Wednesday, May 25, 2016

The Procedural Steps for Enforcing a Judgment in Oman

With regard to disputes, clients often focus on “winning” their cases, that is, successfully attaining a judgment from the court or the arbitrator, without having given much consideration as to enforcing an award and getting paid the amounts that a court or tribunal so orders.  Therefore, it is not uncommon in Oman for clients to “win” a judgment but to still have to wait for a separate enforcement procedure to complete before any money is seen. It is therefore important for clients to understand that the underlying court case or arbitration is the first of two limbs with regards to attaining monies. The second limb is that of enforcement.

This article sets out the five practical steps involved within the enforcement process in Oman:

  • Step 1:  Obtain a Court of Appeal Judgment / Award from an Arbitration Tribunal.  If the dispute is being resolved by way of litigation, then you can only enforce a final judgment.  For our purposes, a Primary Court judgment is final if thirty days have elapsed since the date the judgment was rendered and no party has appealed to the Court of Appeal.  If an appeal is made within the prescribed time frame, then the judgment is eligible for enforcement on the day that the Court of Appeal renders its judgment.  If the dispute is being resolved by way of arbitration, then an award by the tribunal must be translated into Arabic by way of a certified translator.  
  • Step 2:  File an Application at the Enforcement Department of the Commercial Circuit of the Court.  In simple terms, filing an application at the Enforcement Department is a very simple and flexible process.  The Department requires a form to be completed and copies of all judgments (Primary Court and, if relevant, Court of Appeal Judgments) or awards in Arabic.  It is good practice to ensure that the document containing the original arbitration clause is also available for inspection by the Enforcement Department, should that be required.  No fees are usually paid in this regard.
  • Step 3:  Check the Notification from the Enforcement Department.  The Enforcement Department will notify the opposing party of enforcement proceedings and provide them with a seven-day period in which to file an objection.  It is vital for the party that has filed for enforcement to keep attending upon the Enforcement Department, so as to enquire as to whether this step has been completed. 
  • Step 4:  Check any Objections of an Opposing Party.  The enforcement can only be stopped if the opposing party files an objection (known as an “Ishtikhal”) within the prescribed seven-day period, or if the Supreme Court has issued a stay order.
  • Step 5:  Check to See if a Hearing has been Filed in Response to the Ishtikhal.  The hearing will determine whether the Ishtikhal is relevant or whether it should be ignored. 
Either way, enforcement takes place after the above steps have been completed.  Whilst the process is relatively simple, it can be time-consuming and technical.  For this reason, we always advise clients to consider the issues around enforcement at the outset of any dispute. 


Wednesday, May 18, 2016

Enactment of New Laws in Oman

Overview of the Omani Legal System
Oman is an absolute monarchy and all laws are promulgated by the Head of State, His Majesty the Sultan, as Sultani Decrees.  Other laws which are subordinate to Sultani Decrees (in the form of Ministerial Decisions and Executive Regulations) are issued from time to time by Ministers as well as the administrative units of the Government of Oman (the “Government”).  

There are two types of legislation in Oman, primary and secondary.  Primary legislation is promulgated by a Sultani Decree directly from His Majesty the Sultan.  Secondary legislation is passed by Ministerial Decisions and the Executive Regulations.  All ministers in Oman are appointed by the Sultan.  Article 74 of the Sultani Decree 101 of 1996, the Basic Law (“SD 101/96”), provides that all Sultani Decrees and Ministerial Decisions must be published in the Official Gazette.  Executive Regulations are sometimes not published in the Official Gazette but issued as an internal regulation for the relevant Government departments to abide by.

Oman has an Official Gazette pursuant to the Sultani Decree 84 of 2011 (“SD 84/11”) in which new legislation is published.  The date of implementation of any new legislation is generally the date of issue of the Gazette in which the legislation is published.  Article 5 of SD 84/11 provides that the publication shall be considered as presumption for the knowledge of all, and no evidence to the contrary may be accepted.  All legislation published in the Gazette is enforceable.

In addition, Oman operates a system of Shari’ah law in accordance with Article 2 of SD 101/96, which states that Islam is the religion of the State and the Islamic Shari’ah is the basis of the law.   However, the role of Shari’ah is limited in certain areas and, in practice, has little influence on commercial activities.

When it comes to the enactment of new laws in Oman, Article 72 of SD 101/96 provides that the application of the Basic Law shall not prejudice treaties and agreements in which the Sultanate has entered into with other countries, international institutions or organisations.  Article 76 of SD 101/96 further provides that treaties and agreements shall not have the force of law until such time as they have been duly ratified.

The Procedure to Ratify a Law in Oman
There is no fixed procedure for promoting the creation of a new law, whether it be a Sultani Decree or a Ministerial Decision. However, the law in question would have to be sponsored by the relevant Government department and is subject to review by the Ministry of Legal Affairs.  Usually, the Government department that is concerned with the subject matter of the law to be enacted shall be the first to draft, amend and review the new law.  This process does not have a specific timeframe as Government departments have a discretionary timeframe to look at new Sultani Decrees, unless urgency has been placed on the matter by one of the councils, or due to the fact that the legislation has been brought in due to an international treaty.

Once a draft has been issued by a Government department and that draft has been approved by the Ministry of Legal Affairs, the various other Government departments that may be affected by the subject matter of the proposed new law are then asked to review and recommend any amendments to that draft law.   Once approved, the draft law is then sent to the State Consultative Council and the Cabinet of Ministers.

The State Consultative Council has statutory powers to recommend and suggest new legislation for Government departments.  The State Consultative Council consists of the Council of State (Majlis A’ Dawla) and the Consultative Council (Majlis A’Shura).  The Majlis Al Shura will make its recommendation pursuant to Article 29(a) of Sultani Decree 86 of 1997 promulgating the Law regarding the Council of Oman (“SD 86/97”).  The draft is then transmitted to the Majlis Al Dawla, which undertakes a similar exercise (Article 18(d) of SD 86/97).  Both Councils will report to the Ministry of Foreign Affairs to provide final recommendation on the new law.

Once the new law is approved by the parties above, it is then sent to the Diwan Royal Court to His Majesty for his approval, which then leads to the Sultani Decree being published in the Official Gazette.

Further, Article 5 of SD 84/11 provides that new laws and regulations shall be applied from the date of their publication in the Official Gazette or its appendixes, unless specified otherwise.

The Timeframe for the Enactment of New Law
There are no formal prescribed time limits for the completion of the process of promulgation of new legislation.  In theory, the promulgation of a new law can be completed quickly, if one of the councils has expressed the matter concerning the legislation to be urgent, or due to the fact that the requirement for the legislation has been brought about by an international treaty or GCC agreement.

In practice, however, it would be very difficult to predict as to how long each applicable Government unit will take to review and approve the new law as the timeframe is at the discretion of each applicable Government unit.


Wednesday, May 11, 2016

Islamic Project Finance - Part 2

This is the second part of a series of articles discussing Shari’ah-compliant structures used in project financing transactions. This article discusses the Sukuk (i.e., Shari’ah-compliant capital markets instruments) structure, which is now becoming a popular option for financing infrastructure projects in the Middle East.

Sukuk (plural of Sak) is the Arabic term for financial certificates.  The Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”) defines Sukuk as “certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity.”  

Sukuk Structures
From a structural perspective, Sukuk can be divided into two types of transactions, namely, asset-based or asset-backed.  Asset-based Sukuk issuances are usually referred to as Islamic bonds whereas asset-backed Sukuk issuances are normally referred to as securitisations.

The Sukuk issuer (normally a special purpose vehicle (“SPV”) issues certificates into the capital markets in both kinds of Sukuk issuances (mentioned above).  In both the structures, the Sukuk issued represents undivided beneficial ownership interests of the Sukuk investors in the assets of the Sukuk issuer.

Of the two structures mentioned above, the asset-based structure is utilised in project financing transactions.  We discuss below the most commonly used asset-based Sukuk structures that are used for project financing, namely, the Sukuk al-Ijarah structure and the Sukuk al-Istisna’a structure.

A.  Sukuk al-Ijarah
An Ijarah is a lease contract for the transfer of the usufruct of an asset to another person in exchange for a rent claimed from that person.

The Sukuk al-Ijarah structure employs the principles of Ijarah, whereby the ownership or benefit/usufruct of corporeal assets are transferred from an originator  to an SPV, which then leases back the said assets to the originator* for a specific duration.

As a first step, an SPV is incorporated/established, which then issues Sukuk into the capital markets. Each Sukuk holder subscribes to the Sukuk issue of the SPV by contributing cash to the SPV in return for its Sak.

The SPV declares a trust over the Sukuk issuance proceeds in favour of the Sukuk holders.  The SPV then applies the Sukuk issuance proceeds to purchase the assets from the originator and pays cash to the originator as consideration for the said purchase.  The cash is utilised by the originator for the purposes for which the Sukuk were issued.

Thereafter, the SPV leases the assets back to the originator under an Ijarah contract, whereby the originator (in the capacity of a lessee) makes periodic rental payments to the SPV (in the capacity of a lessor).  The periodic rental payments are then passed on to the Sukuk holders as periodic distribution amounts.

The rental payments under the Ijarah contract can be structured in a manner so as to provide the desired return on the Sukuk. The rate of return can therefore be set as a fixed rate or a floating rate.
Under a purchase undertaking, the originator repurchases the assets upon maturity of the Sukuk.  The purchase price, being an amount equal to the aggregate face value of all the Sukuk plus any accrued but unpaid periodic distribution amounts, is passed on to the Sukuk holders for repaying their principal.  The said purchase undertaking also grants an option to the SPV (acting as the trustee for the Sukuk holders) to require the originator to purchase the assets upon the occurrence of an event of default.

Under a sale undertaking, the originator is granted an option to purchase the assets for a price equal to the aggregate amount of the Sukuk issuance proceeds plus any accrued but unpaid periodic distribution amounts upon the occurrence of specific events.

The SPV (as owner of the Sukuk assets) and the originator (as service agent) also enter into a service agency agreement where the SPV appoints the originator as its agent to manage the assets comprising the Sukuk and carry out the services with respect to the major maintenance, insurance and payment of ownership-related taxes pertaining to the Sukuk assets.

B.  Sukuk al-Istisna’a
An Istisna’a is a contract of sale where a commodity is transacted before it comes into existence.  It is an order to a manufacturer to manufacture/construct a specific asset for the purchaser in return for a fixed price to be paid up front.

The principles of Istisna’a are used in structuring Sukuk for project financing where an SPV issues Sukuk into the capital markets and uses the proceeds from the Sukuk issuance to pay the originator (in the capacity of a contractor) in exchange for the construction and delivery of the project (i.e., Istisna’a assets) in the future.  This structure has therefore become particularly useful in financing the construction phase of a project.

Under a Sukuk al-Istisna’a, upon issuance of the Sukuk into the capital markets and their subscription by the Sukuk holders, the SPV declares a trust over the proceeds of the Sukuk issuance in favour of the Sukuk holders.  The SPV (in the capacity of a purchaser) then enters into an Istisna’a contract with the originator (in the capacity of a contractor) where the originator agrees to construct specific assets and undertakes to deliver the said assets to the SPV at a future date.  In return, the SPV pays the Sukuk issuance proceeds to the originator as consideration for the construction and delivery of the assets.

Simultaneously with the execution of the Istisna’a contract, the SPV and the originator enter into a forward Ijarah contract pursuant to which the SPV (in the capacity of a lessor) agrees to lease the assets back to the originator (in the capacity of a lessee) under a forward Ijarah (known as al-Ijarah al-Mawsufah fi al-Dhimmah) during the construction period of the project and under a normal Ijarah following the delivery of the assets so that the SPV receives periodic rental payments during the entire tenor of the Sukuk which payments are then passed on to the Sukuk holders as periodic distribution amounts.

The SPV and the originator also enter into a service agency agreement, a purchase undertaking and a sale undertaking for the same purposes mentioned in Section A (Sukuk al-Ijarah) above.

*The term “originator” wherever used in this article means the party initiating the process of obtaining project finance. Usually, the originator is the sponsor of a particular project who is responsible for the incorporation/establishment of an SPV as a medium to raise funds for the project. 


Monday, May 9, 2016

Liquidated Damages for Delay in Construction Contracts in Oman

It is usual for construction contracts to include provisions by which delay liquidated damages would be payable by the contractor to the owner/client in the event the contractor is delayed in achieving one or more of the construction milestones.  However, the calculation of the value of such delay liquidated damages (usually a daily rate) is not generally considered in detail by the parties, and such amounts are usually randomly ascertained amounts, which do not bear any resemblance to the actual financial loss that is sustained by the owner/client in the event of such delay and are generally subject to a relatively small percentage of the contract price.

Delay liquidated damages are used as a secondary obligation enforceable upon the breach of a primary obligation (the primary obligation in most cases being the completion of the construction or stages of the construction in accordance with agreed construction milestones).  Both the FIDIC Red Book 1999 1st Edition (Clause 8.7 – Delay Damages) and the Omani Standard Documents for Building and Civil Engineering Works 1999 4th Edition (Clause 47 – Penalties for Delay) include liquidated damages provisions applicable in the event of delay to the construction milestones caused by the contractor, and both provisions allow for the contracting parties to agree to the damages amount.  It is important to note that such payment by the contractor of such amounts does not relieve the contractor from its obligation to complete the construction.

Article 267 of the Civil Code promulgated by Sultani Decree 29/2013 (“Civil Code”) specifically deals with the Oman law position regarding liquidated damages, as follows:

"(1) If the subject matter of obligation is not a sum of money, the contracting parties may determine the amount of compensation in advance by making a provision of same in the contract or in a subsequent agreement. 

(2) In all cases, the court may, upon the application of either of the parties, amend such agreement to make the compensation equal to the damage, and any agreement to the contrary shall be null and void.”

Article 267(1) determines that the contracting parties may agree to a liquidated damages amount but Article 267(2) gives certainty to the generally accepted position that, regardless of the liquidated damages amount included in the contract, the Omani courts are specifically permitted to re-open liquidated damages clauses, and adjust the amounts so that they are commensurate with the value of the actual damage incurred. Article 267(2) is obviously in direct conflict with the freedom to contract for which Oman has previously been well known. However, this provision of the Civil Code merely follows established precedent applied by courts of UAE, Qatar and Saudi Arabia who all take a similar position in that they are also not opposed to re-opening pre-agreed liquidated damages clauses.

Therefore, if either the contractor or the owner/client wish to apply to court to adjust the contracted liquidated damages amount, the burden of proof of actual loss and how it is different from the liquidated damages amount set out in the contract is likely to lie with the party seeking the adjustment to the contracted liquidated damages amount from the court.

Further, whilst we are not aware of any case law directly on this point since the enactment of the Civil Code in August 2013, we are aware of a number of existing cases before the Omani courts in which the argument has been put forward by a contractor that the liquidated damages set out in a commercial contract are too high.  However, in practice, given that it is the owner/client who proposes the rate of liquidated damages, and that the contractor prepares and submits its contract price proposal on this basis, in our view, it would be unlikely that an owner/client could successfully bring a claim in court to increase the rate of liquidated damages.

We will review in more detail the practical application by the Omani courts of Article 267 of the Civil Code in another article later this year.

Therefore, in theory, to reduce the risk of a dispute arising between the parties, the owner/client should consider an amount for liquidated damages that would be a genuine, pre-agreed estimate of the likely damage of a delay, due to a fault of the contractor, to the construction milestones.  However, practically speaking, and as is market practice, the owner/client will typically weigh the risk of completion delay and associated owner/client loss against obtaining a reasonable contract price proposal, since an increased contractor liquidated damages liability is most likely to be reflected in an increased contract price.  An owner/client would then seek to mitigate its exposure through insurance.