A legal opinion is an opinion expressing legal conclusions about and/or legal analysis of a transaction or matter.
The main purposes of a legal opinion are:
However, a legal opinion is not a substitute for legal advice which, in a transactional context, is likely to be more extensive.
Legal opinions can be given in a variety of circumstances. In a banking transaction, delivery of a legal opinion will often be a condition precedent to, for example, the advance of a loan.
Although legal opinions will vary in scope they are, in many respects, fairly standard. Typically, they will address issues such as:
Legal opinions are generally required by banks, to reassure them that the legal effect of a lending transaction is as they suppose. Consequently, they will focus on whether the transaction documents:
Legal opinions will not focus on whether the transaction documents bind and are enforceable against the non-obligor finance parties, such as the banks, any facility agent or any security trustee. This applies regardless of the jurisdiction of incorporation of a finance party.
In transactions or matters involving only one jurisdiction, the bank may require only one legal opinion, typically an opinion from the lender's lawyers. In some cases, an opinion may be obtained from in-house counsel of the borrower. The advantage of an opinion from in-house counsel is that they may be prepared to cover issues not usually opined on by external lawyers (for example, litigation or non-conflict with obligor's contracts).
If the transaction involves several jurisdictions, there will usually be a legal opinion from each jurisdiction, for example, the jurisdiction of incorporation of each of the obligors from the obligors’ lawyers and the jurisdiction of the governing law of the transaction documents from the lender’s lawyers.
Wednesday, December 26, 2012
A legal opinion is an opinion expressing legal conclusions about and/or legal analysis of a transaction or matter.
The main purposes of a legal opinion are:
Tuesday, December 18, 2012
A little-known fact of Omani law is that the jurisdiction has no concept of “without prejudice” negotiations. Interestingly, despite this fact, lawyers and/or litigants in the Sultanate do sometimes have “off the record” discussions with a view to a possible settlement. This normally happens when there is a high level of trust between the lawyers or litigants in question.
The problem, however, is that either lawyer or litigant could then write to his or her counterpart, thanking the latter for the offer which had been made. This may lead to a scenario where the Omani Courts are asked to infer that an admission of liability has been made.
In other jurisdictions, it is accepted that parties sometimes make a settlement offer even when they believe they are not liable at all. The offer might be made simply to negate the management time and lawyers’ fees otherwise incurred. When offers are made in this way, they are often termed “nuisance value offers”.
For claimants, the position is somewhat easier than for defendants. Under Omani law, the losing party in a court case is unlikely to have to pay more than RO 100 towards the winning party’s legal costs. This means that claimants can claim a large amount and, if their claim fails, they suffer hardly any impact. However, the situation is naturally somewhat different if the defendant files a sizeable counter-claim, because this could lead to the claimant having to pay a large sum to the defendant.
Claimants can also feel comfortable in Oman sending a letter which contains their time-limited offer to settle. They can write to the counter-party, saying that they have a claim of, say, RO 750,000, but adding that they will accept RO 500,000 provided the latter sum is received within, say, 21 days of the date of the letter. The Claimant will also state in the letter that the time-limited offer constitutes a mere suspension of their full legal rights, and that they will revert to claiming the full RO 750,000 if the RO 500,000 is not paid within the requisite 21 days.
To conclude, extreme care must be taken in Oman as regards settlement talks and negotiations. This is of course especially true when the quantum of the claim is high.
Tuesday, December 11, 2012
Many foreign companies looking to establish a legal presence in Oman to perform a contract with a government entity (or a government controlled entity) will opt for the establishment of a branch office in Oman.
It is important to note that a branch office can only be established if the foreign company has a contract with a government entity (or a government controlled entity). If the foreign company has a contract with a private sector entity, it will not be possible for the foreign company to establish a branch in Oman to perform such contract. Moreover, the foreign company needs to submit a written undertaking confirming that it shall be responsible for any liabilities of the branch office.
The main advantages of establishing a branch office (instead of an Omani company with a local partner) to perform a limited duration government contract are that there is no need for a local partner, there are no minimum capital requirements, the administrative and procedural requirements are minimal, the tax treatment is the same as with respect to other types of legal entities in Oman and a branch is 100 percent owned and managed by the foreign company (since this is basically treated as the Omani office of the foreign company and does not have a separate legal existence).
Since the establishment of a branch office is linked to a contract with a government entity (or a government controlled entity) the tenure of a branch office is also restricted to the terms and duration of the contract. The commercial registration of a branch office may be extended if the contract is extended for further periods or if the foreign company is awarded another government contract for a longer duration.
In this respect, it has been noticed that once the government contract has been duly performed and full payment for the services has been received, the foreign companies will often close the branch office without formally cancelling the registration of the branch at the Ministry of Commerce and Industry. One reason for this practice could be that the commercial registration of the branch is only valid until the date of completion of the contract and once this date has passed the foreign companies do not consider that any additional steps are required to be undertaken.
Although the registration of the branch with the Ministry of Commerce and Industry may already have expired, as a matter of good corporate governance, steps should always be undertaken to ensure that the commercial registration of the branch is formally cancelled at the Ministry of Commerce and Industry.
Moreover, the registration of a branch office with the Ministry of Commerce and Industry also triggers the requirement of registering the branch at the Secretariat General of Taxation at the Ministry of Finance. Accordingly, it is important to ensure that the Secretariat General of Taxation is also informed about the closure of the branch. In fact, a no objection certificate will be required to be given by the Secretariat General of Taxation (addressed to the Ministry of Commerce and Industry) confirming that it has no objection to the cancellation of the commercial registration of the branch and that there are no tax liabilities associated with the branch.
Furthermore, at the time of the registration of the branch, an authorized signatories form is also required to be filed with the Ministry of Commerce and Industry indicating the names, signatures, authority limits and financial powers of the authorized individuals (normally officers of the foreign company). The mere expiry of the branch’s commercial registration does not necessarily mean that the authorized signatories of the branch will not be able to use their powers any more and that the foreign company will no longer be liable for the actions of such authorized signatories.
Therefore, the formal cancellation of the commercial registration of the branch is also important to ensure that there are no continuing (tax or other) liabilities for the foreign parent company (or the individuals who are registered as authorized signatories of the branch) in Oman.
Wednesday, December 5, 2012
One of the first matters to be addressed as the Sultanate of Oman moves to implement Islamic banking is Shari`a governance within Islamic banking institutions (i.e., full-fledged domestic Islamic banks, Islamic windows of conventional domestic banks and Islamic banking branches of foreign banks, which are referred to as “Licensees”). Shari`a governance is a subset of the general obligations and corporate governance framework and includes a range of topics that are particular to Islamic banking activities.
This article addresses a subset of those Shari`a governance matters, specifically certain matters pertaining to Shari`a supervisory boards (each an “SSB”) and related Shari`a governance entities and mechanisms. These topics are addressed in Title 2 (“Title 2”) of the proposed Islamic Banking Regulatory Framework of the Central Bank of Oman (the “CBO”), Version 2.0, of March 2012 (the “IB Framework”).
As a notable general position, the IB Framework makes reference to, and encourages (but does not seem to mandate) adoption of and adherence to, various guidelines of the Islamic Financial Services Board (“IFSB”). The explicitly referenced IFSB guidelines include the Basic Professional Ethics and Conduct for Members of the Shari 'a Board pursuant to the Guiding Principles on Shari 'a Governance Systems for Institutions Offering Islamic Financial Services (December 2009), the Guiding Principles on Conduct of Business for Institutions Offering Islamic Financial Services (December 2009), and the Guiding Principles on Corporate Governance for Institutions Offering Islamic Financial Services (December 2006).
Under the IB Framework, the required Shari`a governance structure is implemented by mandating each Licensee to (a) provide, in its memorandum and articles of association, for the conduct of its business in accordance with Islamic Shari`a principles, (b) establish and maintain systems and controls to ensure Shari`a compliance of its operations and business activities (in addition to the normal compliance requirements), (c) appoint an SSB to oversee operations from a Shari`a compliance perspective and prepare and present an annual Shari`a compliance report to the Licensee’s Board of Directors, and (d) implement a system of Shari`a governance as specified in Title 2.
The Shari`a governance system is the “hallmark and the differentiating factor for Islamic Banks and Islamic Windows which sets them apart from their conventional counterparts”. Its critical elements are (i) the SSB, (ii) the Internal Shari`a Reviewer, (iii) the Shari`a compliance unit and the Shari`a audit unit. The ultimate responsibility for ensuring Shari`a compliance, and the implementation of the required governance systems, lies with the Licensee’s Board of Directors (“Board”), although both the SSB and management have related responsibilities.
Constitution of SSBs
In other words, the restriction on the employee’s right to compete should be no greater than what is necessary and lawful to protect the employer’s business interests.
Licensees must establish their own independent SSBs, although there is a limited outsourcing exception for small institutions as approved by the CBO. Foreign banks must demonstrate to the CBO that their SSB satisfies the requirements of Title 2.
Each SSB must be comprised of at least three Shari`a scholars, and each scholar must be specialized in fiqh al-mu’amalat (Islamic commercial jurisprudence). An SSB may also include one or more non-voting members who are not specialized in fiqh al-mu’amalat but have expertise in Islamic banking or related areas, such as finance, economics, law, accounting or the like and possess basic knowledge of fiqh al-mu’amalat.Licensees are encourage to the use of Omanis on SSBs and to encourage the development of relevant Shari`a expertise among Omanis. These provisions are supplemented by provisions that allow the SSB to consult with outside experts in appropriate circumstances on a case-by-case basis. As a general admonition, the IB Framework indicates that SSB members should come from diverse backgrounds in terms of areas of expertise, qualifications and experience in order to enhance the depth and breadth of Shari`a deliberations and, additionally, should be familiar with the domestic legal and regulatory environment and sensitivities of the Sultanate of Oman.
The IB Framework contains a number of required qualifications (“fit and proper” standards) for SSB members. Most are stated as general requirements, without specific standards. All members must be of respectable character and be of good conduct, particularly in terms of honesty, integrity and reputation in their professional business and financial dealings. SSB members must be Muslim. It is unclear whether this applies to only Shari`a scholar members or also non-scholar members. The rationale for allowing non-scholar expertise with respect to professional matters to be brought into the SSB on a non-voting basis (as noted below, and subject to the conditions noted below) supports an interpretation that such expertise should be sought at the highest and most refined levels, without regard to affiliation restrictions. This matter will be left to future clarification.
SSB members with a Shari`a background must be holders of academic qualifications in the field of Shari`a (a minimum of a bachelor’s degree) that includes the study of usul al-fiqh and fiqh al-mu’amalat from “a recognized institution” (an undefined phrase). Those members must also demonstrate “an adequate understanding of finance / banking in general and Islamic finance / banking in particular” as well as an understanding of the legal and regulatory frameworks applicable to the functions of the Licensee. Shari`a scholars must have accumulated overall experience of ten years or more (in teaching, research, issuance of fatawa and similar matters). And they must demonstrate a strong proficiency in Arabic. It is also recommended that they have reasonable understanding of English.
SSB members other than Shari`a scholars must be individuals generally recognized for their expertise in their respective field (e.g., banking, finance, economics, law, accounting, etc.). They must hold at least a master’s degree. Non-scholar members must have accumulated relevant experience of 15 years or more in the relevant field. These non-scholar members should demonstrate reasonable proficiency in English, and it is recommended that they have some understanding of Arabic.
The IB Framework provides for disqualification of an individual from SSB participation for a range of “for cause” events, including (a) cessation of good character and reputation or a position of respect among one’s peers, (b) failure to attend a substantial number of meetings without reasonable excuse (currently, 75%), (c) association with any unethical or illegal activity, including contravention of any of the requirements and standards of the financial, banking or corporate regulatory system, (d) conviction of any criminal offense, including financial impropriety or moral turpitude (except misdemeanors), (e) dismissal as an employee or director from any entity on the grounds of fraud, misrepresentation or breach of trust, (f) use of confidential and privileged information about the Licensee or its clients obtained as a result of his position in a manner that is detriment to the competitive interests of the Licensee in the market place (but, apparently, not if otherwise in contravention of confidentiality requirements), or (g) assumption of membership in the SSBs of two or more competing financial institutions in Oman.
With regard to clause (g) of the next preceding paragraph, and as noted above, no SSB member can be on the SSBs of more than one competing institution in Oman. However, an SSB member can be on the SSBs of more than one non-competing institutions. The example provided in the IB Framework is that an Islamic bank SSB member can also sit on the SSB of a takaful company or an Islamic fund management company. However, no SSB member can be on the SSBs of more than four institutions in Oman.
The SSB is appointed by the Licensee’s shareholders upon the recommendation of its Board. The IB Framework does not address situations in which a foreign bank might have a different method of SSB appointment. An SSB member may be appointed for a maximum initial term of three years, and can serve one consecutive renewal term of three years on that SSB.
Roles and Responsibilities of SSBs
The SSB is entrusted with the duty of directing, reviewing and supervising the Licensee’s activities in order to ensure Shari`a compliance. The SSB is obliged to issue fatawa in respect of matters considered by it, which fatawa shall be determined by majority vote of the SSB’s Shari`a scholars and are binding on the Licensee.
The SSB’s scope of work is prepared by the Licensee and approved by its Board and is set forth in a charter. The charter must address a range of matters, including, at a minimum, (a) its purpose, (b) the membership and composition of the SSB, (c) the SSB’s chairperson and secretary, (d) grounds for removal and replacement of SSB members, (e) responsibilities and authority of the SSB, (f) meetings, agenda, quorum, voting, minutes and procedural requirements, and (g) amendment matters.
The responsibilities of the SSB include, without limitation: (i) advising the Board and management on Shari`a matters in the Licensee’s day-to-day business; (ii) review and approve all policies, procedures, products, processes, systems and contracts as to their Shari`a compliance, each to be subsequently ratified by the Board; (iii) review and approve products and related documentation, including structures, contracts, marketing and implementing materials; (iv) performance of follow-up to ensure compliant implementation of products; (v) review and approve Shari`a compliance and Shari`a audit functions; (vi) provision of guidance regarding Shari`a compliance to legal counsel, external auditors and other related parties; (vii) provision of written fatawa on relevant matters brought to it through the Internal Shari`a Reviewer or taken up by the SSB itself; (viii) submission to the Licensee’s Board of an annual Shari`a compliance report that addresses the rather detailed matters, and satisfies the standards (including the detailed opinion standards and requirements), set forth in the IB Framework, and (ix) development and implementation of annual training programs for SSB members regarding deficiencies in knowledge regarding banking, finance, economics or other related disciplines for SSB members with Shari`a background and Shari`a-related knowledge for SSB members who are experts in their respective fields but do not have adequate knowledge of Shari`a.
The report’s opinion paragraph included in its annual report (clause (viii) above) must address a variety of matters as specified in the IB Framework. These include whether the SSB has examined, “to a reasonable extent on a test-case basis, each class of transaction, the relevant documentation and procedures”. As one might expect, the opinion must also state, whether, in the SSB’s opinion, the affairs of the Licensee have been carried out in accordance with the rules and principles of Shari'a, the CBO's regulations and guidelines regarding Shari`a compliance and other rules as well as with specific fatawa and rulings issued by the SSB from time to time. The opinion must also address whether, in the SSB’s opinion, the allocation of funds, weightages, profit sharing ratios, profits and charging of losses (if any) relating to investment accounts conform to the basis given by the SSB in accordance with Shari`a rules and principles and whether there has been income from prohibited sources. Obviously, flesh will be put on these bones in the future.
The SSB is required to define the key elements to be evaluated while reviewing and approving a new product. These key elements establish the basis for developing the relevant product prior to its final presentation to the SSB for approval. Key elements pertain to, at a minimum, essential features of the product, processes, structure, documentation (including legal contracts), risk and compliance considerations, marketing, collateral and other necessary details. New product development must include an opportunity for the expression of views by, among others, internal and external auditors, lawyers and others involved in the process. The SSB will determine a product’s Shari`a compliance in the context of relevant fiqh literature, evidence and reasoning.
The IB Framework requires the SSB to report to the Board, non-compliant activities that it has “reason to believe” [are being] carried out in a systematic manner by the Licensee. If those activities shall continue, the SSB is required to inform the CBO and report such violations in its annual Shari`a compliance report. It is likely that the “reason to believe” and “systematic manner” qualifications will give rise to the need for further clarification in the future.
The SSB is required to issue fatawa and guidelines relating to products and bank functions. These are required to be maintained as central reference tools, be disseminated to Licensee employees, and be published in the annual Shari`a compliance report.
The IB Framework outlines a system for the protection of confidential, privileged and sensitive information made available to the SSB. This information may pertain to, among other matters, new product development and transactions, SSB and management decisions, matters presented to the SSB, discussions and deliberations of the SSB, Licensee client information under the banking laws, and matters so designated by management.
Fiduciary Duty and Conflict of Interest Provisions
A welcome development in the IB Framework, although one likely to give rise to some spirited discussion, relates to the considerable array of provisions that are designed to address fiduciary duties, conflicts of interest and related matters involving SSB members. These are defined as obligations to all of the Licensee and its stakeholders, the general public and the industry. Some of those have been previously discussed and relate to prohibitions on SSB members acting on the Shari`a boards of more than one competing institution or more than four institutions in Oman. Others require fairness, objectivity and independent functioning by the SSB members, in both substance and appearance, free from conflicts of interest, and the members are required to continually assess that status.
In a move toward the development of more stringent professional responsibility standards than are seen in most jurisdictions, the IB Framework addresses situations involving even the appearance of impropriety. For example, SSB members shall not have (a) any relationship with the Licensee that “could possibly be seen to interfere or reasonably be perceived to interfere” with the exercise of a member’s independent judgment when delivering fatawa and rulings or (b) any relationship that “could possibly be seen to interfere or reasonably be perceived to interfere” with the exercise of independent profession judgment. These are strong standards, and constitute a strong move toward a code of professional conduct and professional responsibility for SSB members. It will be interesting to see how these requirements are given definition. Some definition is provided by the IB Framework’s restrictions on employment, board positions, relationships (including those with family members of, and stakeholders of, the Licensee) and managerial and operation responsibilities that are expressly specified. More detail will undoubtedly be forthcoming as the framework is implemented.
The Board is required to undertake annual checks on the independence and conflicts of interest of SSB members as well as their annual performance and report the results to the Central Bank of Oman. The SSB members are made solely and personally responsible for their own work as members of the SSB. Notably, the SSB members are admonished to “appreciate the diversity of opinions among various mainstream schools of thought and differences in expertise among the fellow members” of the SSB.
In the event of an actual or potential issue of independence impairment, SSB members are obligated to document the issue, review and address the issue with the SSB, and, if the issue is unresolved, resign from the SSB and take the issue to the Licensee’s General Assembly. This is yet another step toward a strong professional conduct and responsibility framework. How it will be implemented is yet to be determined.
Management Responsibilities to SSBs
SSB members are required to enable and assist the Licensee’s management by providing advice and guidance regarding Shari`a compliance. Management, on the other hand, is responsible for observing and implementing SSB fatawa, rulings and decisions, and making them available to those who have implementation responsibilities and to other stakeholders. It is obligated, on a timely basis, to disclose information and provide necessary informational access to the SSB through the Internal Shari`a Reviewer (or risk Board penalties). Management is obligated to allocate adequate resources (including people, systems and processes) to support the Shari`a governance framework.
In instances of non-compliance with the Shari`a requirements, the management is obligated to take remedial action, including notification of the Internal Shari`a Reviewer and the SSB, cessation of new business relating to the non-compliance, and acting on the remedial and preventative advice of the Internal Shari`a Reviewer and/or the SSB. These are commendable steps toward strong professional conduct and a professional responsibility system, but these steps leave a broad range of unaddressed questions.
The Shari`a governance system that is to be implemented in the IB Framework is already the subject of considerable, and spirited discussion in the Islamic finance, banking and investment industry. It will certainly evolve as it is given greater form and substance. All are urged to participate in the on-going discussions as this is a fundamental, and forward looking, centerpiece of the Islamic banking governance package that the CBO desires to implement.
Thursday, November 29, 2012
With a flat corporate income tax rate of 12% on annual profits above RO 30,000, and no personal income tax, Oman has a well-deserved reputation as a business-friendly jurisdiction from a tax perspective. Nevertheless, there are a number of tax-related issues that businesses in Oman would do well to heed carefully. Most such tax issues are, of course, best addressed by accountants; however in this month’s client alert we wanted to highlight one tax issue that we sometimes encounter in our legal work: customs duty.
In Oman, customs duty is normally a flat 5% of the value of the goods being imported. For businesses that import significant quantities of goods or high-value goods into Oman, customs duty could add up to a high operational cost and could significantly reduce profit margins. Many companies thus look for ways to reduce their exposure to customs duties. There are three possible ways that companies can do so, which we briefly discuss below.
The first – and often best – way for a company to reduce its exposure to customs duty is to arrange, by contract, for its customers to reimburse the company for the Omani customs duty it pays to bring in the goods or equipment necessary to carry out the work for the customer. For example, an oil services company that will provide drilling services for an oilfield customer in Oman, which will require the use of high-value machinery which must be imported into the Sultanate from abroad, could provide in the oil services contract that the customer must reimburse the service provider for any Omani customs duties that the service provider incurs importing the equipment and supplies that are required to carry out the work for the customer.
The second way that a company could reduce its customs duty exposure is to secure a temporary duty-free importation permission from the Royal Oman Police Directorate General for Customs. This is a limited category of exemption – it applies only to machinery and heavy equipment to be used for Government or investment projects, it is granted at the discretion of the Royal Oman Police, and most importantly it is valid only for a temporary period (six months at a time, renewable consecutively for a total period up to three years). However, temporary importation can be an attractive option for companies that seek to import high-value equipment into Oman for a brief period of time to carry out a Government or investment project, and will then re-export the equipment out of Oman.
The third route that companies could pursue to reduce their Omani customs duty exposure is to apply for a customs duty exemption pursuant to the Foreign Capital Investment Law. This exemption, which is granted at the discretion of the Ministry of Commerce & Industry and the Ministry of Finance, is not an easy one to secure – it tends to be granted only for key industrial and infrastructure projects for national economic development – however it is an option that companies can pursue. The process to seek this exemption is to first apply to the Ministry of Commerce & Industry, and if the Minister of Commerce approves the application he will forward the application to the Ministry of Finance, which would study the application and make the final determination of whether to grant the customs duty exemption.
Tuesday, November 27, 2012
Curtis, Mallet-Prevost, Colt and Mosle has signed a Memorandum of Understanding (MOU) with the global publishing, research and consultancy firm Oxford Business Group (OBG) on research facilities to allow OBG access to the firm’s research resources and expertise. Through this partnership, Curtis will provide OBG with the knowledge necessary to complete the legal chapter within The Report: 2013. The Report: Oman 2013 is an in-depth analysis of the changes in Oman’s legal framework, which are pieces of a grander project to attract investors, support the younger generation by creating jobs, and diversify Oman’s economy. The publication, which will be available both online and in print, will be a guide to potential investors and include interviews with economic and business leaders such as Hamood Sangour bin Hashim Al Zadjali, the executive president of the Central Bank of Oman, and Yahya bin Said Al Jabri, chaiman of the Special Economic Zone Authority at Duqm (SEZAD).
The full article covering the MOU can be found in the Times of Oman here: http://www.timesofoman.com/News/Article-1974.aspx
Monday, November 26, 2012
A tool which perhaps should be used more often in Omani litigation is the right to have the status of a project viewed by a judge, so there cannot be a later dispute about the status of, say, a construction project at that specific moment in time.
The court may decide of its own volition, or based on a request from one of the litigants, to inspect the disputed item/project.
If the court decides to inspect, it will determine the date in this regard, and the court can appoint an expert to assist with the inspection and to write a report.
The court can also delegate the expert to hear witnesses and the court can fix a session to hear the observations of the litigants upon the expert’s report.
The above mechanism has particular importance in construction matters.
Friday, November 16, 2012
Employment contracts often contain a non-compete clause which purports to restrict an employee’s future conduct. Historically, non-compete covenants have been regarded as unlawful restraints on trade and, hence, were unenforceable in most jurisdictions. However, increasingly the need to protect the employer’s legitimate business interests is being widely recognized.
Partial Restraint May Be Valid
While a clause constituting a blanket bar on the employee from joining any other employer would still be an unlawful restraint, a partial restraint genuinely aimed at protecting the employer’s legitimate business interests would be considered valid in some jurisdictions. The covenant must balance the protection of the employer's business interests against the employee's right to earn a living.
A partial restriction could be better justified by an employer if its scope is limited and satisfies the following criteria:
- it is aimed at protecting the assets, information, or skills acquired by the employee during the course of employment (e.g., a high premium intellectual property, customer list, source code etc.);
- it is applicable only for a clearly defined and limited period (rarely exceeding three years);
- its applicability is narrowed down to certain geographical locations; and
- it is made industry-specific.
Measures to Address the Breach of Covenant
A breach of the covenant can be contractually addressed by explicitly stating that the employer has the right to sue the breaching employee for compensatory damages (including loss of profit). In some jurisdictions, it is possible to seek an injunction from the court to restrain the employee from joining a competitor pursuant to a non-compete clause in the employment contract.
Under Omani law, Article 50 of the Commercial Code states that a merchant, X:
(a) cannot induce the workers of merchant Y to assist X in enticing clients away from Y; and
(b) cannot induce the workers of merchant Y to leave Y’s employment and enter into X’s employment and disclose to X the secrets of Y.
The law regards these acts as unlawful trade practices warranting compensation. Although this legal provision is intended to address a business to business scenario and not an employer-employee relationship, an aggrieved employer could attempt to seek recourse in the Courts based on this provision.
To conclude, the validity of a non-compete clause is not addressed by the Omani labour law. However, we believe that the Courts in Oman may, in future, be willing to find in favour of employers who rely on non-compete clauses.
Monday, November 12, 2012
In a piece of good news for American businesses, the U.S. Embassy in Muscat recently announced that it has held successful talks with high-level officials at the Omani Ministry of Commerce & Industry regarding the ongoing implementation of the US-Oman Free Trade Agreement. The Ministry officials affirmed their commitment to extend ‘local’ Omani treatment to American companies as stipulated in the FTA, together with their commitment to monitor application of the FTA vigorously to ensure that such benefits are granted only to bona fide American companies and not to third-party nationals with no substantial business activities the United States.
In our experience, despite occasional implementation issues during these first few years of the US-Oman FTA’s existence, the FTA has already proven to be a significant boon for American clients doing business in Oman, by allowing them 100% ownership of an Omani limited liability company and lower minimum share capital requirements. The continued signs of high-level, bilateral commitment to the FTA are excellent news for American companies already doing business in the Sultanate and for those who are looking to do so in the future.
Tuesday, November 6, 2012
This is the fourth and final post in the series of articles addressing Shari`ah-compliant home financing products. It considers bay bithamin ajil (“BBA”) and istisna’a structures. Thereafter, it provides a few observations on the structures that are likely to be used in the Sultanate of Oman in light of the current draft of the proposed Islamic banking rules. BBA structures are used in Malaysia, Indonesia and Brunei, but are not encountered in the Middle East, the United States, Canada, the United Kingdom or Australia. Istisna’a structures (including istisna’a – parallel istisna’a structures), or construction financing structures, are used throughout the world.
Bay’u Bithamin Ajil Definition and Principles
The bay’u bithamin ajil or BBA contract is a contract of sale, utilizing deferred payment concepts. Importantly, it is not a separate kind of sale under the Shari’ah. The payment of the price is deferred and is payable at a particular time in the future, usually on an instalment basis. Elements of sale that have been previously discussed in these Client Alerts are applicable and must be satisfied. For example, the sale and purchase price must be agreed and fixed at the inception of the transaction – at the time the contract is made. Thus, the profit rate for a BBA transaction is fixed at the inception of the transaction for the entire period of the transaction.
The fixed rate nature of the BBA contractual transaction has led to various criticisms pertaining to its competitiveness and appropriateness as a banking tool. Addressing some of those criticisms, Bank Negara Malaysia introduced a rebate (ibra’) mechanism that use variable rate financing techniques. Using this mechanism, the sales price bears a fixed profit rate that is designated as the ‘ceiling profit rate’. The ceiling profit rate is set at a rate that is greater than the actual variable rate that will be charged to the home purchaser (which is referred to as the ‘effective rate’). The difference between the payment calculated at the ceiling profit rate and the payment calculated at the effective rate is the amount of the rebate to the home purchaser for the relevant period.
Different types of sale arrangements may be embedded in the BBA transaction. In Malaysia, Indonesia and Brunei, the bay’ al-‘inah (sale and buy-back) structure is frequently used. This type of structure is not used with any frequency outside Malaysia, Indonsesia and Brunei. Figure 1 provides a graphic depiction of a BBA transaction using this mechanism.
In this transaction, the Customer identifies the property that the Customer desires to acquire (say, from a developer), enters into a Property Purchase and Sale Agreement (step 1) and pays a Deposit amount to the Property Seller (step 2).
As a result of paying the Deposit amount to the Property Seller, the Purchaser is deemed to have become the beneficial owner of the property. The Purchaser then approaches the Bank to seek financing for the acquisition of the property in an amount equal to the balance of the purchase price over the amount of the Deposit (the “Financing Amount”). That is, the property purchase price is equal to the sum of the Deposit and the Financing Amount.
Upon arranging that financing, the Purchaser enters into a Property Sale Agreement (step 3) and sells the property to the Bank for an amount equal to the Financing Amount (step 4). The Bank will consummate the purchase of the property by making payment of the Financing Amount, which is usually disbursed directly to the Seller as shown in step 5.
Thereafter, pursuant to the Property Purchase Agreement (step 6), the Bank sells the property to the Purchaser at an amount equal to the sum of (a) the Financing Amount plus (b) a profit amount on the Financing Amount, which may be determined using either a fixed or floating rate (the “Total Purchase Amount”) (step 7). The Purchaser then makes installment payments of the Total Purchase Amount to the Bank, as illustrated in step 9. The obligation of the Purchaser to make the installment payments of the Total Purchase Amount will often be secured by a rahn (mortgage) on the property from the Purchaser to the Bank, as illustrated in step 8.
Istisna’a – Parallel Istisna’a Home Construction Financings
The term “istisna’a” (or ‘istisnā’) means requesting a san’ah, which is the work of a small or large scale manufacturing worker. In jurisprudence and the modern Islamic finance and investment industry, the term is used to refer to a type of forward sale contract involving the request to manufacture (or construct) a specific item in a specific form for a specific price. The commission to manufacture contract is thus a contract to purchase the item to be manufactured by the worker, where the worker provides both the raw materials and the labor to produce the final product. Historically, the istisna’a contract is derived from situations in which the custom production was required or desired, although it now refers more broadly to both manufacturing and construction undertakings. The sāni’ or sane is the seller, the mustasni’ or mustasne is the purchaser, and the masnū’ or masnou is the object of the sale transaction.
The istisna’a is similar to the forward sale contract (salam) in that it involves the future delivery of a traded item, it is a sale of an object that is not existent at the time of the consummation of the sale and purchase contract, and the object of the sale is a liability of the seller. In the istisna’a contract, the sales price need not be paid immediately at the time of entering into the contract, in contrast to the salam contract.
The nature of the istisna’a contact in a situation where a purchaser desires to have a house constructed is seemingly straightforward. The purchaser/mustasne commissions the seller/sane to build a house (masnou) and sell it to the purchaser upon completion of construction, whereupon the purchaser will make payment in full. In the normal course, and classically, this arrangement does not involve instalment payments of the purchase price by the purchaser. The seller would have to be qualified to construct the house, or at least to cause the construction of the house (or the acquisition of the masnou in the markets).
The pure istisna’a contract does not seem well suited to situations in which the purchaser of the house is in need of financing to effect the purchase and the payment of the house purchase price. Additionally, the pure istisna’a does not seem well suited to situations in which the purchaser desires to make instalment payments of the purchase price, particularly instalment payments over an extended period of time. And construction contractors and manufacturers are not well positioned to provide long-term financing of house acquisitions. With respect to each of these matters, the introduction of banks and/or financial institutions into the equation seems both appropriate and beneficial.
This line of thought leads to the contemporary istisna’a – parallel istisna’a transactional form. This form involves two istisna’a contracts, one between the house purchaser as the mustasne (the “end mustanse”) and the bank as the sane, and one between the bank as the mustasne and the constructor as the sane (the “end sane”). Figure 2, overleaf, provides a graphic depiction of the overall transaction involving both istisna’a contracts.
The “First Contract” is comprised of the Istisna’a Agreement (step 1) between the Customer (Home Purchaser) as the End Mustasne and the Bank as the Sane. The Bank agrees to construct the House (Masnou) (which will be delivered in step 5) in accordance with the plans and specifications set forth in, and otherwise as agreed in, the Istisna’a Agreement and for a price (the “Istisna’a Amount”) set forth in the Istisna’a Agreement (which will be paid in instalment payments in step 6). The Istisna’a Amount is equal to the sum of (a) the cost to construct the House, which is the “Total Istisna’a Amount” referred to in step 4, plus (b) the financing costs to be paid to the Bank. Those financing costs may be calculated using either a fixed or a floating rate. The Bank is obligated to the Customer (Home Purchaser) in respect of the construction of the House. The Customer (Home Purchaser) agrees to purchase the House for the Istisna’a Amount on the instalment payment terms set forth in the Istisna’a Agreement.
Of course the Bank is not in the business of constructing houses. Thus, the Bank, as Mustasne, arranges for the “Second Contract”, being the “Parallel Istisna’a Agreement” (step 2), with the Construction Contractor as sane (or “End Sane” because it is the ultimate sane in the overall istisna’a – parallel istisna’a arrangement). Pursuant to the Parallel Istisna’a Agreement, the Construction Contractor agrees to the construct the House and deliver it to the Bank (step 3), which will make payment to the Construction Contractor in one or more spot market payments (step 4) during or at the end of the construction period. All construction terms pertaining to the House to be constructed pursuant to the Parallel Istisna’a Agreement (e.g., the plans and specifications) are identical to the construction terms set forth in the Istisna’a Agreement between the Customer (Home Purchaser) and the Bank. That is, the two contracts are “parallel” in all regards other than the price and the timing of the payment of the price. The price to be paid to the Construction Contractor under the Parallel Istisna’a Agreement is the “Total Istisna’a Cost” (step 4). It is the cost to construct the House without regard to any financing costs that are included in the Istisna’a Amount.
It is to be noted that the Istisna’a Agreement and the Parallel Istisna’a Agreement are, and must remain, totally independent obligations and arrangements, rather than interdependent obligations and arrangements. Thus, for example, pursuant to the Parallel Istisna’a Agreement, the Construction Contractor is obligated to the Bank, but not the Customer (Home Purchaser), in respect of the construction and delivery of the House. Pursuant to the Istisna’a Agreement, the Bank is separately and independently obligated to the Customer (Home Purchaser) in respect of the construction and delivery of the House. These obligations are independent and unrelated. Failure by the Construction Contractor to construct and deliver the House in accordance with the plans and specifications will not relieve the Bank of its obligation to the Customer (Home Purchaser) to deliver the House in accordance with the plans and specifications; the Bank will continue to be liable to the Customer (Home Purchaser).
Home Purchase Financings in the Sultanate of Oman
The four-part survey of Shari`ah-compliant home purchase financing products has considered a range of different structures and techniques for financing home purchases. These have included (i) the lease (ijara), which is discussed in Islamic Banking: Home Purchase Financings I: The Lease, (ii) the musharaka mutanaqisa (diminishing partnership), which is discussed in Islamic Banking: Home Purchase Financings II: Musharaka Mutanaqisa, (iii) the murabaha (cost-plus sale involving a commodity), which is discussed in Islamic Banking: Home Purchase Financings III: Murabaha and Tawarruq, (iv) the tawarruq (seeking of cash through the use of a murabaha in which the commodity purchased by the party needing financing is immediately sold by that party for cash), which is discussed in Islamic Banking: Home Purchase Financings III: Murabaha and Tawarruq, (v) the bay’u bithamin ajil or BBA contract, which is discussed in this client alert, and (vi) the istisna’a – parallel istisna’a, which is also discussed in this client alert. Each of these is discussed at http://omanlawblog.curtis.com.
While these discussions are indicative of the range of possibilities from a global perspective, it is clear that only a subset of these structures will be offered by Islamic banks or Islamic windows of conventional banks in the Sultanate of Oman. The current drafts of the proposed Islamic banking regulations for the Sultanate of Oman require that products be in accord with the standards and guidelines of the Accounting and Auditing Organization for Islamic Financial Institutions (“AAOIFI”). Thus, certain types of tawarruq structures (i.e., organized tawarruq) will not be permitted in Oman, as was discussed in Islamic Banking: Home Purchase Financings III: Murabaha and Tawarruq. In addition, BBA structures will not be permissible in Oman.
The structures that will be available for home financing products in the Sultanate of Oman are likely to be the ijara (lease) and the musharaka mutanaqisa (diminishing partnership). Generic transactions using these structures were discussed in Islamic Banking: Home Purchase Financings I: The Lease, and Islamic Banking: Home Purchase Financings II: Musharaka Mutanaqisa, respectively.
As the Sultanate of Oman prepares to roll out its new legal and regulatory framework for Islamic banking in the coming months, we continue to cover Islamic banking in the Client Alert as it is an important and growing field. This article is the fourth in a series by Curtis partner Michael J.T. McMillen, an Islamic finance specialist based in our New York office who provides support to our Islamic banking practice in Oman and throughout the Middle East region.
1This type of contract is also knows as a bay muajjal in Southeast Asia and is commonly referred to as a bay murabaha in the Middle East.
2See Introduction of Islamic Variable Rate Mechanism, in The Islamic Financial System, 187-89 (2003), BANK NEGARA MALAYSIA, available at http://www.bnm.gov.my/files/publication/ar/en/2003/cp05_003_whitebox_intro.pdf.
3If the raw materials were provided by the purchaser, the contract would be one of employment of the labour of the worker.
4See Wahbah Al-Zuhayli, Al-Fiqh Ali-lslami wa-Adillatuh (Islamic Jurisprudence and its Proofs), Financial Transactions in Islamic Jurisprudence, Mahmoud A. El-Gamal, translator (2002), at 267-79, for discussions of the jurisprudential positions regarding whether the istisna’a is a contract of sale or a promise to sell or a form of employment of the manufacturer, of appended conditions, of the legal status of the contract, and of legal characteristics of the contract, and for a detailed comparison of the istisna’a and the salam contracts.
Monday, November 5, 2012
Muscat, Oman, November 1, 2012 - Curtis, Mallet-Prevost, Colt & Mosle LLP has announced that Taimur Malik has joined the international law firm as Counsel in its Corporate and Infrastructure Development groups. He will be based in Curtis’ Muscat office.
Mr. Malik moves to Curtis from Vale, the world’s second largest mining and metals group, where he was Head of Legal for the Middle East as well as responsible for providing support to the group’s business development, project and exploration work in Central Asia and South Asia. Prior to Vale, he worked at leading law firms in Oman and Pakistan.
He has counseled clients on a wide range of corporate transactions and projects, including government concessions, M&A and joint ventures in countries across Asia, the Middle East, Europe and Africa. He advised clients in matters involving Power, Water, and Infrastructure Projects, Commercial Agencies and Insolvency, Banking and Finance, Real Estate, Mining, Oil & Gas and Petrochemicals.
“We are delighted to welcome Taimur Malik to Curtis,” said Bruce Palmer, managing partner of Curtis in Oman. “He brings a wealth of international experience from the private sector in a wide range of matters that will help Curtis continue to expand both in Oman and around the world.”
In Oman, Mr. Malik has been actively involved in the development, project and operations phases of many of the largest government financed projects (such as the country’s first multi-billion dollar dry dock in Duqm) as well as foreign investment based projects (including Oman’s first multi-billion dollar iron ore pelletizing plant and distribution center in Sohar). He has also advised numerous Fortune 500 companies, leading Omani business groups and governmental entities on a broad range of legal matters related to doing business in Oman.
Mr. Malik has been recognized by several leading legal industry directories, including the Legal 500 and the IFLR 1000. The International Financing Review declared one of his deals as “Latin America Loan of the Year 2011.”
Mr. Malik regularly conducts international law training and capacity building sessions for public sector officials. His articles on legal issues appear regularly in leading publications and he has also contributed to books on joint ventures and mergers and acquisitions in the Middle East. He has also been a Research Scholar (International Commercial Contracts) at UNDROIT in Rome and a Visiting Fellow (WTO Dispute Resolution) at South Center in Geneva.
Mr. Malik was called to the Bar by the Honourable Society of Lincoln’s Inn, UK. He was educated at the University of London, University of Heidelberg, Hague Academy of International Law, Boston University School of Law, University of Dundee and the London School of Economics. He has also received a general management certificate of achievement from Judge Business School, University of Cambridge and is an Associate Member of the Chartered Institute of Arbitrators.
Curtis, Mallet-Prevost, Colt & Mosle LLP is a leading international law firm providing a broad range of services to clients around the world. Curtis has 16 offices in the United States, Latin America, Europe, the Middle East and Central Asia. The firm’s international orientation has been a hallmark of its practice for nearly two centuries. For more information about Curtis, please visit www.curtis.com or follow Curtis on Twitter (twitter.com/curtislawfirm) and Facebook (Facebook.com/Curtis.Careers).
Thursday, October 18, 2012
Zoning is a well-established method of land-use planning in many countries. Under this approach, specific parcels of land are designated as permissible for (i.e., “zoned for”) particular types of uses and activities, such as: residential, commercial, agricultural, industrial, or undeveloped open space. The fundamental purpose of zoning is to avoid undesired or incompatible combinations of land use within a community that would interfere with the community’s distinctive character or the land area’s overall intended purpose.
In some countries where zoning is actively practiced, the broader guidelines for a zoning regime would be set out by the central government and administered at the regional level by the local municipalities or governorates. In other countries, most zoning is spearheaded by local governments. Within each broad zoning category, there can be further subdivisions. For instance, a residential area could be divided into low-density housing with villas and single homes and high density housing with high-rise apartment buildings and an industrial area could be light and heavy industry zones. In urban zones, there could be residential, mixed residential-commercial, commercial, industrial and special zones (with power plants, airports, shopping malls, sports complex, etc.), and infrastructure for each zone is planned on the basis of its zoning designation.
Zoning is a relatively new concept in Oman; however, it could be poised to play a key role in the coming years as the Government increases its focus on sustainable real estate development. As the Sultanate features five regions subdivided into 61 districts and four governorates, this organizational structure could be a helpful starting point for giving Omani land, including property that is not yet developed or slated for development, zoning designations; this way, Government authorities and prospective property developers would be able to consider not only the applicable zoning for the particular lands they are contemplating for projects, but also the relevant zoning of the surrounding lands.
Friday, October 12, 2012
With 3,165 kilometers of pristine coastline and a deep drop-off ocean shelf, Oman is a prime candidate for fish farming, also known as aquaculture. In recent years, the Omani Government has indicated a particular desire to grow aquaculture operations within the Sultanate, both as a means of diversifying the national economy away from hydrocarbons and as a way to ensure domestic food security needs. The Omani aquaculture sector thus offers an array of potential opportunities for investors.
There are several key considerations that investors would do well to bear in mind when pursuing aquaculture projects in Oman. First, as with any investment project in Oman, it is important to select the appropriate local entity type for forming a permanent Omani establishment. Previous posts discuss the most commonly used options, such as a limited liability company or a branch to service an Omani Government contract.
Second, it would be important for investors to work with the Omani Government authorities to clearly establish up front the land use rights that will pertain to the project. As land ownership in Oman is generally limited to Omani and GCC nationals, the best way for a foreign investor to obtain land rights for a long-term aquaculture project in Oman likely would be via a usufruct, which can be granted for a period of up to 50 years for projects that contribute to Oman economic or social development.
Finally, and perhaps most crucially, investors would do well do work with the Omani Government authorities early in the process of planning the aquaculture project to arrange the procurement of all licenses necessary to operate the project, and to ensure that the term of these licenses would be commensurate with the term of the aquaculture project.
Monday, October 8, 2012
Many companies use debt to fund their operations and investments. Broadly speaking, there are two main types of debt finance: bank loans and debt securities. We have discussed bank loans – such as overdrafts, term loans and revolving facilities – extensively in past posts. This month we provide a brief overview of debt securities.
Debt securities are financial instruments that borrowers (who are referred to as “issuers” in this context) sell to investors.
Typically, a debt security entitles its holder to receive periodic interest payments from the issuer during the term of the security, as well as repayment of the security’s principal amount at the end of the term. For example, if you hold a 20-year, RO 1,000 bond paying a fixed 5% annual interest, the issuer is obligated to pay you interest of RO 50 per year throughout the 20-year term and then to pay you RO 1,000 at the end of the term. There are, of course, other variations that a debt security can take. Some debt securities carry the right to receive a fixed periodic interest rate, others a floating interest rate. Convertible debt securities give the holder the right to tender the security to the issuer in exchange for a given number of shares of the issuer’s common stock. Zero-coupon debt securities pay no periodic interest and only repay the principal amount.
Debt securities are thus used by companies to borrow money from investors as an alternative to borrowing from a bank. Many governments also issue debt securities. In Oman, both the Government and large corporations issue debt securities.
The name used to describe a debt security is often based on the length of its term. Longer-term debt securities are usually called “bonds”, whereas short-term debt securities may be called “commercial paper” when issued by companies or “bills” when issued by a government entity.
While bank loans continue to meet most Omani companies’ debt finance needs, debt securities are often a viable alternative or complement for large companies. It is also important to note that other forms of debt, such as vendor financing (e.g., when a corporate customer buys heavy equipment using a loan provided by the equipment manufacturer), play an important role for many Omani companies, particularly small and medium-sized enterprises.
Tuesday, October 2, 2012
This article is the third (of four) addressing Shari`ah-compliant home financing products. It considers murabaha and tawarruq structures. These structures predominate in many areas of the world and their use has been increasing in recent years, particularly since the onset of the global financial crisis in 2007-2008. They are discussed in some detail because of their widespread use in other Shari`ah-compliant products.