Tuesday, July 13, 2021

Rules Organising Investments by the Public Authority for Social Securities and Pension Funds

The long-awaited consolidation of the pension funds has come into effect by virtue of Sultani Decree 33/2021 regarding the Systems for Retirement and Social Security, consolidating the management and operation of Oman’s various pension funds into two funds: a fund named the “Social Security Fund” and a fund named the “Military and Security Services Pension Fund.” Both funds shall have a legal personality, enjoy financial and administrative independence and shall be subordinate to the Council of Ministers. The systems of both funds shall be issued by a Sultani Decree.

Prior to the consolidation of the funds, there were nine funds that were subject to the limitations set forth by Sultani Decree 31/1996 on the Rules Organizing Investment of the Funds of each of the Public Authority for Social Securities and Pension and Retirement Funds, and this was further amended by Sultani Decree 12/2009.

The amendments issued the updated list of entities that such provisions are applicable to:

1. The Sultan’s Special Force Pension Fund; 

2. Internal Security Service Pension Fund; 

3. Royal Guard of Oman Pension Fund; 

4. Royal Oman Police Pension Fund; 

5. Royal Office Employees Pension Fund; 

6. Public Authority for Social Insurance; 

7. Civil Service Employees Pension Fund; 

8. Diwan of Royal Court Employees Pension Fund; 

9. Defence Ministry Pension Fund; and 

10. Any other pension funds that may be established per Sultani Decrees. 

The investment of the capital of the aforementioned funds shall be in the fields listed in the amendment, specifically: (i) real estate properties in the Sultanate and outside; (ii) shares and bonds issued by foreign companies listed in stock markets in foreign countries; (iii) bonds issued by the Sultanate’s government and foreign countries’ governments; (iv) shares and bonds issued by Omani stock companies; and (v) the deposits a local and foreign banks.

Pension funds are a central component of the financial sector in the Sultanate of Oman. The consolidation into the Social Security Fund and the Military and Security Services Pension Fund is a reflection of Oman’s continuous efforts to boost and develop the government sector.

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Wednesday, May 5, 2021

Good Faith: English Law v the Oman Civil Code

Introduction

The English courts’ historic reluctance to imply a term of good faith into agreements negotiated between two commercial parties at arm’s length is well known and is based on the long-established doctrine of freedom of contract. In contrast, in civil law countries, such as Oman, performing obligations in a manner consistent with good faith is a fundamental part of the contract.

Those working with international contracts, particularly construction standard forms such as those in the FIDIC suite, need to keep these very real differences in mind as they can have a significant impact on how some provisions operate in practice.

Summary of recent English case law on good faith

A series of English cases on good faith in early 2013, notably a High Court judgment in Yam Seng Pte Ltd v International Trade Corporation Limited, had raised the prospect that the English courts may be on their way to recognising an overarching duty of good faith, but this prospect now seems to have receded.

Several subsequent judgments have made it very clear that the English courts are not ready to imply a general doctrine of good faith. The judgment of the High Court in Yam Seng appears to have been sidelined (if not directly overruled) by the Court of Appeal, and in later cases.

If the parties want to have an express duty of good faith, they need to create one and they should think very carefully about its scope. The English courts will not allow good-faith-type wording to overrule an absolute contractual right such as the right to terminate for convenience. The parties will need to expressly provide that a good-faith obligation operates in relation to such a provision.

Good faith in Omani contracts

In most jurisdictions in this region, including Bahrain, Kuwait, Qatar and the UAE, the parties to a contract are expressly required by terms of their respective civil codes to perform their contractual duties towards each other with good faith. For example, article 246 of the UAE Civil Code provides:

“The contract must be performed in accordance with its contents and in a manner consistent with the requirements of good faith.”

This in effect is a requirement not to use the terms of a contract to abuse the rights of the other contracting party, not to cause unjustified damage to the other party and to act reasonably and moderately. 

Even though the Oman Civil Code (Sultani Decree 29/2013) contains no equivalent provision, Omani lawyers generally accept that, as a matter of Omani jurisprudence, an identical principle applies in the Sultanate.

So, can the doctrine of good faith be used as a tool to adjust, erode or dilute the effect of clear contract terms? Simply put, no. If good faith could override contractual terms, that could leave parties uncertain as to whether or not adherence to an agreed (but onerous) term is mandatory. It would undermine the fundamental principle of contract law that the contract means what it says. Article 155 of the Oman Civil Code provides that a contract is the law of the parties and (except in very limited circumstances) prevails over all else. As such, parties are bound by the terms to which they have agreed, and the duty of good faith does not alter their contractual rights or obligations. Indeed, it could be argued that a party seeking to circumvent agreed terms through the application of a good-faith argument may itself not be acting in good faith in seeking to do so! 

An act of bad faith by one contracting party may provide a cause of action for the other, and the duty of good faith is therefore overarching, unlike at English law. In deciding whether an act constitutes bad faith the court may also look at article 59 of the Oman Civil Code which provides that a party is prohibited from exercising its rights if: 

  • it is intended to infringe the rights of another party; 
  • the desired interest is unlawful;
  • the gain is disproportionate to the harm that will be suffered by the other party; or 
  • it exceeds the bounds of custom or practice.

There are some potentially wide-ranging ramifications of this, including:

  • Good faith is most likely to be applied to evidence, or to support, an allegation of breach. Where, for example, building materials are found to be defective a breach will be easier to establish if there has been some attempt to conceal this or cover up the materials once incorporated into the works.
  •  Reliance on a time bar notice (e.g., FIDIC’s clause 20.1) is likely to be restricted where a party seeking to rely on it knew about that breach previously (for example, if notification of the claim was made informally and is recorded in meeting minutes or similar but was never formally made). In other words, denying a claim due to the time bar when it had already been communicated, albeit informally, would be an act of bad faith. 
  • Avoiding liability for a very substantial claim due to a time bar may also be unlawful where the losses were serious and unequal with the employer’s contractual claim to be notified in a required time period (for example, 28 days under clause 20.1 of the 1999 FIDIC contracts). Article 59(1) of the Oman Civil Code provides that “a person shall be held liable for an unlawful exercise of his rights” and this, together with the good-faith obligation, may be used to challenge the effectiveness of a time bar in such circumstances. 
Whilst the Oman Civil Code does provide (in article 267) that parties may fix a pre-agreed compensation mechanism or amount in their contract, the court may also vary the pre-agreed amount of compensation or damages to equal the actual loss in any event, regardless of whether there was any “act of prevention” on the part of the employer.

  • Good faith is also applicable in relation to termination for convenience clauses although it is worth noting that the duty of good faith is not applicable to the obligation itself but to the performance of the obligation. Accordingly, the parties’ agreement that the employer may terminate the contract for convenience is a valid agreement and the Oman courts will normally uphold this. Although this employer’s right might be looked at as contradicting the good-faith principle, it would be an enforceable contract term as it was freely entered into.
However, if the employer relies on this contract provision to terminate the contract in circumstances that give rise to performing the contract in a manner that is inconsistent with good faith, then the court might have a different view.

 For example, if the contract provides for termination for convenience and limits the liability of the employer to compensate the contractor for the work done until the date of termination, but excluding mobilisation cost, the employer who terminates the contract for convenience immediately after mobilisation and before the contractor has done any work is performing the contract in bad faith. In this case, the contractor might rely on article 59 (abuse of right) and 267(2) (claiming actual loss) of the Oman Civil Code to recoup its losses.

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Wednesday, April 7, 2021

Joint Ventures in Oman

There are many different reasons why a business may seek to enter into a joint venture.  It may wish to access new markets, develop new products or benefit from the particular expertise of its joint venture partner or share risks and resources.  Curtis has worked on a diverse range of joint ventures in Oman across all industry sectors.  We understand the importance of ensuring that the joint venture structure and documentation encapsulate the underlying commercial objectives of the participants, whilst also being appropriate for the scale or complexity involved.

The phrase “joint venture” can have a number of different meanings.  Oman attracts significant foreign investment so it may involve the partnering of Omani and foreign investors.  The joint venture will typically involve the incorporation of a company to act as the joint venture vehicle.  This article will focus on corporate joint ventures since that is the most common approach, although the phrase “joint venture” may also be used to describe a contractual arrangement, for example, in the areas of commercial agency, franchise and (less commonly) a simple, unincorporated contractual co-operation agreement.

Structuring the joint venture

Curtis has been at the forefront of the Omani legal market in our understanding of corporate law, including Sultani Decree 19/2018 (the “Commercial Companies Law”) and its practical interpretation by the relevant government officials and legal departments, enabling us to devise and implement optimal corporate structures for our clients.

We work closely with the relevant licensing authorities to ensure that various corporate structures proposed by us for joint ventures are acceptable.  In our experience, such authorities are keen to engage with us to enable innovate corporate structures, given their objective of attracting and facilitating foreign investment into the country.

Our objective is to allow our clients to focus on their business and have a legal corporate structure that they know is robust and flexible enough for their short, medium and long term objectives.

Key provisions in joint venture or shareholders’ agreements

In addition to our structuring expertise, Curtis also has a wealth of experience in advising on the relevant joint venture documentation.  Various documents will be required depending on the circumstances of the joint venture, but typically the principal document will be the joint venture or shareholders’ agreement.

The following are key provisions in any joint venture agreement (although there are others which are not noted below):

  • The purpose and scope of the joint venture.
  • Board composition and management arrangements.
  • Financing of the joint venture company.
  • Reserved matters requiring consent of shareholders/directors and voting requirements.
  • Dividend policy.
  • Restrictive covenants.
  • Deadlock resolution.
  • Transferability of shares under different circumstances.
  • Termination or exit from the joint venture.

Certain of these matters are discussed in more detail below.

1.  Board composition and management arrangements

Board composition will usually be proportionate to each party’s shareholding.  In a 50:50 joint venture, it would be normal for the parties to be entitled to appoint an equal number of directors, although this is not always the case.  Any party that has minority representation on the board should require a number of issues to be reserved for shareholder approval, depending on the nature of control and veto rights which are appropriate to the joint venture.  The list of shareholder reserved matters will often be one of the more heavily negotiated aspects of a joint venture agreement.

Under joint venture agreements, it is common for the shareholdings of parties to be subject to mechanisms that change these, e.g., on a capital call, one shareholder may subscribe for shares whilst the other may not, so diluting the latter shareholder.  It is therefore important that board composition provisions cater for the possibility of change and enable board appointment rights to vary where a shareholder’s proportionate ownership has increased or decreased.

Day-to-day management of the business of the joint venture will often be delegated by the board to the general manager or CEO.  In a 50:50 joint venture, the board will normally be entitled to appoint the general manager or CEO, but this is not always the case and in certain instances this right could be given to one of the shareholders.  Whilst the general manager or CEO will have broad powers to operate the business on a day-to-day basis, it is important to ensure that certain key matters are reserved to the board or the shareholders.  This is of particular significance for a shareholder where the other shareholder has the right to appoint the general manager or CEO.

2.  Financing of the joint venture company

In any joint venture, the funding provisions need to be carefully tailored to reflect the parties’ chosen method or methods of funding the joint venture company.  There are various options available but a typical process would involve the board of the joint venture company (or senior management such as the CEO) deciding that funding is required.  Following this “funding call” an agreed mechanism will determine from whom funding should be procured (for example, loans from banks or other third parties or equity/shareholder loans from the shareholders).  This would often be subject to shareholder approval, with the deadlock resolution mechanism being invoked if the shareholders cannot agree on any relevant issues within a stipulated timeframe (see Deadlock resolution below for further details).

Where the shareholders are obliged to make contributions (typically pro rata to their shareholdings), the agreement should clearly state what happens if one of them defaults.  For example, should the other shareholder be able to fund the shortfall amount and receive additional shares, thereby further diluting the defaulting shareholder?  Or should the other shareholder be entitled to provide a shareholder loan equal to the shortfall amount and, if so, should this shareholder loan rank ahead of all other shareholder loans and attract a preferential rate of interest?  A failure to comply with a funding obligation would also typically constitute an event of default triggering the compulsory share transfer provisions, whereby the non-defaulting shareholder can elect to purchase the shares of the defaulting shareholder at a discount to market value (occasionally an option is also included for the non-defaulting shareholder to sell its shares to the defaulting shareholder at a premium to market value).  These types of clauses are designed to incentivise the shareholders to comply with their funding obligations, providing the joint venture company with the financing it needs to successfully operate its business.

3.  Dividend policy

It is important for the parties to consider the dividend policy of the joint venture company at the outset.  This will often depend on the nature of the business, in particular on whether the joint venture’s purpose is intended primarily to be cash-generating or as a growth company.

The dividend policy will need to be clearly stated in the joint venture agreement in order to reduce the likelihood of a dispute arising in the future.  One option is to provide for the distribution of an annual dividend of a certain percentage of the joint venture company’s annual profits.  A more flexible option is to allow the board of the joint venture company to determine a reasonable level of dividend on an annual basis.  In either case, it is important to include certain caveats – for example, dividends should only be payable to the extent that they comply with applicable laws (for example, regarding distributable reserves or requirements to maintain a reserve) and do not result in the joint venture company being in breach of any of its banking covenants.  Where it is envisaged that the parties will make shareholder loans to the joint venture company, the joint venture agreement should make it clear that no dividends will be paid until all such shareholder loans have been repaid in full.  The payment of dividends would often be subject to shareholder approval, with the deadlock resolution mechanism being invoked if the shareholders cannot agree within the stipulated timeframe (see Deadlock resolution below for further details).

4.  Deadlock resolution

Deadlocks can arise in various circumstances, but the most common circumstance is when a board or shareholders’ resolution is not passed by the requisite majority of directors or shareholders, respectively.

It is usual to ensure that, as a first step, appropriate efforts are made by the parties and their representatives to resolve a deadlock.  There could be a “cooling off period” during which the parties are required to use reasonable endeavours to resolve the dispute within a certain period of time.  If they are unable to do so, referring the dispute to the chairman/CEO of each party can be a useful tool.  It is not uncommon to refer disputes to an independent expert, although it may not be sensible to have a third party adjudicate on a matter of commercial or financial significance.
Other, more extreme options can be included but these should be used with caution as they have the potential to bring the joint venture to an end and can be manipulated by an unscrupulous party.  However, such options include the following in a deadlock situation:
  • “Russian Roulette”:  Under this mechanism, any party may serve a notice on the other, either requiring the receiving party to purchase its entire holding from it, or for the receiving party to sell its entire holding to the initiating party, at the price set out in the notice.  The receiving party then has a period in which to accept the offer made in the notice or reject it, in which case the roles of “vendor” and “purchaser” are reversed.  This method ensures that a realistic price is set by the initiating party, as that party may either have to sell its holding, or buy the other's holding, at the price it states in the notice.
  • “Texas or Mexican Shoot Out”:  Under this mechanism, the initiating party may serve a purchase notice on the receiving party stating that it is willing to buy the other out and setting the price at which it is prepared to buy.  The receiving party then has a period in which to serve a counter notice, stating that it either (i) is prepared to sell at the price contained in the purchase notice; or (ii) wishes to buy the interest of the initiating party at a higher price.  If the latter situation occurs and both wish to buy, then a sealed bid system will be put into operation, with the person who bids highest being entitled to buy the other out.  Alternatively, this bidding process can be run as an auction with the parties raising their bids in competition with one another.  This is a starker mechanism than the “Russian Roulette” procedure.  It is more openly susceptible to misuse where one party does not have the resources or desire to buy, requiring a strong nerve in that case to increase a low opening price.
Naturally, these mechanisms and the points raised above will not be appropriate for all joint ventures so it is important that the parties carefully consider the relevance and applicability of these provisions at the outset.

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Thursday, February 18, 2021

International Chamber of Commerce's Revised Rules of Arbitration

The International Chamber of Commerce (“ICC”) has unveiled revised Rules of Arbitration which will come into force on 1 January 2021 and will be applicable to cases submitted to the International Court of Arbitration on or after the enforcement date (the “Rules”).

The significant changes introduced by the ICC to the Rules include the following points:

1. ICC Appointment of the Arbitral Tribunal

The amendment to Article 12(9) grants the ICC the authority to appoint all members of the arbitral tribunal when there is an innate inequality or unfairness in the parties’ arbitration agreement. The amendment was added to address specific situations in which implementing the parties’ arbitration agreement would result in an unequal treatment of the parties, and might consequently jeopardise the enforceability of any award.

2. Joinder for Additional Parties

Under the previous Rules, a party was only able to request the addition of an additional party before the confirmation or appointment of any arbitrator or if all the parties, including the additional party, agreed to the addition.

The newly introduced Article 7(5) of the Rules allows for a request for joinder to be made before the arbitral tribunal and after the confirmation or appointment of any arbitrator. The arbitral tribunal may, after considering all the relevant circumstances, and without the consent of the other party in the arbitration, accept the request for joinder.

3. Consolidation of Arbitrations

The 2021 Rules have amended Article 10(b) of the ICC Rules. From now on, consolidation is possible where “all of the claims in the arbitrations are made under the same arbitration agreement or agreements.” This new amendment permits the consolidation

4. Treaty-based Arbitrations

Article 13(6) of the Rules states that “Whenever the arbitration agreement upon which the arbitration is based arises from a treaty, and unless the parties agree otherwise, no arbitrator shall have the same nationality of any party to the arbitration.

The ICC added this provision to ensure the neutrality of the arbitral tribunal and to preserve the fairness of the arbitration process by establishing that no arbitrator in a treaty-based arbitration should have the same nationality of any party to the arbitration, unless otherwise agreed by the parties.

5. Changes in Party Representation

In accordance with the Article 17, if a party changes its representative it must immediately inform the ICC Secretariat, the arbitral tribunal, and the other parties. The arbitral tribunal may take any measure necessary to avoid a conflict of interest for an arbitrator arising from such a change. This includes excluding new counsel from participating in whole or in part in the proceedings.

6. Expedited Rules

After witnessing the results of the expedited procedures set out in the 2017 Rules of Arbitration, the threshold of US$2 million dollars has been raised to US$3 million dollars in the 2021 Rules. Cases that fall under the expedited procedures umbrella usually take less than six months to render the award. The procedure is also now more cost-effective.

As of date, in cases where the amount in dispute is less than the US$2 million threshold, the parties may opt out of the expedited procedure, and parties may agree to opt into this procedure where the amount in dispute is higher than this threshold.

7. Virtual Hearings

The modified Article 26(1) of the 2021 Rules introduces in clear terms the possibility of holding virtual hearings, which have become the new normal in light of the recent COVID-19 pandemic. The article sets out several possible modes of communication including, but not limited to, videoconferencing, telephone, or other appropriate means of communication.

Under the ICC Rules 2017, the videoconferencing and telephonic communications were limited to conducting case management conferences under Article 24 and expedited arbitration proceedings under Article 30. Now, under the ICC Rules 2021, the aforesaid modes have been further recognised so as to extend to the conduct of full arbitration hearings.

The new wording further clarifies that a hearing need no longer be held in person, unless any party so requests, or if the arbitral tribunal deems it necessary.

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