Termination for Convenience under Omani Law

Introduction
Typically, under English law there are no restrictions on one or more parties being allowed to terminate a contract “for convenience” or “without cause.”

However, under Omani law, Article 133 of the Civil Transactions Law promulgated by Sultani Decree 29/2013 (the “Civil Code”) suggests that the inclusion of such a provision would render the contract voidable:

A contract shall not be binding on one or both of the contracting parties despite its validity and enforceability if it contained a condition that such party may terminate it without mutual consent or legal proceedings. Either party may act unilaterally in terminating the contract if by its nature the contract is not binding on him or if he reserved to himself the right to terminate it.

In the UAE, there is an exception to this principle, but only in relation to “muqawala,” or construction, contracts.

A recent UAE Court of Appeal judgment, citing the Egyptian Civil Code, ruled that employers in construction cases could be entitled unilaterally to terminate a contract, on the grounds that “muqawala contracts often take a long time to complete and circumstances may change in the period between contract formation and completion of the contract work.”

No such exception exists in Omani jurisprudence. In the section of the Civil Code dealing specifically with muqawala contracts, Article 646 provides:

A contract of muqawala shall terminate upon the completion of the work agreed or upon the cancellation of the contract by consent or by order of the court.

Practitioners have usually dealt with this issue by adding wording to the effect that a party terminating for convenience would undertake to pay the other party adequate compensation for any costs or losses incurred by them directly flowing from the termination.

This type of wording aimed to prevent disputes by effectively anticipating what a court would order by way of compensation to a party whose contract had been terminated in violation of Article 646.

However, in Article 258 (1), the Civil Code introduced a very significant new remedy in Oman, namely the specific performance of contractual obligations. Previously, a claimant’s remedy for breach of contract was primarily limited to damages. Now a claimant may seek an order requiring a contract party to perform its contractual obligations.

We have yet to see if, and in what circumstances, the Courts will order specific performance. We note that Article 258 (2) illustrates that specific performance is a discretionary remedy, as it states that the Court may impose monetary damages in place of specific performance if in the circumstances specific performance would be “overly oppressive for the debtor”.

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Oman and the Law of the Sea - Part I

In October 2017, the Sultanate of Oman submitted a formal application to the United Nations to extend its continental shelf. This article is the first in a three part series exploring the Law of the Sea as relevant to Oman, the international legal process involved, and the dynamics behind and potential benefits arising from Oman’s recent application.

Oman’s application, submitted by United Nations Ambassador H E Shaikh Khalifa bin Ali al Harthy, marked the end of a decade-long process of exploration and research culminating in a formal submission to the United Nations Commission on the Limits of the Continental Shelf (the “Commission”), part of the United Nations Division for Ocean Affairs and Law of the Sea. A successful submission would allow Oman to exercise exclusive rights over a large area of seabed in the Arabian Sea, including the right to explore for oil and gas and other non-living resources.

The continental shelf is the underwater, or submarine, portion of a coastal state’s landmass extending to the outer edge of the relevant continent’s limits. The continental shelf falls under each relevant coastal state’s jurisdiction, and these coastal states have exclusive rights to explore and exploit the resources found therein. Coastal states also assume the duty to safeguard the ecosystem of their continental shelf, and an obligation to allow other states to use their shelf for certain purposes that do not diminish its resources, such as the laying of essential pipelines and cables.

The continental shelf is subject to a special international legal regime that has resulted from decades of development in customary international law and treaty law. The need for this legal regime arose at the turn of the 20th century, when the technology developed to enable the exploitation of submarine resources such as oil and gas. These technological advances inspired a spate of claims over seabed territory that had previously belonged to no one in particular, revealing a lacuna in international law. The first clear claim that the resources of the continental shelf belong to the adjacent coastal state is widely attributed to President Harry Truman of the United States in 1945, and over the following decade many states followed suit.

The legal regime governing the continental shelf developed after World War II, evolving through multilateral negotiations under the auspices of the United Nations. The First United Nations Conference on the Law of the Sea was held in 1958 and adopted the Geneva Convention on the Continental Shelf (the “Geneva Convention”). The Geneva Convention solidified the continental shelf regime in international law, but lacked a workable definition of what the continental shelf meant in practice. Ideas for defining the outer limits of the continental shelf were the subject of much debate over the next two decades, and culminated in the 1982 adoption of the UN Convention on the Law of the Sea (the “Law of the Sea Convention”) following the Third United Nations Conference on the Law of the Sea. Today, there are 159 signatories to Law of the Sea Convention. The most important principles however are considered to be customary international law, and thus also binding even on non-parties to the Law of the Sea Convention.

The modern definition of the continental shelf begins with the submarine territory stretching out 200 nautical miles from a state’s coastline (1 nautical mile is 1.852 kilometers). This minimum area coincides with a coastal state’s Exclusive Economic Zone (“EEZ”), and states have rights over living as well as non-living resources in the EEZ. The term “continental shelf” as used in the Law of the Sea Convention has a strictly legal connotation and is used as a juridical term. This is distinct from the geological term, which in scientific literature refers to that part of the continental margin which extends beyond the shoreline where there is no noticeable slope. This is also referred to in the scientific literature as the “natural prolongation” of the continent, and may often be either larger or smaller than the continental shelf as defined in the Law of the Sea Convention.

States that wish to extend the limits of their continental shelf beyond the EEZ must prepare and submit applications to the Commission, just as Oman has done in October 2017. However, any given continental shelf may not extend beyond 350 nautical miles from shore or alternatively, more than 100 nautical miles beyond the point at which the seabed measures at a depth of 2500 meters. The deep ocean floor outside of this maximum area belongs to no state, and as per Article 137 of the Law of the Sea Convention no state may claim jurisdiction over it.

Coastal states seeking to extend the limits of their continental shelf may choose which of these limitations is most advantageous to apply. States must gather and submit to the Commission extensive documentation linking the desired extension of limits to the landmass of the continent comprising the state’s territory. Such submissions set out the coordinates of the outer limits of the relevant continental shelf and are accompanied by technical and scientific data in support of the claim.

Part II of this series will explore the process that states undergo in seeking to extend the limits of their continental shelves, and obstacles they may face along the way. Part III will examine Oman’s submission to the Commission and discuss the potential benefits to Oman of extending its continental shelf.

Click here to read Oman and the Law of the Sea - Part II
Click here to read Oman and the Law of the Sea - Part III

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"Best," "Reasonable" and "All Reasonable Endeavours" Clauses: Key Considerations

Many commercial contracts include the terms “best endeavours”, “reasonable endeavours” or “all reasonable endeavours”, particularly in connection with obligations in respect of which a party is unwilling make an absolute commitment, but where that party is nevertheless expected to “try” to fulfil the obligations in question. The effect of using endeavours clauses is widely misunderstood. It is not always clear in practice what level of effort is required by each of the various permutations (the above three are merely the most commonly-used in a wide spectrum of similar phrases).

“Best Endeavours” 
The meaning of the term “best endeavours” has been modified significantly over the years, but the starting point is that the phrase “means what the words say; they do not mean second-best endeavours” (Sheffield District Railway Co v Great Central Railway Co [1911] 27 TLR 451).

In other judgments courts have ruled that best endeavours impose an obligation:

• to do what can reasonably be done in the circumstances; 
• to leave no stone unturned; but 
• that does not require actions which would lead to financial ruin of the company or undermine its commercial standing or goodwill. 

Best endeavours clauses are now judged by standards of reasonableness. “All a reasonable person could do in the circumstances” has become a short way of stating the rule. Importantly, the best endeavours obligation does not extend to a situation where a company is required to put itself at the risk of ruinous financial loss to fulfill its obligation, nor does it require a party to undertake steps that have no likelihood of success.

In practice, a company subject to a best endeavours obligation:

• must take all commercially-practicable action having regard to costs and the degree of difficulty; 
• may be required to incur significant expenditure; and 
• may be required to divert resources elsewhere within the business. 

In Jet2.com v Blackpool Airport Ltd [2012] EWCA Civ 417, the airport entered into a 15-year contact with Jet2.com, a low cost airline. The contract included a general provision which contained an obligation on both parties to “… cooperate together and use their best endeavours to promote Jet2.com’s low cost services from Blackpool Airport”. The Court of Appeal held that this obligation to use best efforts to promote an airline’s low cost services gave rise to a specific duty on the airport operator to accept arrival and departures outside the airport’s normal operating hours. This was the case even though the contract did not make reference to operating hours and the Court was aware the airport operator would lose money as a result.

In a more recent case, Astor Management AG v Atalaya Mining plc [2017], Atalaya tried to argue that an obligation to use reasonable endeavours was only enforceable if:

• “the object of the endeavours is sufficiently certain”; and 
• “there are sufficient objective criteria by which to evaluate the reasonableness of the endeavours”. 

The judge disagreed, ruling:

“The role of the court in a commercial dispute is to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy.”

Reasonable Endeavours 
The obligations imposed by the term “reasonable endeavours” are less onerous than those of “best endeavours”. The contractual obligation to use reasonable endeavours requires the party:

• to give it “an honest try” so as not to hinder the fulfilment of the objective; and
• take all commercially practicable action, but only to the extent that such action is not detrimental to a party’s commercial interests. 

A party subject to a reasonable endeavours obligation may be required to incur limited expenditure, however as expressed above would not require the party to compromise its commercial interests. When determining what “reasonable endeavours” means the recent English case of Minerva (Wandsworth) Ltd v Greenland Ram (London Ltd [2017] EWHC 1457 suggested applying an objective approach where you should ask “what would a reasonable and prudent person acting properly in their own commercial interest and applying their minds to their contractual obligation have done to try?”

All Reasonable Endeavours 
The “all reasonable endeavours” clause is considered by the English Courts to sit somewhere between “best endeavours” and “reasonable endeavours”, implying something more than reasonable endeavours but less than best endeavours. In practice however, determining what is meant by “all reasonable endeavours” can be somewhat unclear. For instance, whether a party is obliged to incur expenditure in fulfilling its obligations or compromise its commercial interests, is invariably fact specific and determined on a case by case basis.

Endeavours Clauses in Omani Law Contracts 
In Oman, endeavours clauses frequently appear in a wide variety of contracts, including shareholders” agreements, joint venture agreements, agency agreements and supply agreements. When faced with an endeavours clause, the Omani Courts would probably interpret “best endeavours” as imposing more onerous requirements than a “reasonable endeavours” or “all reasonable endeavours” provision. All things considered, the facts and circumstances of a case are likely to take precedence in determining how an Omani court would interpret an endeavours clause in a contract governed by Omani law.

Conclusion 
If a party has agreed to a “best endeavours”, “reasonable endeavours” or “all reasonable endeavours” obligation in a contract, they should not treat it as a non-obligation. Otherwise, the risk for non-performance remains. Instead, they should understand that some real efforts will be required of them particularly if a course of action has been prescribed as part of that obligation. Equally, the parties need to be clear about what it is that they are trying to achieve in order to avoid an endeavours clause being ignored by a court or arbitral tribunal for uncertainty.

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Development of Real Estate Investment Funds in Oman

Real estate investment funds (hereinafter referred to as a “REIF”) are one of the primary ways to invest in real estate. A REIF owns income-producing real estate in a range of property sectors and is generally seen to have a number of benefits to investors. Investment in a REIF is now possible in Oman by virtue of the Capital Markets Authority (the “CMA”) Organisational Regulation of Real Estate Investment Funds No. 2 of 2018 (the “REIF Regulations”) and Ministerial Decision No. 95/2017 issued by the Ministry of Housing (“MD 95/2017”).

Prior to the enactment of the REIF Regulations and MD 95/2017, a fund wishing to invest in real estate was reliant solely on the CMA’s Executive Regulations of the Capital Markets Law promulgated by Decision No. 1 of 2009 (the “CML Executive Regulations”), which permitted funds to invest up to 30 per cent of their capital in real estate. The CML Executive Regulations however, proved unsatisfactory (as far as REIFs were concerned), and owing to the lack of regulatory framework for the governance of REIFs, the Ministry of Housing showed reluctance to approve funds investing in real estate.

In an effort to diversify the Sultanate’s economy, the REIF Regulations are seen to support the Sultanate’s National Program for Enhancing Economic Diversification or Tanfeedh, as it is better known. Such REIF Regulations are aimed to encourage both foreign and domestic investment in real estate in Oman. This aim is evidenced by the fact the REIF Regulations state that a REIF is required to offer at least 40 per cent of its capital to the public, upon issuing its investment units for public offering. In other words, at least 40 per cent of the investment units of a REIF must be available for public subscription and be traded on the Muscat Securities Market (“MSM”).

This article sets out: (a) the key points to establishing a REIF in Oman; (b) the key investment rules applicable to a REIF; and (c) the management responsibilities of a REIF.

Establishing a REIF 
Among other organisational requirements to set up a REIF, such as duly completing an application to CMA for initial approval and appointing a company licensed by CMA to be the REIF’s investment manager, the paid-up capital of the REIF must be no less than 10 million Omani rials (“OMR”). This requirement is a departure from the requirements set out in Part VI of the CML Executive Regulations, wherein it was stated that the capital of a fund at the time of establishment shall not be less than 2 million OMR.

Investment Rules 
The REIF Regulations set out parameters by which a REIF may operate in the Sultanate and have determined that a REIF is not permitted to: (a) provide loans of financial facilities; (b) develop properties, unless the development is to renovate, supply or expand existing properties within its investment portfolio; (c) buy a piece of land; or (d) invest more than 25 per cent of the total value of its assets outside of the Sultanate (unless otherwise approved by the CMA as explained further below).

A REIF is also prohibited from purchasing properties at an amount exceeding 110 per cent of amount stated in any property’s valuation report. A REIF is further prevented from selling any property for less than 90 per cent of the property’s valuation. All properties in the REIF’s investment portfolio are subject to an independent re-valuation at least once in every 3 years.

Conditions for Purchasing Properties 
It is specified by the REIF Regulations that 50 per cent of the total value of a REIF’s assets must be invested in income generating properties and/or special purpose vehicles (“SPV”). Any investments of the REIF in assets not related to real estate and/or cash, deposits and cash market instruments are not to exceed 25 per cent of the total value of the REIF’s assets.

Leased and non-leased properties 
When purchasing properties, a REIF is required to meet certain conditions, including that, subject to certain exceptions, a property be fully leased, have good historical records and/or promising prospects such that it will obtain a good level income; economical according to the MSM reports and be free from any obligations or rights of third parties at the time of purchase.

It is also usually a requirement that a REIF have a majority ownership and control over the purchased property. However, in certain instances, a REIF may purchase properties without having a controlling majority on the basis that:

• the total value of the REIF’s non majority owned properties shall not exceed 25 per cent of the total value of the REIF’s assets after the acquisition;
• the acquisition is in the best interest of the holders of a REIF’s investment units; and 
• there is a clear disclosure in the REIF’s prospectus regarding the risks associated with its ownership of properties without having a controlling majority. 

A REIF may only purchase unleased properties on the condition that:

• there is a strong probability of obtaining a tenant; 
• any disbursements of capital to enhance the condition of the property will not materially affect the proceeds of the holders of the REIF’s investment units; and 
• within a reasonable period of time, the holders of the REIF’s investment units will attain reasonable proceeds. 

Properties under construction 
A REIF is only permitted to purchase properties under construction if the criteria under Article 125 of the REIF Regulations are satisfied. By way of overview, some of these Article 125 conditions include that:

• the REIF’s portfolio must be sufficient to ensure there is no significant decrease in the fund’s revenues during the construction period of the property in question; 
• the purchase agreement is conditional upon the completion of the property construction; 
• the total value of the properties under construction that are purchased by the REIF will not exceed 10 per cent of the total value of the REIF’s assets after purchase; and 
• the REIF is prevented from selling the property under construction for at least 2 years from its completion. 

Properties with a usufruct contract 
As far as usufruct contracts are concerned, a REIF may purchase the rights from a usufruct contract. However, this is only permissible if the REIF has obtained the requisite consent of the competent authorities to transfer the usufruct contract to the REIF prior making the units available on the MSM. 

Special Purpose Vehicles 
In order to acquire a SPV with interest in property, an investment manager is required to consider, among other things, the following:

• whether the acquisition is in the interest of the holders of an REIF’s investment units; 
• whether there a valid commercial reason for the acquisition of the SPV rather than the properties; and 
• whether the property owned by the SPV will be compliant with the conditions for purchasing properties, some of which are outlined under the relevant heading above. 

A REIF should purchase the entire SPV or otherwise must acquire ownership rights that guarantee the REIF majority ownership and control over the SPV.

Properties Outside the Sultanate 
As referred above, a REIF is permitted to purchase property outside the Sultanate, however investment abroad must not exceed 25 per cent of the total value of the REIF’s assets. Investment in property outside the Sultanate is further only permitted on the basis that it is considered in the best interest of holders of the REIF’s investment units. In assessing whether investment abroad is/is not in the best interest of holders of investment units some of the factors that must be considered include whether there are any:

• contradictions imposed on foreign ownership, restrictions on foreign exchange, transfers and provisions relating to competition and monopoly; 
• economic, political, legal, judicial and accounting factors including the real estate market; 
• operational restrictions including the level of transparency with respect to accounting and financial reporting; or 
• restrictions or barriers to tax, in those countries where the REIF is looking to purchase property. 

Loans and Debt 
It should be noted that a REIF is permitted to take a loan(s) for the purchase of properties and SPVs. Under the CML Executive Regulations, a REIF was not permitted to borrow more than 30 per cent of its net asset value, whereas the REIF Regulations state that the total debt of a REIF is not to exceed 6o per cent of the total value of the REIF’s assets at the time of borrowing. However that percentage may be exceeded if approved at an extraordinary general meeting of the holders of a REIF’s investment units.

Other Controls 
MD 95/2017 has further specified controls, including that a REIF is permitted to own property only if it is used in connection to commercial, residential, industrial and tourism purposes. Further, a residential complex may only be purchased by a REIF if the complex is 10,000 square meters or more in size. A REIF is prevented however from owning empty spaces and properties used for agricultural use.

Management of a REIF 
A REIF’s investment manager is required to ensure there is suitable and duly appointed fund management to supervise and control the work of the REIF and its service providers. Subject to certain restrictions as to who may serve as a member of fund management, management is to comprise of at least 3 but no more than 7 members, including 2 independent members. As part of the responsibilities of the REIF’s management, fund managers are required to ensure that a fair and accurate assessment of all REIF assets and liabilities are made.

A Shari’ah committee must also be formed of at least 3 members all of whom must be independent from the investment manager and whose functions include, but are not limited to:

• providing real estate investment and fund management advice in accordance with the principles of Islamic Shari’ah and ensuring the REIF is in compliance with principles of Islamic Shar’iah and the CMA Regulations; 
• providing expertise and legal advice on all matters, in particular on the REIF’s articles of association, prospectus, investment decisions and other operational matters of the REIF; 
• reviewing the report of the investment manager regarding the REIF's compliance with its investment transactions in accordance with the principles of Islamic Shari’ah; and 
• preparing a report to be included in the annual or interim report of the REIF that includes its opinion as to whether the operation of the REIF is conducted in accordance with the principles of the Islamic Shari’ah for the relevant financial period. 

In accordance with the REIF Regulations, an investment manager of a REIF must appoint an individual with suitable experience and knowledge in real estate investment and the investment strategy of the REIF in order to responsibly manage the REIF’s portfolio. If the REIF’s investments include properties situated outside the Sultanate, the investment manager must further have the requisite capabilities to manage the legal and regulatory requirements of the relevant state in which such properties are located.

Conclusion 
Although the concept of funds investing in real estate is not entirely new in Oman, it is understood that the comprehensive REIF Regulations will encourage the establishment of REIFs and be beneficial for the overall development of the real estate sector in the Sultanate. Investors of REIFs will see high returns of 90 per cent of any annual net profit on their investment and have access to a diverse portfolio of real estate which, prior to the REIF Regulations, had previously been largely unavailable to both foreign and domestic investors.

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