jurisprudence, the selection, weight and prioritisation of secondary sources vary across Islamic religious communities.

How does Sharia law influence Omani law?

In principle, Sharia law is the bedrock foundation for all Omani law. The Basic Law of the Sultanate of Oman (Sultani Decree No. 101/1996), which serves as a form of national constitution, sets forth the fundamental principles which guide the Sultanate’s laws and policies. In Article 2, the Basic Law states that “The religion of the State is Islam and the Islamic Sharia is the basis of legislation”.

At a practical level, however, Sharia law in Oman is manifested principally in family law matters such as marriage, divorce and inheritance (Miraath). In family law, Sharia law actively governs and all matters are carried out strictly in accordance with Sharia principles.

When it comes to the Omani law governing commercial matters, however, Sharia law typically supplies guiding background principles rather than specific rules.

Indeed, Article 5 of the Law of Commerce (Sultani Decree No. 55/1990) provides that the following hierarchy – placing Oman’s explicit commercial law provisions at the top – shall apply to commercial transactions:

“If there is no legal provision then custom shall have effect and special or local custom shall take precedence over general custom. If there is no custom then the provisions of the noble Islamic Shari’a shall apply, and after that the principles of equity.”

A number of Omani Supreme Court decisions, the latest of which was issued in 2008, have confirmed that the role Sharia law plays in commercial transactions is different to that which it plays in other areas such as family law. In commercial matters, Sharia law will typically not come into play, except perhaps to fill in gaps among the explicit provisions of Oman’s commercial laws.

What does Sharia law mean for businesses in Oman?

The main takeaway for businesses is that Oman takes a strictly Sharia-based approach to family law matters, but takes a more secular and capitalistic approach to most commercial law matters. This means that Omani companies are usually free to follow standard international commercial practices without restriction from Sharia law. For example, while other countries may require the use of traditional Islamic financing methods such as Sukuk, Murabaha and Mudharaba, Oman typically does not require this.

The key caveat, however, is that businesses should be mindful of areas where family law can intersect with commercial law. The prime example of this is that inheritance issues – a family law matter adjudicated by Sharia law – can affect a company’s succession planning or shareholder composition. Navigating these intricacies is yet another way in which legal professionals can assist companies in crafting their corporate structures.