Monday, August 19, 2019

Latent Defects in Omani Construction Contracts

In Justin Sweet’s authoritative work Defects, the term “defect” is defined as “a failure of the completed project to satisfy the express or implied quality or quantity obligations of a construction contract.”

The question of whether a defect is patent or latent is determined objectively.  A latent defect is one that would not be apparent in the course of a reasonable inspection.  A particular defect may be latent to the casual observer, but patent to a construction professional, such as an architect or engineer.  In a commercial context, there are cases that suggest that a defect is patent if it is reasonably discoverable with the benefit of such skilled third-party advice.

The Omani perspective 

The Fédération Internationale des Ingénieurs-Conseils (FIDIC) Conditions of Contract for Construction, more commonly known as the FIDIC Red Book, is commonly used for building and engineering works designed by the employer in Oman.  (This article references the 1999 first edition.)

The provisions in the Red Book dealing with latent defects are generally consistent with the position under Omani law, essentially that contractors may be liable for latent defects discovered after the performance certificate has been issued by the employer.

Many of those familiar with the construction industry in the Middle East region will be familiar with the term “decennial liability.”  In particular, many will be familiar with a requirement that, in relation to works performed under a construction contract, a contractor and an architect remain legally liable for a period of 10 years after the completion of the works.

A number of countries in the Middle East have similar legal provisions in that regard.  Generally, neither a contractor nor an architect can contract out of the liability.  The liability is a form of strict liability.  There are some differences of opinion among the legal profession as to what extent (if any) a claimant needs to prove fault or causation against a contractor or architect, but it is clear that there is no obligation on a claimant to prove negligence, or a failure to achieve an industry standard, etc.  To put it another way, there is no requirement to demonstrate the contractor or architect was “negligent,” but there are some differing views as to what extent (if any) there is a need to show that some action or inaction by the contractor or architect caused or contributed to the loss and damage.

In most parts of the Middle East, where there is a law imposing decennial liability, it only applies where the relevant structure has collapsed or suffers a major structural defect.  The law in Oman is far more extensive.  The relevant provisions of Sultani Decree 29/2013 (the “Civil Code”) are typical of what might be found in other jurisdictions in the Middle East, in that liability is limited to total or partial collapse, and defects affecting the stability or safety of the works.

However, the Engineering Consultancy Law promulgated by Sultani Decree 27/2016 (the “Engineering Consultancy Law”) provides that decennial liability extends to any defect, not just defects leading to collapse or those affecting stability or safety.  This would suggest that the contractor and the engineer remain liable for ten years for even minor defects.

In summary, decennial liability is broader in Oman than elsewhere in the Middle East, and can cover defects, both patent and latent, that are neither structural nor safety-related.  It is important that, when drafting contracts, contractors and consultants consider how best to allocate risk and protect themselves from claims.  It is also critical that parties to construction contracts keep good records to protect themselves from such claims, including photographs of works, and any relevant warranties given by manufacturers and suppliers.

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Monday, August 12, 2019

New Foreign Capital Investment Law

His Majesty Sultan Qaboos issued Sultani Decree 50/2019 on 1 July 2019, issuing the much-awaited new Foreign Capital Investment Law (the “New FCIL”) that replaced the earlier Foreign Capital Investment Law issued by Sultani Decree 102/1994 (the “Old FCIL”).  The development of the New FCIL took over four years and involved assistance from the World Bank.  During the course of the development of the New FCIL, the comments and input from various stakeholders, and consultation sessions, were organised by the Ministry of Commerce and Industry (the “MOCI”).  The New FCIL comes into force six months after the date of its publication in Official Gazette issue 1300 on 7 July 2019.

Under the Old FCIL regime, foreigners could not undertake commercial activity in Oman unless they had a formal presence by way of a legal entity or an agent.  A legal entity would take the shape of either a commercial company under the Commercial Companies Law or a branch of a foreign company.

While foreigners could register a local commercial entity under the provisions of the Old FCIL and the Commercial Companies Law, their ability to establish a wholly owned commercial company was restricted.  Under the provisions of the Old FCIL, a foreigner could establish a commercial company in Oman, subject to a restriction on maximum foreign ownership in the share capital of the commercial company.  This restriction initially allowed up to a maximum foreign ownership of 49%.  Upon Oman’s accession to the World Trade Organisation (the “WTO”), this restriction was relaxed to a maximum of 70% of the share capital of a commercial company.  As an exception to the Old FCIL, complete foreign ownership was permitted in some exceptional circumstances.  The exceptions were as follows:

(i) establishment in one of the Free Zones;
(ii) establishment under the Gulf Co-operation Council (the “GCC Treaty”);
(iii) establishment under the one of the free trade agreements (“FTA”) ratified and in force in Oman; and
(iv) special projects (with a minimum capital of OMR 500,000) which contribute to the development of the national economy as approved by committee for foreign investment following a recommendation from the MOCI under the provisions set out in the Old FCIL.

The New FCIL removes the requirement for having an Omani partner and shareholding restrictions on foreigners, thereby effectively permitting wholly owned non-Omani companies.

Under the New FCIL, all benefits, incentives and guarantees granted to foreign investment projects under the Old FCIL shall continue until such time that those benefits expire.  The New FCIL is promulgated without prejudice to the regimes pertaining to GCC investment, the Special Economic Zone at Duqm, the Public Establishment for Industrial Estates and the Free Zones.  Article 3 prohibits foreigners from practicing investment activities in Oman save in accordance with the provisions of the New FCIL.  It further provides that foreign investment projects will be subject to the laws of Oman and subject to any international treaty in force in Oman in relation to investment and double taxation.  It appears that FTAs entered into by Oman will continue to be implemented in their usual course.

The New FCIL provides for establishment of an Investment Service Centre (the “Centre”) at the MOCI.  The Centre will be responsible for licensing and easing the procedures relating to grant of licences, permits and other consents required for an investment project.  The Centre will also be responsible for issuing foreign investment licences to foreign investors.  While the Old FCIL also provided for grant of a licence for foreign investment, in recent practice that licence was not issued separately and was considered deemed to have been granted with the company registration documents.

Article 7 of the New FCIL states that foreign investors will be required to abide by the timetables provided by them for the execution of the project and approved in accordance with the economic feasibility study.  It also restricts foreign investors from making substantial amendments to the project without the MOCI’s approval.  It appears that under the New FCIL the foreign investors will be required to submit a business plan.  We expect this to be similar to, although more detailed than, the foreign investment application form that the MOCI introduced few years ago.

In addition, the New FCIL provides that the Cabinet may grant a single approval based on a recommendation of the Minister of Commerce and Industry to establish, operate and manage strategic projects.  This approval will be effective on its own without the need for further procedures.  It appears that once the Cabinet’s single approval is granted as an umbrella approval, then the other project approvals from different governmental entities and authorities would not be required.  What this would entail in practice and how different it would be from the other approvals mentioned in the New FCIL is yet to be seen.

While the New FCIL is substantially different from the Old FCIL, there are a number of similarities.  Article 6 of the New FCIL provides that foreign investment projects may be carried out by an establishment or a company established under the law.  Furthermore, Article 14 provides for a negative list of activities, in other words activities that are not open to foreign investment.  The MOCI maintains a list a foreign investment negative list on the basis of the Old FCIL and following reservations made in its accession to the WTO.  Until such time that a new negative list is published we expect that the negative list currently implemented will continue in effect.

The executive regulations of the New FCIL are to be issued within six months of its effective date.  Until such time, the regulations under the Old FCIL will continue to the extent that they do not contradict the New FCIL.


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Friday, August 9, 2019

In the Pipeline - July 2019


The Foreign Capital Investment Law is promulgated by Sultani Decree 50/2019. It aims to boost and promote foreign capital investments in the Sultanate by expanding investment sectors. The Executive Regulations and implementing decisions shall be issued within six months. Sultani Decree 102/94 and any legislation that contradicts the new law shall be repealed. The Sultani Decree is to be published in the Official Gazette and implemented six months from the date of publication.

The Privatization Law is promulgated by Sultani Decree 51/2019. The law sets out procedures for the privatisation of government facilities so as to expand the role of the private sector. The former privatization Law, Sultani Decree 77/2004, and any legislation that contradicts the new law will be repealed. The Sultani Decree is to be published in the Official Gazette and implemented the day following the date of publication.

Sultani Decree 52/2019 promulgates the Law on Partnership between Public and Private Sector. The law encourages investments by the private sector in the public sector in order to encourage a diverse range of national income sources. Any legislation that contradicts the new law will be repealed. The Sultani Decree is to be published in the Official Gazette and implemented the day following the date of publication.

The objective of the Bankruptcy Law, Sultani Decree 53/2019, is to support businesses in resuming their economic activity while in distress by restructuring the business. Book Five of the Law of Commerce and any legislation that contradicts the new law will be repealed. The Sultani Decree is to be published in the Official Gazette and implemented one year after the date of publication.

The Public Authority for Privatization and Partnership and its system of governance has been established by Sultani Decree 54/2019. The newly established public authority will have a legal identity that will enjoy administrative and financial autonomy. All employees and assets of the Oman Authority of Partnership for Development and the Department of Privatization at the Directorate General under the Ministry of Finance shall be allocated and transferred to the new Public Authority.
Sultani Decree 9/2014 and any legislation that contradicts the new law shall be repealed. The Sultani Decree is to be published in the Official Gazette and implemented from the date of issuance.

Please contact us if you would like more detailed advice on the above.

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