Tuesday, June 14, 2022

The Advance on Costs in Arbitration – Issues to Consider

The payment of advances on costs in arbitration aims to ensure that an arbitral institution has sufficient funds  to  cover  the  payment  of  arbitrators’  fees  and  expenses,  as  well  as  costs  incurred  in  the administration of arbitral proceedings.  The advances on costs paid to arbitral institutions do not include party costs, such as legal fees and expert fees.  Each of the major arbitral institutions requires that parties furnish some form of advance on costs before an arbitration can proceed. 

Whilst payment of the advances on costs is often perceived as one of the more perfunctory steps in an arbitration, in practice it can give rise to strategic considerations, and can have the effect of bringing an arbitration to a standstill. 

Certainly in Oman and other countries in the Middle East, respondents often treat the payment of the advances on costs as the claimant’s financial burden to discharge if the claimant wishes to obtain a final award.  As such, it is not unusual to encounter a respondent who is unwilling to pay its share of the advances on costs.

The option of simply waiting for the defaulting party to pay its share of the advances on costs should be approached with caution.  The arbitration will not proceed where the advances on costs remains unpaid.  Aside from causing delays to the timetable and frustrating busy arbitrators, the Court will eventually dismiss the reference without prejudice to either party’s right to bring fresh proceedings concerning the same claims at a later stage.  Whilst this may sound superficially appealing to some respondents, thought should be given to the consequences of having a reference dismissed without any conclusion.  Where disputes really do need to be fully and finally resolved (such as where the employer is withholding certificates and/or performance security after completion), this uncertainty may not be a satisfactory outcome for either party.

The  parties’  obligations  to  make  payment  of  the  advances  on  costs  are  an  extension  of  the  parties’ obligations in the arbitration agreement.  Accordingly, a refusal by either party to pay the advances on costs will constitute a breach of contract.  The usual remedies for breach of contract are available against a party failing to pay its portion of the advances on costs.

However, the Court or tribunal will not levy any sanction against a party for failing to pay its portion of the advances on costs.  The Court is, at that stage, concerned only with securing payment of its own costs and the costs of the tribunal.  Usually, the Court will ask the compliant party whether it wishes to pay in substitution for the defaulting party.  A party that elects to pay in substitution has the option of seeking reimbursement. 

Unlike in litigation, where public resources are finite and there is less tolerance for non-compliance, institutional Courts and tribunals often demonstrate more patience to parties who fail to satisfy their obligations to pay the advances on costs.

It is not uncommon in the Middle East to encounter a party who refuses to pay its portion of the advances on costs, at times receiving reminders from the Court or tribunal for several months to make payment, given  multiple  warnings  before  the  tribunal  is  finally  instructed  to  suspend  work.    Alternatively,  a tribunal in Oman may allow the arbitration to proceed, and deal with payment of tribunal costs in its final award.  It may therefore fall to the parties, rather than to the Court or tribunal, to be proactive in ensuring the expeditious resolution of disagreements about payment of the advances on costs, where this is achievable.

Parties arbitrating in the Middle East should be prepared for non-paying respondents, and should be aware of the important strategic considerations of the options available under the relevant institutional rules – whether paying by substitution, splitting the advances on costs, or raising the issue in a related security for costs application.

In short, issues on the advances of costs in an arbitration should be given careful consideration and the appropriate legal advice obtained at an early stage to resolve any issues that might arise. 


Monday, May 9, 2022

Partial and Interim Arbitral Awards in Oman

It is relatively common in arbitration proceedings for a party to seek an interim or partial award on a discrete issue. The issue may concern fundamental matters such as the tribunal’s jurisdiction, time bars on proceeding, and so forth, or preliminary points which may limit the need for certain evidence to be heard.  There are a variety of reasons why an interim or partial award may be sought.

A key issue arises in relation to interim awards in which the governing law is Oman. The Law accompanying Royal Decree 47/1997 (also known as the Oman Arbitration Law) does not contain any procedure for partial or interim awards. That would not prevent an arbitral tribunal from issuing an arbitral award, but questions arise about what a party may do to challenge an interim or partial award.

Some interim or partial awards may have the effect of concluding a matter in favour of one party or another. In such cases, the interim award is in effect a final award, and (depending on the details of the proceeding) could most likely be challenged in the same way and to the same extent that a final award might be challenged, pursuant to Articles 52 to 54 of Royal Decree 47/1997. 

However, where a partial or interim award only concludes certain aspects of an arbitration proceeding, and the arbitration continues, or where the issue had the potential to conclude the arbitration, but the award as issued did not, then any party wishing to challenge the award has a problem.  Article 54 provides that a party seeking to set aside an award must do so within 90 days.  However, because the Oman Arbitration Law does not allow for interim or partial awards, there is some uncertainty whether the 90 days commences from the receipt of the interim or partial award, or from receipt of the final award, which will in part reflect the earlier award. To date there appears to be no case law on the issue.  If a party is placed in such a situation, and thinks it has good grounds, it may be prudent to at least apply to set aside an unfavourable interim award within 90 days of its receipt, but this is a matter that should be carefully considered by a party in conjunction with its legal advisors. 


Thursday, March 31, 2022

Omani Personal Data Protection Law

Oman has recently issued a national privacy legislation with the publication of a new Personal Data Protection Law, promulgated by Sultani Decree 6/2022 (the “Law”). The Law was issued on 9 February 2022, and will come into effect on 13 February 2023. The Law will repeal Chapter Seven of the Electronic Transactions Law that limited obligations related to the protection of private data in the field of electronic transactions. The issuance of this Law in Oman follows the recurring trend of data protection regulations in the Middle East. 

Who It Applies To 

The Law applies to the processing of personal data, which is defined as “data that identifies a natural person or makes him identifiable, directly or indirectly, by reference to one or more identifiers.” This consists of the name of the person, ID number, location data or data relating to their genetic, physical, mental, psychological, social, cultural or economic identity. 

Who It Does Not Apply To 
  • The Law includes a substantial list of excluded categories to which the provisions of the Law will not be applicable: 
  • Protection of national security or public interest. 
  • Implementation of the units of the administrative apparatus of the state and other public legal persons of the competences prescribed to them by law. 
  • Implementation of a legal obligation imposed on the controller by virtue of any law, judgment, or decision by the court. 
  • Protection of the economic and financial interests of the state. • Protection of a vital interest of the individual to whom personal data relates (data subject). 
  • Detection or prevention of a crime on the basis of a formal written request by the investigation entities. 
  • Execution of a contract to which the data subject is a party. • If the processing is within the personal or family sphere. 
  • For the purposes of historical, statistical, scientific, literary, or economic research, by entities authorised to carry out such works, provided that no indication or reference relating to the data subject is used in the published research and statistics, to guarantee that the personal data is not attributed to an identified or identifiable natural person.
  • If the data is available to the public in a manner that does not impose any violations against the provisions of the Law.
Main Features

Organisations are under the obligation to process personal data within the framework of transparency,
honesty, and respect for human dignity and to grant individuals the right to revoke consent to processing of their personal data, the right to request for their personal data to be amended or erased, the right to have a copy of their personal data and the right to have personal data transferred to another party.

Controllers are required to identify a personal data protection officer.  In addition, there will be controls
on transfers of personal data outside of Oman.  Controllers and all third parties that are appointed to process  the  personal  data  may  be  required  by  the  Ministry  of  Transport,  Communications  and Information Technology to appoint an external auditor in order to verify their compliance. 

A general restriction is placed on the processing of sensitive personal data (genetic and biometric data,
health data, ethnic origin, sex life, political/religious opinions or beliefs, criminal convictions, security measures) without initially obtaining an approval from the Ministry of Transport, Communications and Information  Technology.    Furthermore,  the  processing  of  a  child’s  personal  data  will  not  permitted without the express consent from the guardian unless the processing of such data is in the best interest of the child. 

The executive regulations that will be published in due course will provide further clarifications to the
extent of the requirements and restrictions. 

Consequences of Breach

Data subjects hold the right to file an official complaint to the Ministry of Transport, Communications
and Information Technology if they believe that the processing of their personal data is in breach of the Law.  Furthermore, the Ministry of Transport, Communications and Information Technology has the discretion, in the case that it suspects a violation of the Law, to order rectification and erasure of personal data.

The penalties in relation to the disclosure of secrets or any other applicable privacy offence under the
Oman Penal Law and other laws will continue to be in effect. 


Wednesday, January 26, 2022

Major Changes To Dubai Arbitration Landscape

In recent years, many Oman-based companies have included DIFC/LCIA arbitration clauses in their contracts.  It has been a popular choice for dispute resolution as it combined the certainty of the well-known and trusted LCIA rules, with the convenience of locally administered institutional arbitration within  the  DIFC.    Dubai  Decree  No. 34  of  2021  -  Dubai  International  Arbitration  (the  “Decree”), accompanied by a new statute (the “Statute”), reforms the framework for arbitration in the Emirate of Dubai, and carries important changes for those negotiating and administering contracts. 

The  Decree  dissolves  the  DIFC  arbitration  institution  and  the  Emirates  Maritime  Arbitration  Centre

(“EMAC”), and provides for a framework under which the existing Dubai International Arbitration Centre (“DIAC”) will become the default center for arbitration in Dubai.  This is an important change to note for companies with existing DIFC/LCIA clauses, or those accustomed to including such clauses by default.  The following is a summary of the key changes:

  • Centralisation of Arbitration in the Emirates:  The Decree abolishes the EMAC and the DIFC arbitration institutions.  Both institutions’ operations shall be transferred to DIAC. 
  • Amended Management Structure for DIAC and Introduction of the Court of Arbitration:  DIAC is now composed of three main bodies:  (1) Board of Directors; (2) the Court of Arbitration; and (3) the Administrative Body.  The DIAC Court of Arbitration will consist of 13 members.  The President  of  the  Court  will  be  appointed  by  the  Board  of  Directors.    The  DIAC  Court  of Arbitration is charged with supervising and reviewing draft arbitral awards prior to tribunals issuing the same.  It is hoped that this will reduce any issues faced during enforcement.
  • Supervisory Jurisdiction of the Dubai Courts and DIFC Courts:  Determination of the place or seat of arbitration and the Court with supervisory jurisdiction is intended to be clarified.  There has  been  in  the  past  uncertainty  as  to  whether  the  Dubai  Courts  or  the  DIFC  Court  is  the competent supervisory court with jurisdiction over enforcement and/or nullification of DIAC awards or arbitral awards generally in Dubai.  Article 4 of the Statute clarifies this uncertainty.  The Dubai Courts are bound to accept jurisdiction as a supervisory court if the DIAC arbitration is seated in Dubai, and the DIFC Courts are required to deny jurisdiction in those circumstances (i.e., if the arbitration is not seated within the DIFC).  It should be noted that the DIFC is the default seat of DIAC arbitration proceedings if the parties do not agree otherwise. 
  • Arbitration Funding:  Article 8.4 of the Statute permits the DIAC Board of Directors to establish rules concerning funders of arbitration. 
  • Publication of Revised DIAC Rules:  These have been in the pipeline for some time and, with the expanded and prominent role of DIAC, are expected to be released soon.
In short, now is a good time to review your contracts, and seek legal advice as to how best tailor your arbitration  clauses  to  ensure  that  they  reflect  these  changes,  and  continue  to  meet  the  needs  and intentions of the parties and the subject matter/value of the contract involved.


Thursday, December 2, 2021

Curtis Successfully Defends The Sultanate of Oman and Oman Aluminium Rolling Company LLC in U.S. Department of Commerce Trade Case

Curtis’ International Trade practice delivered a significant victory for the Government of the Sultanate of Oman and local aluminum sheet and foil producer Oman Aluminium Rolling Company LLC (OARC) in a year-long investigation by the U.S. Department of Commerce into allegations that the Sultanate unfairly subsidised OARC’s operations.

The pivotal issue in the case was the charge that the Sultanate directed banks in Oman to provide OARC with preferential lending. An international Curtis team, comprising lawyers in Muscat, Geneva, and Washington, successfully beat back the allegations. The result was a “negative” finding on the banking issue by the U.S. Commerce Department and only minimal duties for OARC, preserving its access to the U.S. market.

This is Curtis’ second major victory in Oman involving allegations of unfair subsidies led by partner Matthew McCullough, who specialises in U.S. countervailing duty law. In 2015, Mr. McCullough directed a Sultanate defense representing both the Government and a local PET resin producer to a complete victory in a similar U.S. proceeding.

“Such cases give a government the opportunity to demonstrate internationally that its economy works on competitive, transparent, market-oriented terms,” commented lead partner Matthew McCullough. “A successful result like this helps to preserve and attract inward investment and deters new cases by showing the allegations to be baseless.”

Muscat Managing Partner Simon Ward added, “This case also demonstrates Curtis’ ability to provide immediate legal support in Oman, while drawing on our international team to deliver effective, practical, and efficient legal services in highly specialised areas of international and commercial law such as U.S. countervailing duty law.”

The Curtis team was led by partners Matt McCullough (Geneva/Washington) and Mehdi Mohamed Al Lawati (Muscat), and included associates James Beatty (Washington), Arthad Kurlekar (Geneva), Amrane Medjani (Geneva) and Reem Al Mahrizi (Muscat). 


Tuesday, November 23, 2021

Minority Shareholders’ Rights Under Omani Law

It is common for Omani companies to have at least one minority shareholder – i.e., a shareholder that owns less than 50% of the company’s shares. Some companies are formed with minority shareholders as part of the original ownership structure, such as a joint venture company in which the majority partner owns 70% of the shares and the minority partner owns 30% of the shares. Other companies add minority shareholders at a later stage, for example by granting a minority interest to a new investor in exchange for an infusion of capital.

For any such company, minority shareholder rights represent a key corporate governance issue. The minority shareholder will desire legal protections to ensure that the majority shareholder cannot use its voting control over the company to abuse the minority shareholder’s interests. Protections for minority shareholders not only promote fair and responsible governance, but also encourage investment by giving parties comfort to invest in companies in which they will not be able to exert voting control.

Minority shareholder rights mainly come in two forms: (i) rights conferred by statute, and (ii) contractual rights between the minority shareholder and the company’s other shareholders, enshrined either in the company’s charter or in a shareholders’ agreement. 


Tuesday, November 16, 2021

Double Tax Treaty with the United Kingdom

On 14 October 2021, Her Majesty’s Revenue and Customs (a non-ministerial department of the United Kingdom’s Government responsible for the collection of taxes) (“HMRC”) published the “synthesized” text of the UK’s double tax treaty with Oman, reflecting the changes made to the treaty by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, known as the Multilateral Instrument (“MLI”). This document results from the UK and Oman each depositing with the Organisation for Economic Co-operation and Development (the “OECD”) its instrument of ratification of the MLI, and reflects the modifications each of those jurisdictions submitted to the depositary on ratification.

The MLI entered into force in the UK on 1 October 2018 and in Oman on 1 November 2020.

The revised treaty, as modified by the MLI, applies:

  • For withholding tax purposes, from 1 January 2021. 
  • For other UK income and capital gains tax purposes, from 6 April 2022, and for UK corporation tax purposes, from 1 April 2022. 
  • For other Oman tax purposes, for taxable periods beginning on or after 1 May 2021.
This follows other synthesised texts published by HMRC. However, this synthesised text does not take precedence over either the UK’s original double tax treaty with Oman or the MLI, which remain the applicable legal texts (for example, in the event of any dispute).


Tuesday, July 13, 2021

Rules Organising Investments by the Public Authority for Social Securities and Pension Funds

The long-awaited consolidation of the pension funds has come into effect by virtue of Sultani Decree 33/2021 regarding the Systems for Retirement and Social Security, consolidating the management and operation of Oman’s various pension funds into two funds: a fund named the “Social Security Fund” and a fund named the “Military and Security Services Pension Fund.” Both funds shall have a legal personality, enjoy financial and administrative independence and shall be subordinate to the Council of Ministers. The systems of both funds shall be issued by a Sultani Decree.

Prior to the consolidation of the funds, there were nine funds that were subject to the limitations set forth by Sultani Decree 31/1996 on the Rules Organizing Investment of the Funds of each of the Public Authority for Social Securities and Pension and Retirement Funds, and this was further amended by Sultani Decree 12/2009.

The amendments issued the updated list of entities that such provisions are applicable to:

1. The Sultan’s Special Force Pension Fund; 

2. Internal Security Service Pension Fund; 

3. Royal Guard of Oman Pension Fund; 

4. Royal Oman Police Pension Fund; 

5. Royal Office Employees Pension Fund; 

6. Public Authority for Social Insurance; 

7. Civil Service Employees Pension Fund; 

8. Diwan of Royal Court Employees Pension Fund; 

9. Defence Ministry Pension Fund; and 

10. Any other pension funds that may be established per Sultani Decrees. 

The investment of the capital of the aforementioned funds shall be in the fields listed in the amendment, specifically: (i) real estate properties in the Sultanate and outside; (ii) shares and bonds issued by foreign companies listed in stock markets in foreign countries; (iii) bonds issued by the Sultanate’s government and foreign countries’ governments; (iv) shares and bonds issued by Omani stock companies; and (v) the deposits a local and foreign banks.

Pension funds are a central component of the financial sector in the Sultanate of Oman. The consolidation into the Social Security Fund and the Military and Security Services Pension Fund is a reflection of Oman’s continuous efforts to boost and develop the government sector.


Wednesday, May 5, 2021

Good Faith: English Law v the Oman Civil Code


The English courts’ historic reluctance to imply a term of good faith into agreements negotiated between two commercial parties at arm’s length is well known and is based on the long-established doctrine of freedom of contract. In contrast, in civil law countries, such as Oman, performing obligations in a manner consistent with good faith is a fundamental part of the contract.

Those working with international contracts, particularly construction standard forms such as those in the FIDIC suite, need to keep these very real differences in mind as they can have a significant impact on how some provisions operate in practice.

Summary of recent English case law on good faith

A series of English cases on good faith in early 2013, notably a High Court judgment in Yam Seng Pte Ltd v International Trade Corporation Limited, had raised the prospect that the English courts may be on their way to recognising an overarching duty of good faith, but this prospect now seems to have receded.

Several subsequent judgments have made it very clear that the English courts are not ready to imply a general doctrine of good faith. The judgment of the High Court in Yam Seng appears to have been sidelined (if not directly overruled) by the Court of Appeal, and in later cases.

If the parties want to have an express duty of good faith, they need to create one and they should think very carefully about its scope. The English courts will not allow good-faith-type wording to overrule an absolute contractual right such as the right to terminate for convenience. The parties will need to expressly provide that a good-faith obligation operates in relation to such a provision.

Good faith in Omani contracts

In most jurisdictions in this region, including Bahrain, Kuwait, Qatar and the UAE, the parties to a contract are expressly required by terms of their respective civil codes to perform their contractual duties towards each other with good faith. For example, article 246 of the UAE Civil Code provides:

“The contract must be performed in accordance with its contents and in a manner consistent with the requirements of good faith.”

This in effect is a requirement not to use the terms of a contract to abuse the rights of the other contracting party, not to cause unjustified damage to the other party and to act reasonably and moderately. 

Even though the Oman Civil Code (Sultani Decree 29/2013) contains no equivalent provision, Omani lawyers generally accept that, as a matter of Omani jurisprudence, an identical principle applies in the Sultanate.

So, can the doctrine of good faith be used as a tool to adjust, erode or dilute the effect of clear contract terms? Simply put, no. If good faith could override contractual terms, that could leave parties uncertain as to whether or not adherence to an agreed (but onerous) term is mandatory. It would undermine the fundamental principle of contract law that the contract means what it says. Article 155 of the Oman Civil Code provides that a contract is the law of the parties and (except in very limited circumstances) prevails over all else. As such, parties are bound by the terms to which they have agreed, and the duty of good faith does not alter their contractual rights or obligations. Indeed, it could be argued that a party seeking to circumvent agreed terms through the application of a good-faith argument may itself not be acting in good faith in seeking to do so! 

An act of bad faith by one contracting party may provide a cause of action for the other, and the duty of good faith is therefore overarching, unlike at English law. In deciding whether an act constitutes bad faith the court may also look at article 59 of the Oman Civil Code which provides that a party is prohibited from exercising its rights if: 

  • it is intended to infringe the rights of another party; 
  • the desired interest is unlawful;
  • the gain is disproportionate to the harm that will be suffered by the other party; or 
  • it exceeds the bounds of custom or practice.

There are some potentially wide-ranging ramifications of this, including:

  • Good faith is most likely to be applied to evidence, or to support, an allegation of breach. Where, for example, building materials are found to be defective a breach will be easier to establish if there has been some attempt to conceal this or cover up the materials once incorporated into the works.
  •  Reliance on a time bar notice (e.g., FIDIC’s clause 20.1) is likely to be restricted where a party seeking to rely on it knew about that breach previously (for example, if notification of the claim was made informally and is recorded in meeting minutes or similar but was never formally made). In other words, denying a claim due to the time bar when it had already been communicated, albeit informally, would be an act of bad faith. 
  • Avoiding liability for a very substantial claim due to a time bar may also be unlawful where the losses were serious and unequal with the employer’s contractual claim to be notified in a required time period (for example, 28 days under clause 20.1 of the 1999 FIDIC contracts). Article 59(1) of the Oman Civil Code provides that “a person shall be held liable for an unlawful exercise of his rights” and this, together with the good-faith obligation, may be used to challenge the effectiveness of a time bar in such circumstances. 
Whilst the Oman Civil Code does provide (in article 267) that parties may fix a pre-agreed compensation mechanism or amount in their contract, the court may also vary the pre-agreed amount of compensation or damages to equal the actual loss in any event, regardless of whether there was any “act of prevention” on the part of the employer.

  • Good faith is also applicable in relation to termination for convenience clauses although it is worth noting that the duty of good faith is not applicable to the obligation itself but to the performance of the obligation. Accordingly, the parties’ agreement that the employer may terminate the contract for convenience is a valid agreement and the Oman courts will normally uphold this. Although this employer’s right might be looked at as contradicting the good-faith principle, it would be an enforceable contract term as it was freely entered into.
However, if the employer relies on this contract provision to terminate the contract in circumstances that give rise to performing the contract in a manner that is inconsistent with good faith, then the court might have a different view.

 For example, if the contract provides for termination for convenience and limits the liability of the employer to compensate the contractor for the work done until the date of termination, but excluding mobilisation cost, the employer who terminates the contract for convenience immediately after mobilisation and before the contractor has done any work is performing the contract in bad faith. In this case, the contractor might rely on article 59 (abuse of right) and 267(2) (claiming actual loss) of the Oman Civil Code to recoup its losses.


Wednesday, April 7, 2021

Joint Ventures in Oman - April 2021

There are many different reasons why a business may seek to enter into a joint venture.  It may wish to access new markets, develop new products or benefit from the particular expertise of its joint venture partner or share risks and resources.  Curtis has worked on a diverse range of joint ventures in Oman across all industry sectors.  We understand the importance of ensuring that the joint venture structure and documentation encapsulate the underlying commercial objectives of the participants, whilst also being appropriate for the scale or complexity involved.

The phrase “joint venture” can have a number of different meanings.  Oman attracts significant foreign investment so it may involve the partnering of Omani and foreign investors.  The joint venture will typically involve the incorporation of a company to act as the joint venture vehicle.  This article will focus on corporate joint ventures since that is the most common approach, although the phrase “joint venture” may also be used to describe a contractual arrangement, for example, in the areas of commercial agency, franchise and (less commonly) a simple, unincorporated contractual co-operation agreement.

Structuring the joint venture

Curtis has been at the forefront of the Omani legal market in our understanding of corporate law, including Sultani Decree 19/2018 (the “Commercial Companies Law”) and its practical interpretation by the relevant government officials and legal departments, enabling us to devise and implement optimal corporate structures for our clients.

We work closely with the relevant licensing authorities to ensure that various corporate structures proposed by us for joint ventures are acceptable.  In our experience, such authorities are keen to engage with us to enable innovate corporate structures, given their objective of attracting and facilitating foreign investment into the country.

Our objective is to allow our clients to focus on their business and have a legal corporate structure that they know is robust and flexible enough for their short, medium and long term objectives.

Key provisions in joint venture or shareholders’ agreements

In addition to our structuring expertise, Curtis also has a wealth of experience in advising on the relevant joint venture documentation.  Various documents will be required depending on the circumstances of the joint venture, but typically the principal document will be the joint venture or shareholders’ agreement.

The following are key provisions in any joint venture agreement (although there are others which are not noted below):

  • The purpose and scope of the joint venture.
  • Board composition and management arrangements.
  • Financing of the joint venture company.
  • Reserved matters requiring consent of shareholders/directors and voting requirements.
  • Dividend policy.
  • Restrictive covenants.
  • Deadlock resolution.
  • Transferability of shares under different circumstances.
  • Termination or exit from the joint venture.

Certain of these matters are discussed in more detail below.

1.  Board composition and management arrangements

Board composition will usually be proportionate to each party’s shareholding.  In a 50:50 joint venture, it would be normal for the parties to be entitled to appoint an equal number of directors, although this is not always the case.  Any party that has minority representation on the board should require a number of issues to be reserved for shareholder approval, depending on the nature of control and veto rights which are appropriate to the joint venture.  The list of shareholder reserved matters will often be one of the more heavily negotiated aspects of a joint venture agreement.

Under joint venture agreements, it is common for the shareholdings of parties to be subject to mechanisms that change these, e.g., on a capital call, one shareholder may subscribe for shares whilst the other may not, so diluting the latter shareholder.  It is therefore important that board composition provisions cater for the possibility of change and enable board appointment rights to vary where a shareholder’s proportionate ownership has increased or decreased.

Day-to-day management of the business of the joint venture will often be delegated by the board to the general manager or CEO.  In a 50:50 joint venture, the board will normally be entitled to appoint the general manager or CEO, but this is not always the case and in certain instances this right could be given to one of the shareholders.  Whilst the general manager or CEO will have broad powers to operate the business on a day-to-day basis, it is important to ensure that certain key matters are reserved to the board or the shareholders.  This is of particular significance for a shareholder where the other shareholder has the right to appoint the general manager or CEO.

2.  Financing of the joint venture company

In any joint venture, the funding provisions need to be carefully tailored to reflect the parties’ chosen method or methods of funding the joint venture company.  There are various options available but a typical process would involve the board of the joint venture company (or senior management such as the CEO) deciding that funding is required.  Following this “funding call” an agreed mechanism will determine from whom funding should be procured (for example, loans from banks or other third parties or equity/shareholder loans from the shareholders).  This would often be subject to shareholder approval, with the deadlock resolution mechanism being invoked if the shareholders cannot agree on any relevant issues within a stipulated timeframe (see Deadlock resolution below for further details).

Where the shareholders are obliged to make contributions (typically pro rata to their shareholdings), the agreement should clearly state what happens if one of them defaults.  For example, should the other shareholder be able to fund the shortfall amount and receive additional shares, thereby further diluting the defaulting shareholder?  Or should the other shareholder be entitled to provide a shareholder loan equal to the shortfall amount and, if so, should this shareholder loan rank ahead of all other shareholder loans and attract a preferential rate of interest?  A failure to comply with a funding obligation would also typically constitute an event of default triggering the compulsory share transfer provisions, whereby the non-defaulting shareholder can elect to purchase the shares of the defaulting shareholder at a discount to market value (occasionally an option is also included for the non-defaulting shareholder to sell its shares to the defaulting shareholder at a premium to market value).  These types of clauses are designed to incentivise the shareholders to comply with their funding obligations, providing the joint venture company with the financing it needs to successfully operate its business.

3.  Dividend policy

It is important for the parties to consider the dividend policy of the joint venture company at the outset.  This will often depend on the nature of the business, in particular on whether the joint venture’s purpose is intended primarily to be cash-generating or as a growth company.

The dividend policy will need to be clearly stated in the joint venture agreement in order to reduce the likelihood of a dispute arising in the future.  One option is to provide for the distribution of an annual dividend of a certain percentage of the joint venture company’s annual profits.  A more flexible option is to allow the board of the joint venture company to determine a reasonable level of dividend on an annual basis.  In either case, it is important to include certain caveats – for example, dividends should only be payable to the extent that they comply with applicable laws (for example, regarding distributable reserves or requirements to maintain a reserve) and do not result in the joint venture company being in breach of any of its banking covenants.  Where it is envisaged that the parties will make shareholder loans to the joint venture company, the joint venture agreement should make it clear that no dividends will be paid until all such shareholder loans have been repaid in full.  The payment of dividends would often be subject to shareholder approval, with the deadlock resolution mechanism being invoked if the shareholders cannot agree within the stipulated timeframe (see Deadlock resolution below for further details).

4.  Deadlock resolution

Deadlocks can arise in various circumstances, but the most common circumstance is when a board or shareholders’ resolution is not passed by the requisite majority of directors or shareholders, respectively.

It is usual to ensure that, as a first step, appropriate efforts are made by the parties and their representatives to resolve a deadlock.  There could be a “cooling off period” during which the parties are required to use reasonable endeavours to resolve the dispute within a certain period of time.  If they are unable to do so, referring the dispute to the chairman/CEO of each party can be a useful tool.  It is not uncommon to refer disputes to an independent expert, although it may not be sensible to have a third party adjudicate on a matter of commercial or financial significance.
Other, more extreme options can be included but these should be used with caution as they have the potential to bring the joint venture to an end and can be manipulated by an unscrupulous party.  However, such options include the following in a deadlock situation:
  • “Russian Roulette”:  Under this mechanism, any party may serve a notice on the other, either requiring the receiving party to purchase its entire holding from it, or for the receiving party to sell its entire holding to the initiating party, at the price set out in the notice.  The receiving party then has a period in which to accept the offer made in the notice or reject it, in which case the roles of “vendor” and “purchaser” are reversed.  This method ensures that a realistic price is set by the initiating party, as that party may either have to sell its holding, or buy the other's holding, at the price it states in the notice.
  • “Texas or Mexican Shoot Out”:  Under this mechanism, the initiating party may serve a purchase notice on the receiving party stating that it is willing to buy the other out and setting the price at which it is prepared to buy.  The receiving party then has a period in which to serve a counter notice, stating that it either (i) is prepared to sell at the price contained in the purchase notice; or (ii) wishes to buy the interest of the initiating party at a higher price.  If the latter situation occurs and both wish to buy, then a sealed bid system will be put into operation, with the person who bids highest being entitled to buy the other out.  Alternatively, this bidding process can be run as an auction with the parties raising their bids in competition with one another.  This is a starker mechanism than the “Russian Roulette” procedure.  It is more openly susceptible to misuse where one party does not have the resources or desire to buy, requiring a strong nerve in that case to increase a low opening price.
Naturally, these mechanisms and the points raised above will not be appropriate for all joint ventures so it is important that the parties carefully consider the relevance and applicability of these provisions at the outset.