The GCC Railway Network – Opportunities and Challenges

Even in a region where larger-than-life infrastructure projects have become almost commonplace, the proposed pan-GCC Railway network evokes a grandeur that stirs the imagination. Scheduled to be completed in 2019 at a cost of US$ 25 billion, the GCC Railway will connect the six GCC nations of Oman, Saudi Arabia, Kuwait, Bahrain, Qatar and the United Arab Emirates, helping to forge deeper economic and political ties within the Gulf as it transports people and goods across borders.

This article provides an overview of the GCC Railway scheme, and discusses some key legal issues which are likely to arise thereunder.


Initial Stages

The GCC Railway, will be created by the interconnection of each GCC country’s national rail network. These national railways are still in their early stages. Two countries, Saudi Arabia and the United Arab Emirates, already have a head start. The former operates a rail line between Riyadh and the Persian Gulf port city of Dammam, and has commenced construction on the North-South Rail which will connect Riyadh with the northwestern city of Al Hadeetha. The latter boasts the Dubai metro, and has begun building the Union Railway which will link the seven Emirates.

The other GCC countries, currently in the planning and design phases, are quickly getting up to speed. In the Sultanate of Oman, the current plan calls for the national railway to be designed in three phases. The first phase would be a 230-kilometer rail line from the northern industrial city of Sohar to the capital Muscat. The second phase would be a 560-kilometer line from Muscat to the port city of Duqm, and the third phase would involve extending the Duqm line to Salalah in southern Oman.

The Omani press has reported that the Ministry of Transport and Communications recently floated a tender for a design and project supervision consultancy contract, with the goal of completing the design phase by 2013 and completing construction by 2018.

Inter-Country Coordination – Challenges, Opportunities and Legal Issues

Building the GCC rail network will naturally require an abundance of engineering skill and manual labor – but it will also require more: a common framework that will enable the six national rail networks to integrate and operate together as a single, unified GCC rail system. Such coordination should consider a number of issues, including the following:
• Technical issues – the various GCC national railways will need to have uniform standards for the gauge size of tracks and the locomotives which can run on these tracks, particularly along cross-border rail segments;
• Safety issues – of crucial importance, each railway’s signal and communication systems must be compatible and integrated;
• Commercial issues – for example, agreeing to a common fare structure across the GCC; and
• Legal and regulatory issues – implement a joint customs system to allow a single point of entry into the GCC and a uniform custom tariff for imported goods.

The Need for a Coordinated GCC-Level Regulatory Approach

Moreover, the six member nations would do well to provide a GCC-level regulatory and legal framework under which the respective national authorities could deliberate and agree on technical, safety, commercial and legal issues. Thus, the GCC Railway project will require not just capital and manpower, but also a large measure of political unity and skillful diplomacy over the coming years. But if the region’s successful development of large-scale air and sea transportation in recent years is any indication, the prospect of a pan-GCC Railway network is a goal that should be realized.

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Oman’s Consumer Protection Law

This article provides an introduction to the basic principles of Oman’s Consumer Protection Law, which was promulgated as Royal Decree 81/02 (with executive regulations issued by Ministerial Decision 49/07) (the “Consumer Protection Law”). It is particularly useful for tourists, business travelers and expatriates alike to be aware of the laws available to protect the consumer of goods or services, as it is possible for anyone to find themselves a victim of a rapacious supplier.

What is the Consumer Protection Law?

Fundamentally, the Consumer Protection Law is legislation intended to ensure that suppliers and advertisers abide by the principles of fair dealing and credibility when dealing with consumers. The law does not apply to ‘business-to-business’ commercial dealings between merchants. The Consumer Protection Law requires that every commercial establishment upholds the principle of protecting their consumers’ interests through providing quality services or products. Violations of this law include, but are not restricted to:
• knowingly supplying unsafe products without suitable warning to consumers;
• refusing to accept return of goods (excluding perishable products) that are within the minimum return period of 10 days from the purchase date;
• refusing to uphold an existing maintenance agreement with the consumer;
• intentionally misleading consumers with false advertising;
• refusing to provide compensation for an injury that the consumer sustained from normal use of the product or service;
• charging a higher price than advertised; and
• refusing to provide the consumer with proof of purchase (or a receipt) that at a minimum shows the date and value of the purchase.

It would be easy to believe that the Consumer Protection Law only applies to the purchase of products, i.e., a car or a mobile phone. However, it is important to understand that the law applies to all aspects of the commercial world, including where a commercial establishment provides a service to a consumer – for example, a dentist providing a filling or a mechanic servicing a car. Whenever a service or product is provided to a consumer by a supplier, the customer is protected by the Consumer Protection Law (provided that the consumer has not misused the service or product) and, should the supplier be found guilty of violating this law, the establishment can be fined up to RO 5,000.

Why is there a Consumer Protection Law?

The Consumer Protection Law is intended to promote a level playing field of fairness and equality between the supplier and the consumer, and to protect consumers against monopolistic companies and deceitful business practices. The Consumer Protection Law ensures that consumers are supplied with correct information about the products and services that they buy, prevents the companies from gaining unlawful profit through dishonest practices, and maintains a fertile market for new companies to enter by restricting the scope for dishonest or monopolistic business practices.

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Career Corner: How to Become an Omani Lawyer

With the Sultanate’s rapid economic development proceeding apace, Oman provides an abundance of opportunities for law firms and lawyers. Recognizing this trend, the Omani government has taken steps to increase the ability of young Omanis to participate in the legal field, by providing scholarships for the study of law domestically and abroad, and by tilting the legal system in ways to raise Omani participation in the legal field. For example, the Ministry of Justice took the decision in 2010 to reserve to Omanis the exclusive capacity to appear and present cases before the Primary Court.

However, in order to ensure that new Omani lawyers will have the requisite experience and expertise to carry out their duties, the Omani government has put in place certain restrictions on entry into the legal profession and qualification as an Omani lawyer. This article provides an overview of the process for becoming an Omani lawyer.


The registration process

The starting point for an Omani aspiring to become a lawyer is to obtain a university degree. Once they have their degree in hand, Omanis wishing to qualify as a lawyer in the Sultanate must go through several steps, the first of which is registration as a trainee with the Ministry of Justice. The applicant will need to present evidence that he or she meets the necessary criteria for registration, such as evidence of a University degree in law or a related discipline, as well as evidence of good conduct
from the Royal Omani Police.

Becoming a trainee

Once registered, the next step is to work in a local law firm as a trainee. A university graduate with an undergraduate degree is required to work a minimum of two years as a trainee, while those who hold a masters degree must work at least one year as a trainee. During this training period, the trainee may not open a law firm in his own name.

It is important to note that experience in an international law firm will not suffice to fulfill the Omani government’s training period requirement. As a practical matter, Omanis who work in international firms do essentially the same type of work, and often get exposed to a much broader range of experiences, than their counterparts at local firms. However, the current position of the Omani government is that only work performed at a local firm counts toward fulfilling the requisite two years of training to become an Omani-qualified lawyer.

Professional obligations and restrictions for qualified Omani lawyers

After completing the training period and qualifying as an Omani lawyer, every Omani lawyer must continue to heed the rules set out in the Advocates Law, promulgated by Royal Decree 108/96 (as amended). In particular, Article 6 of the Advocates Law requires that an Omani lawyer may not work as a minister or other government official, and may not start a business of his own or work for a company, bank or any other person or entity while working in the legal profession (subject to certain exceptions, for example that lawyers may serve in the Majlis al Shura or on the boards of directors of joint stock companies).

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Islamic Insurance Comes to Oman

Several months ago, in a ground breaking development, His Majesty Sultan Qaboos bin Said approved the establishment of Oman’s first Islamic bank. As the government authorities continue to work through the implementation of His Majesty’s instructions, it is becoming clear that changes and new opportunities are in store not only for the banking sector, but also for related financial sectors such as insurance.

Following His Majesty’s broad-based royal directive, many of the details of implementation have been carried out by government authorities such as the Capital Market Authority (CMA) and the Central Bank of Oman (CBO). For example, the local press recently reported that the CMA had issued important guidance in respect of Islamic insurance, or takaful. The CMA stipulated that conventional insurance companies would not be permitted to run takaful operations in the Sultanate alongside their conventional insurance businesses; any company wishing to offer takaful would be required to convert to a dedicated takaful company, or to open a new dedicated takaful entity.

This article provides a brief overview of takaful, as a basic primer on the Islamic insurance sector.


Insurance with Islamic principles

Essentially, takaful is designed to provide the same benefits to subscribers as conventional insurance –coverage against unexpected or catastrophic losses – while scrupulously adhering to the principles of Sharia (i.e., Islamic religious law). In particular, takaful is structured to comply with the core Sharia tenets prohibiting interest or unjust enrichment (riba), discouraging ambiguity in contractual terms (gharar), and minimizing the speculative nature of transactions (maysair).

Application of these principles to ‘takaful’ structures

In practice, there are two main ways that a takaful insurance scheme follows Islamic principles.

First, the takaful structures itself as a mudaraba (i.e., profit-sharing venture). The policy contract between the takaful operator (i.e., the insurance company) and the subscribers would specify how any operating surpluses that the takaful runs (e.g., excess of subscriber contributions received over monies paid out on claims) shall be divided between the operator and the subscribers. For example, the contract may state that any surpluses shall go 70 percent to the subscribers, as the providers of capital, and 30 percent to the operator, as the provider of services. This structure helps the takaful scheme avoid falling afoul of the prohibition on unjust enrichment.

Second, the takaful will seek to avoid prohibited elements of uncertainty by structuring its subscriber contributions as tabarru (from the Arabic “to donate, contribute or give away”). Under this concept, payments that the takaful makes on claims by a subscriber would be considered a partial donation by the other subscribers of the capital that they have contributed to the takaful.

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Focus on Litigation: Settlements

In the Sultanate of Oman, as in other jurisdictions, not every litigation matter proceeds all the way to a decision by the Court. What happens if the parties to an Omani court case reach a settlement in the middle of the litigation process?

Sadly, this rarely happens in Oman, primarily because the Omani system has no concept of “without prejudice” negotiations. Furthermore, the fact that the losing party does not have to pay the winner’s legal fees is another reason why Omani court cases often go the full distance to a Supreme Court judgment.

However, settlements can and do occur. The settlement is normally recorded in full detail in a settlement agreement which is in Arabic and signed by the parties. The respective lawyers of the litigant parties normally present the settlement agreement to the Court, and ask the latter to adopt the agreement as the terms of a “settlement judgment” between the parties. This means that the Court gives a judgment, stating that the parties have settled the dispute on the terms stated in the settlement agreement.

In this way, the terms of the settlement agreement become part of the actual text of the Court judgment. The result is that, if one party then breaches the settlement agreement, the innocent party can apply to the Enforcement Department to enforce the terms of the settlement agreement.

It also should be noted that the above mechanism requires that the advocates for both sides be in possession of powers of attorney from their respective clients which empower them to settle the dispute. This is necessary in order to make the request to the Court to adopt the agreement as the terms of a “settlement judgment.”

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Transfers by Lenders under Syndicated Loan Agreements

With the recent volatility in European financial markets, the importance of liquidity and flexibility within the banking sector has been the subject of renewed focus. During such times, some lenders may look to restructure their balance sheets by reducing exposure to certain sectors, countries and/or currencies under various existing transactions. The transfer provisions in a syndicated loan agreement provide a simple mechanism by which lenders can buy or sell interests in a syndicated loan agreement.

By way of background, a syndicated loan is one for which the funds are provided by a syndicate, or group, of lenders. A syndicated loan is often a useful way for the lenders to spread risk or to extend a larger loan than they would be able to do individually. In Oman, large syndicated loan agreements are typically governed by English law, or by the laws of another foreign jurisdiction as lenders tend to prefer the predictability of how such an agreement and the offshore security would be enforced in such a jurisdiction.

This article considers three ways in which a lender may sell all or part of its interests in a syndicated loan agreement, namely through novation, assignment or sub-participation.

Novation

Novation is the most effective way of transferring rights and obligations under a syndicated loan agreement from an original lender to a new lender. The existing agreement (including all outstanding commitments) between the original lender and the borrower is dissolved and replaced by a new agreement between the new lender and the borrower.

The new lender enters into a direct relationship with the borrower and other parties to the syndicated loan agreement. The loan agreement should include the form of transfer certificate used to effect the novation and a provision stating the borrower has no objections to the original lender selling his interest in the loan agreement to a new lender. Novation is typically used for revolving credit facilities in which the original lender still has outstanding obligations such as the obligation to make future loans.

The drawback of this method is that, if the loan is secured, the security is discharged and needs to be renewed each time a novation is executed and the priority of the security may be affected adversely. This, however, can be resolved by appointing a security trustee to hold the security granted under the loan for the benefit of all the lenders.

Assignment

Unlike novation, assignment involves the transfer of rights, but not obligations. For a legal assignment under English law, the assignment must be:
• absolute (i.e., the whole of the debt outstanding to the existing lender);
• in writing and signed by the existing lender; and
• notified in writing to the borrower.

A legal assignment will transfer all of the original lender's rights under the loan agreement, but none of the obligations. New security is not required on each assignment as the original lender retains his obligations under the loan agreement.

An assignment is not an appropriate option if there are outstanding lending obligations, since the original lender’s obligations are not transferred.

Sub-Participation

The distinguishing feature of a sub-participation arrangement is that the original lender remains the "lender of record" to the borrower, and there is no direct contractual relationship between the sub-participant and the borrower. No borrower consent is required, so this process can be confidential.

A funded sub-participation creates new contractual rights between the existing lender and the sub-participant on the same terms as the contract between the existing lender and borrower. The existing lender becomes an intermediary between the borrower and the sub-participant. The sub-participant puts up funds which the existing lender loans to the borrower. The sub-participant is only repaid by the existing lender when the borrower repays the existing lender. Unlike novation, there is no transfer of existing rights and the borrower is often unaware of the contract between the existing lender and the sub-participant.

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Oman’s Law of Engineering Consultancies – Part I

With Oman’s rapid pace of economic expansion and multitude of large-scale construction projects, engineering consultancies play a key role in the Sultanate’s development plans. This article provides an overview of what engineering consultants do and the Omani legal framework that regulates their profession. In forthcoming posts, we shall discuss key aspects of Oman’s Law of Engineering Consultancies which apply in particular to foreign engineering consultancies.

Engineering Consultants: Technical Experts and Project Managers

The work of engineering consultants broadly encompasses the planning, designing, managing, and supervising of engineering projects. As project managers, the engineering consultants are responsible for ensuring that a project is completed on time and within the specified budget.

The tasks assigned to engineering consultancies typically include:
• undertaking technical and feasibility studies and site investigations, including assessing the potential risks of the project;
• developing detailed designs, and resolving design and development issues;
• supervising the tendering process for selecting a contracting engineer, and coordinating amongst the contractors, the subcontractors and the client;
• managing and scheduling the purchase and delivery of project resources, as well as any variations to the project contract;
• reviewing and approving project reports and drawings; and
• ensuring health, safety and environment (HSE) regulatory compliance.

Oman’s Engineering Consultancy Law

Clearly, the technical complexity and high level of responsibility associated with engineering consultancy work calls for rigorous standards to ensure the quality of firms and individuals working in the field. In Oman, the Law Regulating the Work of Engineering Consultancies issued by Royal Decree 120/94, as amended (the “Engineering Consultancy Law”), provides such a regulatory framework.

The Engineering Consultancy Law sets forth general requirements for all engineering consultants, such as a ten-year liability on the engineering consultant and the contracting engineer for defects in construction. However, some of the most interesting aspects of the Engineering Consultancy Law relate to the requirements for foreign engineering consultants.

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The Need for a Dedicated Construction Law in Oman

For construction contracts with the Omani government, the typical standard terms and conditions are modeled broadly on the early 1980s version of the International Federation of Consulting Engineers (FIDIC) terms and conditions. In light of the prevalence of such off-the-shelf standard terms in government-sponsored construction projects, there has historically been little focus or effort toward enacting a comprehensive legal framework for the construction sector.

However, this lack of a comprehensive legal framework sometimes can pose difficulties in relation to private sector construction contracts. Private parties often eschew standard terms like those used by the government, and instead prefer bespoke, project-specific construction contracts. The problem is that, in the absence of a specific, construction-focused law in Oman, the parties to these customized private construction contracts may find themselves in a legal vacuum in the event of a dispute. While private construction contracts may be well negotiated, it becomes difficult to form a view on the enforceability of certain crucial terms under Omani law. Although most construction contracts are subject to arbitration, it is critical to ascertain the enforceability of certain provisions such as limitation of liability, allocation of risks, exclusion of or caps on liability, consequential damages, and liquidated damages.

For this reason, the relevant authorities would do well to consider enacting a dedicated construction law for Oman.

In the meantime, the most viable approach is to reason by analogy and extrapolate from existing laws to various scenarios specific to the construction industry. This article highlights a few such principles from the Law of Commerce (Royal Decree No. 55/1990), the Consumer Protection Law (Royal Decree No. 81/2002) and the Law Regulating the Establishment and Functioning of Engineering Consultancies (the “Engineering Consultancy Law”) (Royal Decree No. 120/1994), which are often cited as bearing most relevance to the construction industry. While the foregoing laws offer limited guidance in interpreting contractual terms of construction contracts, this of course does not vitiate the need for a robust, construction-specific law to provide greater clarity in one of Oman’s most critical industries.

From the Law of Commerce

The Law of Commerce embodies the fundamental principles for doing business in Oman and contains many implicit terms for sale-and-purchase-of-goods transactions that would apply in the absence of a contract, and that could also be extended by analogy to the sale and purchase of services, including construction services. Thus, in the construction context, generally applicable principles from the Law of Commerce could be cited to argue for the enforcement of milestone requirements, termination provisions or other commercially important clauses of the contract.

From the Consumer Protection Law

Unlike the Law of Commerce, which broadly encompasses all commercial transactions, the Consumer Protection Law applies only to business-to-consumer transactions. However, certain principles from the Consumer Protection Law, such as the obligation to provide defect-free service (failing which the consumer is entitled to compensation), could be cited in the business-to-consumer construction context, for example to argue for the enforcement of warranty clauses.

From the Engineering Consultancy Law

The Engineering Consultancy Law is specific in its approach and applies directly to certain key aspects of construction, such as providing for the joint liability on the engineering consultant and the contractor for defects in the construction of a building or structure even if such defect is attributable to the land upon which such structure is constructed. The ten-year liability period of the engineering consultant and the contractor runs from the date of delivery of the structure; however, any legal action must be brought forth by the owner within three years of detection of the defect.

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Limited Recourse to Guarantors in Personal Bank Loans

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

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

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

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

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

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Construction Disputes and Negligent Supervision Claims

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

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

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

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

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

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

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

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Hotel Management Agreements – Operator Fees

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

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

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

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

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

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

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Focus on Real Estate: Rental Bonds

Striking a balance in affording statutory protections to both landlords and tenants can be a thorny affair for real estate regulators. In most jurisdictions, the laws tend to shield tenants more than landlords due to the perceived unequal bargaining power between the parties. Certain market-driven measures, such as rent control restrictions and severe constraints on eviction of tenants, often are directed against and work to the disadvantage of the landlords.

Further, in a less regulated market, the breach of a tenancy agreement or loss or damage caused to the leased premises by the tenants can leave the landlords with little legal recourse. This article seeks to shed light on the ‘rental bond’ or ‘rental deposit’ practice used in some jurisdictions to protect landlords against a potential breach of the tenancy agreement by tenants.

A rental bond is the money paid by a tenant as security deposit which the landlord can claim in the event that the tenant causes damage or loss to the premises or otherwise violates the terms of the lease. The legally stipulated value of the rental bond seldom exceeds one month’s rent. A rental bond is not the same as the payment of rent in advance. It is typically lodged with a rental authority when the landlord and the tenant sign the tenancy agreement. At the end of the tenancy, the rental authority inspects the premises to determine whether any amount from the deposit can be claimed by the landlord as compensation for any loss or damage caused by the tenant. A tenant also can transfer the bond from previous tenancy to a new tenancy with the relevant authority holding the bond money until the expiry of the new tenancy.

In the absence of specific regulations governing rental bonds (such as in Oman), the landlord and the tenant may agree in a lease agreement to place the rental deposit in an escrow account. The account may be interest-bearing with the tenant named as the beneficiary for the interest from the deposit. The agreement could provide for the landlord to return the security deposit to the tenant at the end of the lease if no violation of the lease terms has occurred. The landlord, however, may seek to be reimbursed from the deposit for any loss or damage caused to the premises by the tenant as may be assessed by an independent assessor upon expiry of the lease.

The furnishing of rental bonds can ensure proper upkeep of the leased premises. Although there is no specific legislation addressing this area in Oman, the practice of seeking rental bonds is becoming increasingly common among landlords. An appropriate legislative framework for rental bonds can aid in minimising the potential for arbitrary behavior and in streamlining the real estate rental market.

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Foreign Community Clubs in Oman

In a post last month, we discussed local Omani associations, which are groups formed to carry out not-for-profit social, cultural or charity activities and are registered with the Ministry of Social Affairs, Labour and Vocational Training (the “Ministry”).

This month, we cover a related topic: foreign community clubs. A foreign community club (or a foreign association) is similar, regarding its function and formation, to a local Omani association. However, there are some additional legal requirements for a foreign community club.

As with local associations, the Ministry supervises all foreign community clubs in the Sultanate of Oman. This includes monitoring their activities and issuing instructions and directives to them to maintain the purpose for which they were set up.


Eligibility for foreign community clubs

Each foreign community may establish only one club in the Sultanate of Oman and only one branch thereof in a region (provided that the number of community members is not less than five hundred in that region). Terms and conditions for the establishment of a foreign community club include:

• the number of the foreign community members working in the Sultanate of Oman is not less than two thousand;
• the number of founders is not less than one hundred (excluding those involved in diplomatic missions);
• each founder is above the age of twenty-five years; and
• a fee of OR 200 for the license is paid on establishment and renewal of the foreign community’s club or any of its branches.

Establishing a club

Applications are to be submitted to the relevant department at the Ministry along with the proposed articles of association. The articles of association are then approved by the Ministry and must be signed by all the founders and accompanied by a profile stating the founders’ names, community and professions.

The Ministry then reviews the application to ensure the foreign community club fulfills the necessary requirements to allow the granting of a license. Licenses are valid for two years, and may be renewed via the same process as the original application (except for the signature of the founders), provided approval of the renewal from the annual meeting of such club is submitted by the chairman together with other documents. The renewal application must be submitted to the Ministry at least two months prior the end of the license period.

The name, headquarters, purposes, financial year, number of directors and name of the chairman shall be recorded for each foreign community club at the Ministry. Any amendments must be approved by the Ministry.

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Government Directors in a Joint Stock Company

Following the recent changes to the composition of the cabinet of Ministers in the Sultanate of Oman, a number of joint stock companies which are partially or fully owned by the government have been essentially paralysed, from the perspective of corporate action, by the lack of a functioning board; the existing government directors were removed without any new directors having been appointed.

It goes without saying that the board of directors plays a fundamental role in corporate governance. Where the joint stock company is partially or fully owned by the government, the government appoints directors to represent the government’s interests, objectives and goals on the board. Such joint stock companies specify in their articles of association the number of directors who represent the interests of the Sultanate of Oman or any of its administrative units that own shares in the company.

The procedure for appointing a government director is both simple and straightforward. Article 132 of the Commercial Companies Law requires that the appointment of government directors is a decision taken by the Council of Ministers pursuant to the nomination of the Ministry of Finance and the relevant minister.

Furthermore, the law specifies that government directors cannot be removed from their offices except by approval of the Council of Ministers. This clearly indicates that the government is the only party which is able to appoint or remove its directors, without any constraints. The appointment and removal of directors is effective once the ministerial decision from the minister supervising the Ministry of Finance is issued. Upon issuance of this decision, the company then can appoint or remove the director by submitting the ministerial decision to the commercial registry in the Ministry of Commerce and Industry along with the revised list of authorised signatories and other relevant documents.

As a final point, we note that the government directors’ powers are similar to the powers of any other directors. However, the law points out that acts performed by government directors shall not subject the government directors, the Sultanate of Oman or the public entity to liability under Omani company law.

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Focus on Litigation: Joining Co-Defendants

A defendant in an Omani court case always should consider whether the culpability in fact lies with a party who has not been named as a defendant by the Claimant.

The ability for a defendant in an Omani court case to join in co-defendants is more straight-forward than might be appreciated. This applies equally to joining in Omani and non-Omani parties.

The procedure for joining a co-defendant involves the named defendant making a paper application to the court, attaching copies of the commercial registration documents in respect of the prospective co-defendant(s). This corporate documentation should be obtained from the relevant public register in the country where the entity in question is incorporated.

The defendant also needs to provide the court with full addresses in respect of the co-defendants. Accordingly, we habitually advise that a written Defence always should start with procedural defences, and also should include substantive defences as well.

Provided that a prima facie case is made out, the Omani courts are usually willing to join the other parties into the existing court action as co-defendants.
As an important caveat, we should mention that joining a non-Omani entity may delay the case by some months, as the Omani courts serve such entities with the documentation via diplomatic, country-to-country channels.

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An Introduction to Hotel Management Agreements

With the continued growth of Oman’s tourism sector serving as a centerpiece of the government’s ‘Vision 2020’ economic development plan, one can expect a significant number of new hotels to open in the Sultanate over the coming years.

This article explains what hotel management agreements are and why they are crucial to most hotel development transactions. Next month, we will cover some of the key issues that typically arise in the negotiation of management agreements.

What is a management agreement?

Many hotels, particularly the large-scale, luxury hotels on which the Omani tourism sector is focused, are managed by one of the major international hotel operating companies. These operating companies are the household names whose signage adorns hotels across the globe, such as Ritz-Carlton, Hyatt, Intercontinental or Mandarin Oriental. A number of the international operating companies own some of the hotels they manage. However, many of the operating companies are engaged principally in the business of managing hotels owned by other investors, in exchange for fees.

The management agreement is the primary written contract between the hotel owner and the operating company, setting out the parties’ respective rights and responsibilities, typically in exhaustive detail. There are often other ancillary agreements between the hotel owner and the operating company as well, covering such matters as the use of the operating company’s intellectual property or the payment of the hotel owner’s share of expenses related to activities – e.g., staff training, reservations or marketing – that the operating company conducts jointly for all of the hotels under its management on a regional or worldwide basis.

Why are management agreements so important?

Hotel management agreements are crucial for two main reasons. First and most obviously, large luxury hotels are big business – there is a great deal of money, jobs and prestige on the line for both the hotel owner and the operating company, so management agreements must be negotiated thoughtfully and drafted carefully, commensurate with their high-quantum, high-stakes nature.

Second, hotel management agreements are important because they are the framework that govern a very long-term business relationship. Most hotel management agreements run for a term of at least 10 years and often 15 to 20 years, typically with the option for the parties to extend for an additional 5 or 10 years by renewal. The hotel management relationship often lives on long after the individuals who entered into the relationship – on both the owner and operator sides – have left their respective organizations. Thus, a well-drafted management agreement can play an important part in maintaining a long, mutually prosperous and harmonious relationship between the hotel owner and the hotel operating company.

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Oman Investment Funds

Over the next several months, we will examine certain provisions of the Omani Capital Market Law (Royal Decree No. 90/98) and the implementing executive regulations (Ministerial Decision No. 1/2009) pertaining to investment funds. The regulations apply to all forms of investment funds proposed to be established in Oman, including, for example, all forms of collective investment vehicles traditionally known as ‘private equity funds’ and ‘hedge funds’. Earlier this year, the first private equity fund in Oman was launched by a local investment company. The fund managers requested the Capital Market Authority (CMA) to waive certain provisions of the executive regulations to bring the fund more in line with general market practice and make it more attractive to investors and money managers.

Problems with a ‘one size fits all’ approach

Without an express waiver by the CMA, the regulations effectively would prohibit activity in one of the most important segments of the investment funds industry ─ traditional private equity funds and real estate funds. One problem which arises under Article 208 of the regulations provides that ’The capital of the fund shall be divided into investment units with equal rights’. Strictly interpreted, this regulation would prohibit the fund from issuing different classes of units with different voting and/or economic rights. For example, it is common in private equity funds to issue ‘side-letter’ agreements which provide certain investors with special voting, economic, exit and/or other rights. The referenced language would not allow such side letters and, as a consequence, would be problematic for fund managers interested in establishing an Oman fund.

The ‘one size fits all’ approach mandating the issuance of units of equal rights effectively ignores the fact that different kinds of funds are operated for different reasons because they can offer portfolio diversification opportunities, tailor-made solutions and higher returns.

Frequently negotiated investor rights and terms

It is standard within the fund industry to structure a fund, for purposes of both fund marketability and governance, so as to attach different rights to different classes of fund units, whereby certain units may carry economic rights only, and other units may carry voting rights only or both economic and voting rights. The spectrum of different economic and voting rights associated with units issued by funds, and the varied characteristics of a class of fund units, are usually the result of intense and prolonged negotiations between the manager and one or more sophisticated investors, where the investors may not subscribe to the fund (and the fund therefore may not launch) in the absence of the negotiated, preferential terms. Such preferential terms might include:

• shorter lock-up periods (or more frequent redemption dates) or commitment periods;
• reduction of management fees and carried interest payments;
• special redemption or excusal rights upon the occurrence of “key person events”;
• enhanced fund reporting and/or valuation requirements, carve-outs to transferability restrictions relating to the fund interest and other rights accommodating tax and/or regulatory issues specifically applicable to the investor; and
• specifically in relation to Omani pension funds acting as investors in funds, such pension funds generally negotiate special rights to accommodate the Omani law requirements that a pension fund invest at least 50% of its assets under management in Oman.

In respect of the recently launched Omani private equity fund, the CMA has demonstrated its willingness to waive the referenced restriction in Article 208 of the executive regulations. An amendment of the regulations to remove the blanket restriction on the issuance of different classes of investments units in a fund by the CMA undoubtedly would provide more certainty to the market and assist in attracting sophisticated investors and money managers to Oman investment funds.

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Oman’s Anti Money Laundering and Combating Terrorist Financing Law – Part III

Over the past issues of the Client Alert, we have discussed certain provisions of Royal Decree No. 79/2010, Oman’s Anti Money Laundering and Combating Terrorist Financing Law (the “AML-CTFL”), which is designed to combat money-laundering and terrorist financing. In the April issue, we examined what constitutes the offence of money-laundering, how the authorities define ‘proceeds of crime’ and what actions could be deemed to be terrorist financing. In the May issue, we looked at the obligations under the AML-CTFL for all businesses that operate in Oman, financial and non-financial alike, to ensure their compliance with this law. This month, our final installment in this series provides an overview of the penalties which can apply if a business or person is found to have breached the AML-CTFL.

Penalties

The penalties for breaching the AML-CTFL are severe, and businesses and individuals alike would be well advised to think carefully before engaging in any business which could fall within the scope of this law. Some of the main penalties are as follows.

Firstly, a person who commits or participates in a money laundering crime, or attempts to do so, may be punished (subject to the exceptions below) with imprisonment for a term ranging between three and ten years and with a fine of 5,000 Omani Rials or greater. Notably, there is no upper limit on the fine element of this penalty except that the fine may not exceed the value of the funds which were the subject of the money laundering crime.

We previously established that if a person has information regarding an act of money laundering or terrorist financing (or has reason to suspect that such an act has occurred) and fails to report this to the authorities or informs a person that they are the subject of an investigation under the AML-CTFL and that investigation is harmed by the disclosure, then such failure to disclose or tipping off would be offences under Omani law. Failure to disclose or tipping off are punishable by (subject to the exceptions below) a term of imprisonment of up to three years and a maximum fine of 3,000 Omani Rials.

The public should be aware that the AML-CTFL also states that the disclosure of any procedures, report, analysis or investigation regarding a transaction that involved money laundering or terrorist financing, to the customer, beneficiary or anyone other than the competent authorities, would also constitute an offence under the AML-CTFL. This offence would be punishable by (subject to the exceptions below) a term of imprisonment for at least one year and a fine of up to 10,000 Omani Rials.

Exceptions

The penalties stipulated above can be doubled in the following cases:
• if the crime has been committed in complicity with one or more persons;
• if the offender commits the crime through an organized criminal gang;
• if the crime has been committed as a part of, or in connection with, other criminal activities;
• if the offender has committed the crime in an abuse of his position, e.g., by taking advantage of the powers vested in his office; or
• if the offender is a perpetrator or accomplice in the original crime from which the money laundering funds were obtained.

Conversely, if a perpetrator reports a crime under the AML-CTFL to the authorities and tells the authorities of the parties involved before the authorities had knowledge of the facts, then the reporting perpetrator may be exempted from the penalties stipulated under the AML-CTFL. Even if the report takes place after the authorities were aware of the crime, if it leads to forfeiture of the proceeds of the crime or the arrest of the other perpetrators, then the court may suspend a punishment of imprisonment for the reporting perpetrator.

Terrorist Financing

While some of the penalties above would encompass terrorist financing, there is a specific penalty under the AML-CTFL which relates exclusively to terrorist financing: any person who commits or attempts or participates in terrorist financing may be punished by a minimum term of 10 years imprisonment and a minimum fine of 10,000 Omani Rials. As with the similar money laundering penalty above, the fine element of this punishment has no upper limit other than that it shall not exceed the value of the funds which were the subject of the terrorist financing; this presumably means the money which funded the terrorist financing and not the resulting financial damage which was caused by that terrorism, although the law is not clear on this point.

Business Sanctions

Companies should note that in addition to terms of imprisonment and fines levied, the Omani authorities have the power to impose a number of other business-related sanctions for breaches of the AML-CTFL. These include the annulment of a company’s licence, prohibiting the trade of the company’s securities in the Omani financial markets and, ultimately the power to close the company down.

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Focus on Litigation: Raising Procedural and Substantive Defences

When defending against litigation proceedings in Oman, it is crucial not only to formulate the right defences, but also to deploy them at the right time.

It is a little-known point of Omani law that, in any Omani court litigation, all procedural defences must be stated at the beginning of the very first defence submission.

For example, if the Defendant has an argument that the Oman Courts should decline jurisdiction to hear the dispute, this contention must be explained and detailed in full at the start of the written Defence. The Oman Courts usually reject a procedural argument if it is not raised at the commencement of the case.

Similarly, it is also important to raise substantive defences at the outset of the litigation. If the written Defence does not include substantive (i.e non-procedural) lines of defence, in addition to procedural defences, then there is a risk to the Defendant. Namely, the Oman Courts may reserve the matter for judgment, reject the procedural argument(s) and then state that the defendant has accepted liability for the substantive claim against it by refusing to file any substantive lines of defence.

Accordingly, we habitually advise that a written Defence should always start with procedural defences, and should also include substantive defences as well.

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Islamic Banking in Oman- Part II

Islamic banking is poised to become a key fixture of Oman’s financial sector, following the recent announcement that His Majesty Sultan Qaboos bin Said has approved the formation of Oman’s first Islamic bank. Last month’s Client Alert provided an introduction to the religious, philosophical and economic principles that underpin Islamic finance. This month, we present an overview of some of the classic Islamic banking structures that are commonly used in jurisdictions where Islamic finance is already well established.

Mudaraba (capital provision)

This is an arrangement between an Islamic bank and an entrepreneur in which the bank contributes the capital to fund an entrepreneur’s company, in exchange for a share of the company’s profits. The two most notable features of a mudaraba are that (i) the bank contributes all of the company’s capital, and the entrepreneur contributes his ideas, technical expertise and management skills but no capital, and (ii) the bank and the entrepreneur share the profits of the company according to a pre-agreed scale, while the company’s losses would be absorbed entirely by the bank. A mudaraba structure is well suited to up-and-coming entrepreneurs who possess exceptional business ideas or talents, but lack the financial resources to get their company off the ground.

Musharaka (joint venture)

Under a musharaka, both the Islamic bank and the entrepreneur contribute capital to the entrepreneur’s company. The company’s profits are shared according to a formula that the parties pre-agree, and losses are apportioned pro rata to the parties’ respective capital contributions. Although management of the company may be however the parties agree, it is common for both the entrepreneur and representatives of the bank to be actively involved. A musharaka structure is well suited for an Islamic bank’s proprietary investment activities.

Ijara (lease)

An ijara is a lease structure in which the Islamic bank will buy a specified asset, and lease it to the banking customer at a specified rental price for a specified length of time. It is important for the terms of the lease to be Sharia (Islamic religious law) compliant – for example, not to charge interest or penalties that would be considered usurious and therefore haram (prohibited). Frequently, an ijara will include the option for the customer to purchase the asset at a specified price at the end of the lease period.

Sukuk (Islamic bonds)

Sukuk, or Islamic bonds, are securities representing an ownership interest in an asset or pool of assets. The assets underlying the sukuk will themselves be structured as Sharia-compliant vehicles – such as mudaraba or musharaka. The payments that sukuk bondholders receive are not designated as interest payments, but rather as returns derived from the profits of the business underlying the bonds.

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Overview of Real Estate Title Insurance

As Oman uses real estate registration systems for the transfer of land titles or interests in them, the Real Estate Register at the Ministry of Housing makes the determination of title ownership and encumbrances on the title based on the registration of various instruments affecting the title. This article provides an overview of real estate title insurance, which is a common feature of many jurisdictions worldwide and represents a potential tool for the Omani authorities to adopt in their continued development and enhancement of the Sultanate’s real estate framework. Title Reports In many jurisdictions, there are title companies that perform the service of reviewing the real estate records on file at the Real Estate Register and issuing a report which identifies the owner and all of the interests and/or agreements that are filed against that property. The fees for the title companies' services are paid by the buyers, usufructuaries and lessees for their services. Prior to the conveyance of title, an attorney for the buyer reviews the title report and advises the buyer of the "condition of title" to the property and whether it complies with the requirements set forth in the contracts between the buyers and sellers. Title Insurance The attorney then gives notice of any title objections to the seller, in order for the seller to cure such defects. At the closing of the conveyance of title, the title company converts the title report into a policy of title insurance, in favor of the buyer, usufructuary (or, as relates to a mortgage, in favor of the lender) which insures that the policy names the correct owner and identifies the agreements that have been filed against the property with the Register. In the case of either corporate ownership or individual ownership, a title company insures that the purchaser owns the property subject only to certain interests which are listed in a "title report". As part of the closing documents, the corporate entity delivers to the title company evidence of the company's organizational documents for the title company to review and determine whether the corporation has the power to own, lease and/or mortgage the property and whether the corporation is then currently in existence in "good standing" ─ i.e., that it has paid all of the corporate taxes and filed all of the required forms and taxes with the appropriate taxing authority. Features of Title Insurance Title insurance provides indemnity insurance against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is principally meant to protect an owner's or a lender's financial interest in real property against loss due to title defects, liens or other matters. Title insurance can be purchased to insure any interest in real property. Most institutional lenders would require title insurance to protect their interest in the collateral of loans secured by real estate. The basic elements of insurance provided to the lender cover losses from, inter alia, defects, liens or encumbrances on the title; non-marketability of the real property; invalidity or unenforceability of land rights. Taking account of the growing complexity of real estate transactions in Oman due to the recent surge in ITC and non-ITC real estate developments, the introduction of an appropriate law to allow title insurance would create more security and certainty in the market. Local Associations in Oman A local Omani association is a group, formed in accordance with its bylaws, comprised of a number of individuals with the objective to carry out not-for-profit social, cultural or charity activities and registered with the Ministry of Social Affairs, Labour and Vocational Training (the “Ministry”). Permitted Functions An association may function in the following areas: • welfare of orphans; • welfare of children and adults; • ladies services; • welfare of the aged; • welfare of handicapped persons and persons of special needs; or • any other field or activities which the Minister may deem necessary to incorporate. An association is prohibited from engaging in certain activities including political activities, forming political parties and interfering in religious matters. Foreign associations, local organisations and sports and technical associations and clubs are governed by separate specific laws. Establishing a Local Association To incorporate an association, it must have written bylaws duly signed by at least twenty Omani founding members. The bylaws set out, among other things, the name, objectives, scope of the activities, details of the founding members, conditions governing membership and the financial resources of the association. The founding members must then hold the first general meeting of the association and elect the first board of directors from among themselves for a period of one year. This board then authorises the relevant member to apply for registration of the association with the Ministry. Governance Matters Once registered with the Ministry, the association needs to maintain various books, including a register of members and subscriptions paid, minutes of the meetings of the board of directors and general meeting, and account books at its premises. The Ministry has the right to inspect the registers, books and documents of the association as well as monitor the activities of the association to ensure that they are in conformity with Omani law and the association’s bylaws. All of the members of the association who have followed the bylaws and been a member for at least six months (except for the first general meeting) shall be entitled to attend the general meeting. There is a set procedure which needs to be followed for the calling and holding of ordinary and extraordinary general meetings. Copies of the minutes and any resolution adopted by the general meeting must be provided to the Ministry within fifteen days of the date of each meeting. The board of directors of the association needs to have between five and twelve members, and directors are appointed for two-year terms (except for the first board). The board is responsible for the activities of the association. As mentioned, copies of the minutes and any resolution adopted by the board must be provided to the Ministry within fifteen days of the date of each board meeting. The Ministry has the right to invalidate any board meeting or resolution adopted by the board if convened in breach of Omani law or its bylaws within one month of receiving the relevant documents. In addition, there are further detailed provisions in the law on the financing of associations, merger and dissolution of associations and public service associations, as well as the penalties for non-compliance with such provisions.

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International Law Update: UK Ministry of Justice Publishes Bribery Act Guidance (Part I)

Following on from the publishing of the UK Bribery Act 2010 (the “Act”) last year, the UK Ministry of Justice has recently published final guidance (the "Guidance") on the procedures which relevant commercial organisations can put in place to prevent persons associated with such organisations from bribing. The Act will enter into force on 1 July 2011.

The Act applies to all commercial organisations that are registered in the UK or that have any operations in the UK. Therefore, as mentioned in our article on the Act in the Curtis Oman Client Alert in September 2010, we anticipate anti-corruption clauses becoming widespread in commercial contracts between UK entities and Omani companies. In addition, the Act will be a point of concern for any Omani companies which have operations in the UK. We understand that investigations and prosecutions under the Act are most likely to be targeted at companies in extraction industries and transactions with government entities including politically exposed persons.

The new Guidance has revised all of the adequate procedures for commercial organisations to have in place as a statutory defence in the event of prosecution under the Act from the draft guidance published in September 2010, which was criticised as unworkable, inhibitive of customary business practices and detrimental to the competitiveness of UK companies. The UK Ministry of Justice has also addressed concerns raised by the business community over the ambiguous and potentially far-reaching nature of certain provisions of the Act, namely, regarding corporate hospitality, facilitation payments, suppliers and joint ventures, and foreign companies accessing the UK capital markets.

Corporate Hospitality

The Guidance reiterates the importance to businesses of “reasonable and proportionate” hospitality and promotional expenditures designed for improving corporate image, marketing products and services, or developing public relations, and adds that such expenditures are not intended to be criminalised by the Act. Reasonableness is determined within the context of the organisation’s size and nature of business and the customary practices of its industry.

Lavish or extravagant expenditures lacking in business purpose or to unnecessary or out-of-the-way locales are likely to raise an inference of intention to improperly influence foreign public officials. Accordingly, whilst it would be acceptable for a health care provider to furnish ordinary travel and accommodation to a foreign public official to visit one of its hospitals, a five-star holiday to the same official that is unrelated to a demonstration of the organisation’s services would be suspect. The Guidance provides additional examples of reasonable travel expenditures for foreign public officials. One of these is for flights and accommodation to visit distant mining operations to demonstrate a UK organisation’s safety standards. Another is for flights, hotels, fine dining and sporting event tickets for a foreign official and his or her partner to visit New York as the most convenient location for meetings with senior executives of a UK organisation, although this would be called into question if the executives had visited the official’s country with all the relevant documentation enabling such a meeting to occur the previous week.

Facilitation Payments

Facilitation payments are illegal under the Act. The Guidance contains no specific defences for making facilitation payments, unlike the Foreign Corrupt Practices Act, which has a narrowly construed exception for such payments. Duress is a factor to take into account when considering prosecutions for making facilitation payments, as it provides a common law defence in the UK.

Associated Persons

The Guidance further clarifies the definition of “associated persons” in the context of the corporate offence of failure to prevent bribery, with respect to suppliers and joint ventures.

Suppliers

Whilst mere sellers of goods are not to be considered “associated persons” for purposes of the corporate offence of failure to prevent bribery, suppliers of services that are within the organisation’s control are likely to be included. Indirect suppliers who perform services along a supply chain without any contractual relationship with the organisation are not likely to be associated persons.

Joint Ventures

The Guidance makes a distinction between the treatment of joint ventures that operate as separate legal entities and those which arise through contractual arrangements. Separate entities are not presumed to be associated with their members, and therefore bribes paid by such entities will not necessarily give rise to liability for a member’s failure to prevent them, absent a showing that the venture was performing services for the member and the bribe was paid with an intent to benefit that member. The analysis is different for contractual joint ventures, where an examination of the level of control of the members over the activities of the venture is appropriate. In such case, a member could be liable for failing to prevent a bribe made by the joint venture in the performance of services for that member.

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Emerging Signs of Change to Oman’s Audit Law?

Recently, Royal Decree No. 27/2011 amended the name of the ‘State Audit Institution’ to be titled henceforth the ‘State Financial and Administrative Audit Institution’ (“SFAAI”). While the true significance of this amendment is still emerging – will this merely be a name change, or is it a sign of more fundamental changes to come? – now is an opportune time to reflect on the existing state audit law, which reinforced the independence and widened the audit mandate of what is now called the SFAAI.

The State Audit Law issued by Royal Decree No. 55/2000 (the “Law”) decreed the financial and administrative autonomy of the SFAAI, bifurcating it from the Diwan of the Royal Court. The stated objectives of the institution, which was established to audit state public funds and monitor the performance of entities under its control, are as follows:

• to secure public funds and provide a framework for the efficient management of the funds;
• to make internal financial controls conform with applicable financial regulations;
• to expose any financial irregularities in state organizations that fall under the SFAAI’s purview;
• to highlight intrinsic weaknesses in the financial system and to propose remedies to guard against these weaknesses; and
• to audit entities subject to the Law and to ensure that public funds are economically and efficiently employed.

The Chairman and the Vice Chairman of SFAAI are appointed by a Royal Decree. The Chairman, in turn, appoints other members of the institution. In discharging its functions, the SFAAI is authorized to seek external professional assistance where required, as its state audit functions have to be conducted in accordance with internationally accepted standards. The SFAAI must convey audit reports identifying any breaches of financial regulations to the relevant entities along with recommendations for remedial measures. The Chairman of the SFAAI also must submit a summarized audit report to HM Sultan Qaboos, highlighting any failures of the relevant entities to implement the SFAAI’s recommendations.

The SFAAI also conducts special audits at the specific request of the government – for example, special audits of government-controlled companies in the oil and gas sector or of pivotal financial institutions or government socio-economic programmes. The government and other entities that are subject to state audit by the SFAAI are as follows:
• all Ministries and government agencies that constitute the Administrative Apparatus of the State;
• all companies in which the government controls 51% or more of the shares;
• government pension funds;
• public authorities and other bodies which receive financial grants from the government or in which the government owns shares; and
• publicly or privately owned companies which have been granted concessions by the government for a public utility or for exploiting the country’s natural resources.

As the government’s financial watchdog, the SFAAI is empowered to identify systemic weaknesses and to take remedial steps to address them, rather than narrowly restricting its focus to irregularities in individual transactions. The Royal Decree changing its name could presage a further expansion of the SFAAI’s administrative mandate beyond its present financial functions. We shall watch with interest for further developments in this field.

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Investment Management in Oman

As the Sultanate continues its drive to diversify the national economy, the past few years have witnessed both the growth of existing companies and a flourishing of new ones. With expanding industries, a robust and conservative capital markets infrastructure and increasing trade, Oman stands poised to offer an array of attractive investment opportunities. Not surprisingly, a number of investment funds and investment managers, both domestic and international, are showing increased interest in Oman.

In order to establish or manage an investment fund, it is necessary to comply with the rules and procedures of the Omani laws and regulations that govern the capital markets sector. This article provides a brief overview of the legal and regulatory framework for the investment management sector and answers a pair of frequently asked questions.


The Legal and Regulatory Framework

The Capital Market Law, established by Royal Decree No. 90/1998, provides the legal framework for, among other things, the Muscat Securities Market, the authorities of the Capital Market Authority, and general regulation of Omani capital markets activity. With regard to investment funds, the Capital Market Law prescribes general organizational and operational requirements, while more detailed requirements are set forth in the Executive Regulations of the Capital Market Law issued by Ministerial Decision No. 1/2009.

However, we note that this legal framework is currently best suited to conventional investment funds such as mutual funds. Certain provisions of the Executive Regulations – for example, requiring subscriptions to a fund to be fully paid up front or requiring equal terms for all investor classes – could make it more challenging for some alternative investment funds, such as private equity funds or hedge funds, to operate in Oman. As the Omani authorities continue their drive to enhance the nation’s capital markets, we will continue to monitor the development of this legal framework.

Which kinds of capital markets activities require a license in Oman?

The Capital Market Law states that the following securities-related activities require a license from the Capital Markets Authority:

• promotion and underwriting of securities or financing of investment in securities;
• participation in the establishment, or in increasing the capital, of companies using securities;
• depositing, clearance, and settlement of securities transactions;
• the establishment and management of securities portfolios and investment funds;
• brokerage in securities; and
• management of trust accounts and custodianship of securities.

Note that establishment and management of investment funds are included on the above list and require a license from the Capital Markets Authority.

Are there general rules on a fund’s investment allocations?

The Capital Markets Law and the Executive Regulations prescribe an array of investment rules. Among these, the most general are:

• an investment fund shall invest at least 75% of its capital to achieve its main investment objectives;
• an investment fund that invests in securities:
o shall not hold more than 10% of the outstanding securities of any single issuer;
o shall not allow its investments in the securities of any single issuer to exceed 10% of the net asset value of the fund (this provision does not apply to index funds); and
o shall not borrow more than 10% of its net asset value; and
• an investment fund investing in real estate shall not borrow more than 30% of its net asset value.

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Oman’s Anti Money Laundering and Combating Terrorist Financing Law

As a bastion of stability and security in a sometimes volatile region, and with a robust regulatory and business environment, the Sultanate of Oman tends not to experience major problems with respect to money laundering or terrorist financing. However, as noted in a report by the U.S. Department of State, Oman’s long, rugged coastline remains susceptible to regional criminal activity including terrorism, maritime piracy, smuggling and the traffic and sale of illegal drugs.

Oman’s Anti Money Laundering and Combating Terrorist Financing Law (the “AML-CTFL”), which was promulgated as Royal Decree No. 79/2010, has established a framework for classifying, investigating and punishing money laundering and terrorist financing offences.

What is ‘money laundering’?

Under the AML-CTFL, a money laundering offence will be deemed to have taken place when a person handles funds knowing that such funds are derived, directly or indirectly, from the proceeds of a crime or from participation in criminal activity.

Acts of money laundering could include the conversion, transfer or deposit of such proceeds, with the intent to conceal or disguise the origin of the proceeds, or the possession or use of such proceeds.


What are ‘proceeds of crime’?

For the purposes of the AML-CTFL, proceeds can encompass a wide variety of assets, including currencies, commercial paper, securities and any property or tangible or intangible asset that has financial value.

When we talk about the ‘proceeds of crime’ in connection with money laundering, we are referring to proceeds which were derived – even indirectly – from crimes, including terrorism, illegal drugs, piracy, bribery, corruption, kidnapping, human trafficking and embezzlement.

Terrorist financing

The AML-CTFL singles out terrorist financing, which is deemed to take place when a person raises funds or provides funds, directly or indirectly, knowing that such funds will be used, wholly or partly, to finance terrorist activity or a terrorist organization. This financing can take place in Oman or abroad.

With both money laundering and terrorist financing, it is interesting to note that the links to the activity do not need to be direct in order for the offence to be convictable; however, the person committing the offence must have knowledge of the underlying illegal action.

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Peaceful Strikes Under Omani Law

Although the Sultanate has avoided the degree of social unrest that has arisen elsewhere in the region, protests including employee strikes have occurred in Oman during the past few months. It is not well known that Omani law provides a framework for conducting peaceful strikes, which employers and employees alike would benefit from understanding more precisely.

This article sets out the procedures to be followed by employees to ensure that their strike is carried out lawfully and their demands are made legitimately, as well as the steps available for employers to try to resolve any disputes with their employees in cooperation with authorities in a fast and efficient manner.


The statutory basis for strikes

Ministerial Decision No. 294/2006, as amended (“MD 294/2006”), which was promulgated by the Ministry of Manpower pursuant to Article 107 (bis) of the Labor Law, regulates several aspects of employer-employee relations, including the procedures for holding peaceful strikes. MD 294/2006 states that employees may hold a peaceful strike to demand “the improvement of working conditions and circumstances”. It should be noted, however, that strikes are prohibited in establishments that provide essential public services.

The required procedure

MD 294/2006 sets out the following procedure for employees to hold a strike. First, the employees’ labor union or representatives must provide to the employer, at least three weeks prior to the planned date of the strike, written notice of the employees’ intention to hold the strike. The notice must indicate the employees’ reasons for holding the strike as well as the employees’ demands. This same notice also must be furnished to the Ministry of Manpower and to the relevant local government authorities.

Resolving the strike

MD 294/2006 provides that, upon receiving notice of the planned strike, the Ministry shall attempt to form a committee consisting of representatives of the employees, the employer and the Ministry itself, with the goal of resolving the employees’ demands and ending the dispute. The strike must cease and the employees must return to work upon the employer’s and employees’ representatives agreeing to take part in the committee and commencing negotiations. Upon commencement of the negotiations, the committee must reach an agreement within four weeks; otherwise, the dispute shall be referred to the court system.

However, MD 294/2006 is not clear on its face as to whether either party – the employer’s representatives or the employees’ representatives – is obligated to come to the table and join the committee to negotiate. For example, if the employees could ‘opt out’ of joining the committee, they might not have to end their strike and return to work. If workplace strikes continue in Oman, this likely will be an important area to watch for further clarification from the legislative or judicial system.

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Precautionary Measures

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An issue which often causes a lot of concern is injunctive relief.

From time to time, bank accounts may be frozen and other precautionary measures put in place by the Omani court. Application is often made to the Judge in charge of Emergency Measures, which is an ex parte, paper application which involves no court hearings.

A typical scenario works like this: a Claimant sues a Defendant and becomes worried that the Defendant may have meagre assets against which to enforce a final, non-appealable court judgment.

This fear is perhaps justified given that it may take one or two years from the date of filing a case to actually obtaining a court judgment which can be enforced.

In such circumstances, the Claimant applies in writing to the Judge in charge of Emergency Measures, explaining the circumstances, and the traditional request is for all the bank accounts of the Defendant in Oman to be frozen, so that monies can flow into those accounts, but not out.

The Judge makes a decision on this application without informing the Defendant.

Indeed, it is often the case that the Defendant's first knowledge of an injunction being granted is when a representative of the Defendant attends the Bank to perform a routine transaction and is alerted by the Bank that an injunction has been put in place by court order.

However, the injunction can be challenged by the Defendant, but to do so, a fresh court case has to be filed against the Claimant, and in the meantime, the injunction remains in place.

A Claimant may also seek an injunction as regards property in the hands of a third party. For instance, if A sues B and comes to know that C is about to pay a large sum of money to B, a request might be made to the Judge in charge of Emergency Measures to injunct the monies so that C has to retain them and cannot pay them over to B.

Lawyers are often asked what is the standard of proof required to convince a Judge to issue an injunction order? The answer, unsatisfactory as it is, is that what is required is whatever documentary evidence and skilled written argument it takes to persuade the Judge! From experience, it does seem that the Judges are especially concerned about litigant parties who could be perceived to be a "flight risk" or who have strong ties with overseas countries, especially with countries outside the GCC region. It could well be that the Judges are mindful that an Omani court judgment may not be enforced by countries outside the GCC.

So, what is the first thing to do if your assets are injuncted? The starting point is for a lawyer to go to court to peruse the file and to obtain a copy of the injunction order.

The next step is to file a court case against the beneficiary of the injunction.

There are a number of statutory provisions which provide technical, procedural reasons as to why the injunction should be cancelled by the judiciary.

By way of example, Article 375 of Royal Decree 29/02 (as amended) states: "The judgment debtor should be notified of the attachment minutes and the relevant order within ten days from the date of levying it, otherwise it shall be considered null and void."

Accordingly, the Courts have a right to cancel the injunction if a Court official does not serve the injunction order on the affected party within 10 days after the Judge in charge of Emergency Measures signed that order.

In conclusion, the area of injunctive relief and precautionary measures under Omani law is an intricate and complex subject. It is also little-known that a party can still apply to the Omani courts for injunctive relief even when the contract in question states that any dispute will be settled by arbitration. This is because courts always have the right to make injunction orders because an injunction request is considered to be an ancillary request, which is separate and distinct from the issue of which body has jurisdiction over the substantive dispute.

-James Harbirdge, Partner (Oman)

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Courts versus Arbitration

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

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

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

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

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

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

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

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

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

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

-James Harbirdge, Partner (Oman)

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Oman Cybercrime Law

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

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

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

Crimes targeting computer networks or devices

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

• introduction of a virus, data interference or an intrusion that results in modification, damage, destruction or reconfiguration of a data or an information system
• hacking of a computer system or database of a governmental agency, bank or financial institution for theft of classified information
• unauthorised access, alteration or destruction of electronic medical data
• unauthorised modification or destruction of a website
• illegal interception or transmission of data or information
• denial of service (DoS) attack attempting to make a computer resource unavailable to its intended user or deactivating access to a service provider

Malicious Software or Malware: The production, sale, purchase, import, distribution or display of software or a computer resource (widely termed ‘Malware’) designed to access a computer system for committing a cybercrime is a punishable offence under the Law.

Crimes facilitated by computer networks or devices

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

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

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

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

The Law also characterises the following ‘real-world’ crimes are cybercrimes when committed via cyberspace:

• money laundering
• unlawful dealing in drugs and psychotropic substances
• gambling
• copyright infringement
• theft of art and cultural artifacts
• illegal arms dealing
• human trafficking
• illegal trading of human body parts
• dealing in pornographic materials
• cyber-stalking
• cyber bullying
• breach of privacy
• obscene or offensive content
• cyber-terrorism

The Law also addresses ‘white-collar’ corporate crimes facilitated by computer devices or networks.  While it is difficult for lawmakers to anticipate and address every conceivable crime, this Law constitutes a much-needed beginning to stave off superficial attempts to extrapolate existing criminal laws to apply an increasingly complex cyber-world.  This Law also exemplifies the need for individual states to legislate for computer and internet crime laws to facilitate an overarching international treaty for combating multi-jurisdictional cybercrimes.

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