Friday, September 30, 2011

Limited Recourse to Guarantors in Personal Bank Loans

Guarantees (along with their cousins, indemnities) are an important feature of banking law, which we have discussed in previous issues of the Client Alert. Conceptually, the main purpose of having a guarantor is to give the lender the comfort of having a reliable third party stand behind the obligations of the borrower, so that the lender may have recourse against the guarantor in the event that the borrower breaches its obligations to the lender. As a practical matter, the question often arises: if the borrower defaults, at what point may the guarantor be forced to satisfy the borrower’s obligations?

Until recently, Oman’s Law of Commerce (Royal Decree No. 55/1990) provided that a lender could always claim payment from a guarantor upon default by a borrower, without the lender having to first attempt to recover payment from the borrower. This rule meant that the borrower could effectively walk away from a default situation unscathed, while the guarantor would be left obligated to pay the borrower’s debt without having any defence that the borrower should be pursued first, or at least joined with the guarantor in any proceedings relating to the payment of the debt.

However, in June 2010 an amendment was made to the Law of Commerce to provide an exception to this rule in relation to guarantees of personal loans from banks. The practical effect of this amendment is that a guarantor of a personal loan from a bank may now request the inclusion of language in the guarantee stating that, in the event of a default by the borrower, the bank may not pursue the guarantor unless and until it has (i) obtained judgment against the borrower for the debt and (ii) enforced that judgment to the point where it has recovered all it can from the borrower to repay the debt. The purpose of such a clause is to ensure that all means of recovery against the borrower have been exhausted before the guarantor is called upon to pay the debt or any sums owing in relation thereto.

Please note that the aforementioned amendment does not apply to loans by institutions other than banks or to loans other than personal loans from banks. The amendment also does not go so far as to obligate banks to accept the guarantor’s request to include language requiring first recourse to the borrower.

Yet, at least this amendment does open the door to a more protected position for guarantors. Previously, any such provision in a guarantee requiring that a bank first obtain and enforce judgment against a principal would likely have been declared void by courts on grounds that it was against public policy. Now, if negotiations are sufficiently well-balanced, a guarantor may find it can obtain the bank’s agreement to incorporate language that will provide the guarantor with a certain level of protection.


Wednesday, September 21, 2011

Construction Disputes and Negligent Supervision Claims

Many construction disputes in the Middle East arise out of the alleged negligent supervision of a project. There can be a tendency for judges and arbitrators in the region to assume that, by undertaking to “supervise” a project, an entity is assuming wholesale responsibility for everything that happens in relation to the project – and anything that goes wrong.

But what if the “supervisor” had no role or responsibility in the design of the project? What if the “supervisor” was only being paid to supervise two days per week? What if the constructing/installing entity deliberately ignores or overrides the recommendations of the “supervisor”?

The upshot of all this is that, from the point of view of the so-called “supervisor”, it is important to precisely define and caveat in every contract what exactly is meant by “supervision.”

In many cases, the word “supervision” should probably be left out of the contract entirely, given that “supervise” can be a loaded word in the Middle East construction sector and may connote to some of the region’s judges and arbitrators an unreasonably heightened standard of responsibility.

Instead, it might be preferable for the supervising entity to describe itself in the contract using a different term, such as “monitor” or “compliance monitor”. This would be particularly appropriate when the entity is merely monitoring the other parties on the project and providing suggestions, with no power to bind those other parties or control their actions.

More importantly, the contract should clearly state:
(i) what the monitor’s/supervisor’s responsibilities are;
(ii) how these responsibilities are to be fulfilled (e.g., by maintaining a log noting observed instances of non-compliance); and
(iii) any limitations on the powers to carry out these responsibilities (e.g., if the monitor/supervisor has been granted no powers to bind the other entities involved in the project, this should be explicitly stated in the contract).

In sum, given the tendency of some tribunals to assume that “supervisors” bear wholesale responsibility for the project, it behooves supervising and monitoring entities to negotiate a contract that clearly states what their mandate includes – and explicitly carves out what their mandate does not include.


Wednesday, September 14, 2011

Hotel Management Agreements – Operator Fees

In a previous post we presented an overview of what hotel management agreements are and why they are crucially important to hotel development transactions. Now we shall discuss one of the key specific issues that hotel management agreements cover: operator fees.

The fees that the hotel owner pays to the operating company for managing the hotel, which can be thought of as the contract price of the hotel management agreement, are naturally of paramount importance. Indeed, operator fees are one of the critical issues that are often agreed by the hotel owner and the operator up front via an initial letter of intent or memorandum of understanding, before the parties even begin to negotiate the hotel management agreement in earnest.

Operator fees typically consist of the following:
• the base fee;
• the incentive fee; and
• other fees and/or reimbursements.

Base fees
Under most hotel management agreements, the operator receives an annual base fee equal to a percentage of the hotel’s gross revenues for that year. The base fee percentage is heavily negotiated between the hotel owner and the operator. Although base fees for large, international-grade hotels frequently range between 1 to 2 percent of the hotel’s gross revenues, the figure which the owner and operator arrive at will depend on a variety of factors, including:
• current market conditions;
• the parties’ relative bargaining power; and
• the unique characteristics of the hotel in question.

Incentive fees
In addition to base fees, many hotel management agreements also provide for the operator to receive an annual incentive fee equal to a percentage of the hotel’s operating profits for that year. The percentage level of the incentive fee often will be keyed to a sliding scale based on the hotel’s profit margin (e.g., operating profits divided by gross revenues) – the higher the hotel’s profit margin for the year, the higher the percentage of that year’s profits the operator will be entitled to receive as its incentive fee. This structure, of course, is designed to encourage the operator to run the hotel efficiently and to achieve a high profit margin as well as a high level of gross revenue.

Other fees and/or reimbursements
Although base fees and incentive fees comprise the core compensation for hotel operators, the owner might also need to pay additional amounts to the operator (or its affiliates) pursuant either to the hotel management agreement or to a related agreement. These additional amounts, which are sometimes characterized as fees and other times characterized as cost reimbursements, may include payments for such things as (i) technical assistance by the operator or its affiliates in designing or renovating the hotel, or (ii) marketing efforts for the hotel or training programs for staff provided by the operator or its affiliates.