Tuesday, May 22, 2012

Labor Law Update: New Ministerial Decision Requires Private-Sector Salary Increases

In a development of importance to private-sector employers and employees throughout the Sultanate, the Ministry of Manpower has recently issued Ministerial Decision No. 32/2012, which mandates annual salary increases for private-sector workers in Oman. MD No. 32/2012, which applies to all employees in the private-sector and became effective on 30 January 2012, entitles employees to a salary increase of at least 3% each year.

MD No. 32/2012 provides that, each year, every employee who has been working for his employer for at least six months as of January 1st of such year shall be entitled to receive an annual increase to his basic salary for such year equal to at least 3% of his previous year’s basic salary, with effect from January 1st of such year. However, employees who have been rated as underperforming in their annual appraisal for the previous year may not be eligible to receive such an annual salary increase for the new year. Please note that MD No. 32/2012 sets 3% as the minimum threshold for an employee’s annual salary increase, and is without prejudice to any terms more favourable to the employee stated in his employment contract.


Thursday, May 17, 2012

Franchise Agreements

The Sultanate of Oman features an array of international goods and services providers, many of which are operated as franchises. Eateries such as McDonald’s and Starbucks, retailers such as H&M and Zara are just a few examples of Oman’s thriving franchise sector. Such franchises represent not only an important segment of the Sultanate’s existing commercial landscape, but also a significant opportunity for Omani entrepreneurs to start new businesses.

This article provides an overview of what franchises are and discusses key legal and commercial issues relevant to entrepreneurs looking to start a franchise in Oman, particularly with US franchisors.

What is a Franchise?

Although the word “franchise” often conjures images of particular kinds of businesses – such as fast food restaurants or budget hotel chains – franchising is actually used across a broad spectrum of enterprises. What all franchises have in common are (i) a branded line of products and/or services, (ii) an operating system prescribed by the franchisor, and (iii) one or more fees charged to franchisees for the right to participate in the business system by selling the branded products and/or services and by utilizing the franchisor’s operating system. Franchisors and franchisees are independent business entities, and franchisors typically derive their income from initial and ongoing fees paid by their franchisees. Sometimes franchisors also sell items to franchisees or collect fees from franchisees’ suppliers.

For example, in the case of a fast food restaurant such as McDonald’s, the franchisor, McDonald’s Incorporated, has created and maintains (i) a brand together with intellectual property (e.g., the golden arches logo) and products (e.g., the Big Mac hamburger) associated with the brand, and (ii) a system for operating McDonald’s restaurants, which likely includes detailed guidelines for restaurant layout and decoration, food preparation guidelines, customer service guidelines, and many other requirements. McDonald’s franchisees, namely the businessmen and companies that own and operate McDonald’s restaurants throughout the world, pay franchise fees to McDonald’s Incorporated in exchange for the right to use McDonald’s Incorporated’s brand and operating system.

The legal framework for franchising in Oman

In some jurisdictions, there is a separate legal framework that governs franchises. However, in Oman franchises are simply considered another form of commercial agency. Accordingly, franchise agreements, like any agency or distribution agreement, are governed by Oman’s Commercial Agency Law, unless the agreement is expressed to be governed by the laws of a country other than Oman, coupled with an arbitration clause.

To form a legally valid franchise relationship in Oman, it is necessary for the franchisor and franchisee to enter into a franchise agreement and to register in the Commercial Agents Registry at the Ministry of Commerce & Industry.

The franchise agreement is naturally a very important document to the franchisor and the franchisee alike. Although the franchise agreement will usually be based on the franchisor’s standard form, it is important for the franchisee (and, we recommend, the franchisees legal advisors) to review the franchise agreement carefully and negotiate its key points with the franchisor. From the perspective of an Omani franchisee, the key issues are likely to be:

  • the fees that the franchisee will be obliged to pay to the franchisor;
  • the services that the franchisor will provide to the franchisee (for example, training and marketing support);
  • the scope of the franchise rights (for example, geographical reach);
  • the reasonableness and attainability of any performance targets or restrictions that the franchisor may impose on the franchisee;
  • whether the franchisee is being appointed on an exclusive or non-exclusive basis; and
  • the governing law and jurisdiction clause.
Franchise Disclosure Documents (FDDs)

Every prospective franchisee would do well to obtain detailed information about the franchisors that interest him. Fortunately, when it comes to US franchisors, this information is fairly easy to come by.

US franchisors are required to deliver Franchise Disclosure Documents (FDDs) to prospective franchisees for locations within the US, although this requirement does not apply abroad. Franchise laws in twenty other countries also require franchisors to prepare FDDs. FDDs contain invaluable information about the experience of the franchisors and their executives, including the number of units of the franchise opened and closed in recent years, litigation and bankruptcy history, initial investment estimates, audited financial statements of the franchisor, and contact information for the franchisor’s current franchisees, as well as those who have left the brand during the franchisor’s last fiscal year.

Every prospective franchisee should study the information required to be included in the FDD, however US franchisors are often advised by their lawyers not to provide the FDD to foreign franchisee prospects because international franchise agreements usually differ from the US domestic agreements, and the laws of most countries, such as Oman, do not require them to make such detailed disclosures. Franchisors may also fear that if they have no experience in operating businesses in a new market, such as Oman, that a US-oriented FDD could mislead prospective Omani franchisees. Nevertheless, we strongly recommend that an Omani franchisee should demand and examine the franchisor’s FDDs prepared for the US market, as these documents will contain useful information that the prospective franchisee can use in evaluating specific franchise opportunities.

Other recommendations

In order to take advantage of the best available franchising opportunities and to avoid problems with inexperienced or undercapitalized franchisors, prospective Omani franchisees should consider the following:

  • Only acquire a franchise if you are comfortable with the franchisor, the people who lead it, and its organizational culture.
  • Obtain an FDD of the franchisor, even if it is prepared for the US market. Many FDDs are available online. Many franchisors prepare international or country-specific FDDs and will normally provide them to prospective franchisees without their having to ask.
  • Contact unit franchisees in the US and elsewhere. Many franchisees are willing to share information about their experiences with prospective franchisees.
  • Although franchisor executives describe franchising as a relationship which is a form of partnership, franchise agreements are complex documents which define the relationship and carefully define the rights, duties and remedies of franchisees. A lawyer with a sophisticated understanding of international franchising can help you to understand, evaluate and negotiate a franchise agreement.
  • Be wary of a franchisor that is willing to make substantial modifications to its franchise program for the sake of concluding a deal. Franchisors should have a business plan for your market, and should demand that you present them with a business plan of your own before reaching agreement on a franchise relationship.
  • Check out other resources at http://www.franchise.org/ and also check with the US Foreign and Commercial Services at the US Embassy in Muscat for information about evaluating US franchisors offering franchises in Oman.


Thursday, May 10, 2012

Taking Security: Commercial Mortgages

In Part I of this article, which was featured in a previous post, we provided an overview of what commercial mortgages are and the fundamental legal concepts that govern them in Oman. This month we conclude by discussing further the registration requirements for commercial mortgages, along with potential enforcement issues.

 Further details on commercial mortgage registration

For a commercial mortgage to remain valid, its registration must be renewed every five years at the Ministry of Commerce & Industry (MCI). A commercial mortgage can be released and removed from the register of the MCI by the expiry of the mortgage after five years, i.e., without its renewal. It can also be released and removed by virtue of a court order or written agreement of the borrower and the lender.

Details of the commercial mortgage are set out in the commercial registration papers of the borrower. These details include the name of the mortgagee, the date of the charge and the assets mortgaged. In practice, the MCI require the consent of the lender to make any changes to the commercial registration of the borrower once the commercial mortgage has been registered even if only one asset, such as a rig, has been mortgaged.

The registration of a commercial mortgage at the MCI requires the assets to be located in Oman and the borrower to be incorporated in Oman. For moveable property such as ships and aircraft, the vessel must be registered in Oman as the mortgage will be registered against the title to the ship or, as the case may be, the aircraft. Such registrations will be with the relevant authority and not with the MCI.

Potential enforceability issues

If the borrower fails to pay its debt, then a court order is required by the lender to enforce the commercial mortgage against the assets of the borrower (unless the borrower otherwise cooperates with the lender’s enforcement against its assets). This can be a long process and it can take up to two years to obtain the court order. The assets will then be sold by public auction administered by the Omani courts and the lender only will be entitled to the proceeds of sale of the asset sufficient to discharge the secured loan. It is not possible for a lender to simply take physical possession of any secured assets and sell them without the involvement of the Omani courts.

In practice, in relation to limited recourse projects and other transactions, commercial mortgages have been granted and registered by the MCI over a wide range of contracts and government licences. But in our view, there is serious doubt about the ability to mortgage and enforce a mortgage over contracts and government licences. The fact that such commercial mortgages have been registered by the MCI does not mean that they will automatically be enforceable in the Omani courts. In relation to contracts, many of the borrower’s rights under contracts are contingent or come into effect in the future. In addition, many contracts, by their very terms, are not capable of being sold in the manner that mortgaged assets are sold by the Omani courts on enforcement, and consent of the counterparty to any transfer of obligations is likely to be required. In a similar manner, most government licences are not capable of being sold and as a matter of law are generally personal to the borrower.


Friday, May 4, 2012

Preliminary Attachment

In the Civil & Commercial Procedures Law issued by Royal Decree 29/2002, creditors are granted a legal remedy known as “provisional attachment” which serves to protect the creditor’s rights against his debtor.

As per the prescribed methodology, a creditor may request the Primary Court to issue an order of provisional attachment over the properties of his debtor.

The Civil & Commercial Procedures Law has specified the cases in which a creditor may exercise such a right against his debtor. These cases are (a) if the creditor is a bearer of a bill of exchange or promissory note and the debtor is a merchant and the said instrument obligates him to adhere to it in accordance with the Commercial Law, and (b) in any case in which the creditor fears he may lose his rights, provided that the creditor must prove to the Primary Court that such fear is justified.

The Civil & Commercial Procedures Law specifies certain additional conditions which must be met before a provisional attachment order can be granted. First, the creditor’s right must be definite, meaning the debt upon which the creditor is relying on (x) is in existence and (y) is not based on a probability or subject to a condition. (However, the debt can be subject of a dispute.) Second, the creditor’s right must be matured, meaning that the debt is due and payable at the time of filing of the request for the provisional attachment.

In addition, if the creditor does not possess an “executive deed” (such as a final non-appealable Court judgment), or if the debt sum is not specific (meaning the specific numerical amount of the indebtedness sum is not known), then the Judge issuing the provisional attachment order should provide a temporary estimation of the debt.

Once the provisional attachment order has been signed by the Judge, the Court must notify the debtor within the following ten days; otherwise, the provisional attachment order shall be considered null and void.
Furthermore, the creditor is required, within the above ten days, to file a court case, requesting the “validation” of the provisional attachment order.


Wednesday, May 2, 2012

Applications of the Copyright Law to Art in Oman

As anyone who has visited the recently inaugurated Royal Opera House Muscat can attest, the fine arts are coming to play an increasingly prominent role in the Sultanate.  The economic and social advances achieved under Oman’s ‘Renaissance’ of the past decades have laid the foundations for artistic and cultural activities to flourish, with exhibitions and galleries featuring the work of both renowned international artists and a growing corps of Omani artists.

However, it is important not just to create art, but also to protect the artists, their works, and the rightful use of those works.  Legal statutes, particularly Oman’s Law of Copyright and Related Rights (Royal Decree No. 65/2008) (the “Copyright Law”), help to provide this protection.

This article discusses the framework under the Copyright Law with respect to reproduction rights for artwork, which would apply, for example, when an artist licenses the reproduction rights to his works to a museum or gallery.  Essentially, this framework consists of two parts: the inalienable rights of the artist as creator of the work, and the transferable economic rights in the work.

Inalienable rights of the artist as creator

The Copyright Law provides that the following rights of the artist as creator of the artwork are inalienable:

·         the right to decide to publish his work for the first time;
·         the right to have the work attributed to him in the manner he decides; and
·         the right to object to any distortion, deformation or any other modification of his work.

Thus, even when an artist relinquishes economic rights in his work (described below), such as by licensing the work to a gallery, the licensee’s use of the artwork shall be limited so as to respect to the artist’s inalienable rights – for example, the licensee gallery would be prohibited from deforming the artist’s work without the artist’s permission.

Economic rights in works of art

The Copyright Law also provides that certain economic rights in a work of art, such as the following rights, are transferable by a written agreement:
·         reproduction of the artwork;
·         disposal of the original artwork or copies of it to the public, by sale or by any other assignment that transfers the ownership;
·         public display of the artwork; and
·         publication of the artwork by any means.

Just as economic rights holders such as licensees must respect the artist’s rights as creator of the work, the artist is likewise obligated under the Copyright Law to respect the licensee’s rights in the artwork. Without prejudice to the artist’s inalienable rights as creator, the artist is prohibited from obstructing the use of the licensed rights in the artwork by the holder of such rights.