Recently, Royal Decree No. 27/2011 amended the name of the ‘State Audit Institution’ to be titled henceforth the ‘State Financial and Administrative Audit Institution’ (“SFAAI”). While the true significance of this amendment is still emerging – will this merely be a name change, or is it a sign of more fundamental changes to come? – now is an opportune time to reflect on the existing state audit law, which reinforced the independence and widened the audit mandate of what is now called the SFAAI.
The State Audit Law issued by Royal Decree No. 55/2000 (the “Law”) decreed the financial and administrative autonomy of the SFAAI, bifurcating it from the Diwan of the Royal Court. The stated objectives of the institution, which was established to audit state public funds and monitor the performance of entities under its control, are as follows:
• to secure public funds and provide a framework for the efficient management of the funds;
• to make internal financial controls conform with applicable financial regulations;
• to expose any financial irregularities in state organizations that fall under the SFAAI’s purview;
• to highlight intrinsic weaknesses in the financial system and to propose remedies to guard against these weaknesses; and
• to audit entities subject to the Law and to ensure that public funds are economically and efficiently employed.
The Chairman and the Vice Chairman of SFAAI are appointed by a Royal Decree. The Chairman, in turn, appoints other members of the institution. In discharging its functions, the SFAAI is authorized to seek external professional assistance where required, as its state audit functions have to be conducted in accordance with internationally accepted standards. The SFAAI must convey audit reports identifying any breaches of financial regulations to the relevant entities along with recommendations for remedial measures. The Chairman of the SFAAI also must submit a summarized audit report to HM Sultan Qaboos, highlighting any failures of the relevant entities to implement the SFAAI’s recommendations.
The SFAAI also conducts special audits at the specific request of the government – for example, special audits of government-controlled companies in the oil and gas sector or of pivotal financial institutions or government socio-economic programmes. The government and other entities that are subject to state audit by the SFAAI are as follows:
• all Ministries and government agencies that constitute the Administrative Apparatus of the State;
• all companies in which the government controls 51% or more of the shares;
• government pension funds;
• public authorities and other bodies which receive financial grants from the government or in which the government owns shares; and
• publicly or privately owned companies which have been granted concessions by the government for a public utility or for exploiting the country’s natural resources.
As the government’s financial watchdog, the SFAAI is empowered to identify systemic weaknesses and to take remedial steps to address them, rather than narrowly restricting its focus to irregularities in individual transactions. The Royal Decree changing its name could presage a further expansion of the SFAAI’s administrative mandate beyond its present financial functions. We shall watch with interest for further developments in this field.
Tuesday, May 31, 2011
Emerging Signs of Change to Oman’s Audit Law?
Monday, May 23, 2011
Investment Management in Oman
As the Sultanate continues its drive to diversify the national economy, the past few years have witnessed both the growth of existing companies and a flourishing of new ones. With expanding industries, a robust and conservative capital markets infrastructure and increasing trade, Oman stands poised to offer an array of attractive investment opportunities. Not surprisingly, a number of investment funds and investment managers, both domestic and international, are showing increased interest in Oman.
In order to establish or manage an investment fund, it is necessary to comply with the rules and procedures of the Omani laws and regulations that govern the capital markets sector. This article provides a brief overview of the legal and regulatory framework for the investment management sector and answers a pair of frequently asked questions.
The Legal and Regulatory Framework
The Capital Market Law, established by Royal Decree No. 90/1998, provides the legal framework for, among other things, the Muscat Securities Market, the authorities of the Capital Market Authority, and general regulation of Omani capital markets activity. With regard to investment funds, the Capital Market Law prescribes general organizational and operational requirements, while more detailed requirements are set forth in the Executive Regulations of the Capital Market Law issued by Ministerial Decision No. 1/2009.
However, we note that this legal framework is currently best suited to conventional investment funds such as mutual funds. Certain provisions of the Executive Regulations – for example, requiring subscriptions to a fund to be fully paid up front or requiring equal terms for all investor classes – could make it more challenging for some alternative investment funds, such as private equity funds or hedge funds, to operate in Oman. As the Omani authorities continue their drive to enhance the nation’s capital markets, we will continue to monitor the development of this legal framework.
Which kinds of capital markets activities require a license in Oman?
The Capital Market Law states that the following securities-related activities require a license from the Capital Markets Authority:
• promotion and underwriting of securities or financing of investment in securities;
• participation in the establishment, or in increasing the capital, of companies using securities;
• depositing, clearance, and settlement of securities transactions;
• the establishment and management of securities portfolios and investment funds;
• brokerage in securities; and
• management of trust accounts and custodianship of securities.
Note that establishment and management of investment funds are included on the above list and require a license from the Capital Markets Authority.
Are there general rules on a fund’s investment allocations?
The Capital Markets Law and the Executive Regulations prescribe an array of investment rules. Among these, the most general are:
• an investment fund shall invest at least 75% of its capital to achieve its main investment objectives;
• an investment fund that invests in securities:
o shall not hold more than 10% of the outstanding securities of any single issuer;
o shall not allow its investments in the securities of any single issuer to exceed 10% of the net asset value of the fund (this provision does not apply to index funds); and
o shall not borrow more than 10% of its net asset value; and
• an investment fund investing in real estate shall not borrow more than 30% of its net asset value.
Wednesday, May 18, 2011
Oman’s Anti Money Laundering and Combating Terrorist Financing Law
As a bastion of stability and security in a sometimes volatile region, and with a robust regulatory and business environment, the Sultanate of Oman tends not to experience major problems with respect to money laundering or terrorist financing. However, as noted in a report by the U.S. Department of State, Oman’s long, rugged coastline remains susceptible to regional criminal activity including terrorism, maritime piracy, smuggling and the traffic and sale of illegal drugs.
Oman’s Anti Money Laundering and Combating Terrorist Financing Law (the “AML-CTFL”), which was promulgated as Royal Decree No. 79/2010, has established a framework for classifying, investigating and punishing money laundering and terrorist financing offences.
What is ‘money laundering’?
Under the AML-CTFL, a money laundering offence will be deemed to have taken place when a person handles funds knowing that such funds are derived, directly or indirectly, from the proceeds of a crime or from participation in criminal activity.
Acts of money laundering could include the conversion, transfer or deposit of such proceeds, with the intent to conceal or disguise the origin of the proceeds, or the possession or use of such proceeds.
What are ‘proceeds of crime’?
For the purposes of the AML-CTFL, proceeds can encompass a wide variety of assets, including currencies, commercial paper, securities and any property or tangible or intangible asset that has financial value.
When we talk about the ‘proceeds of crime’ in connection with money laundering, we are referring to proceeds which were derived – even indirectly – from crimes, including terrorism, illegal drugs, piracy, bribery, corruption, kidnapping, human trafficking and embezzlement.
Terrorist financing
The AML-CTFL singles out terrorist financing, which is deemed to take place when a person raises funds or provides funds, directly or indirectly, knowing that such funds will be used, wholly or partly, to finance terrorist activity or a terrorist organization. This financing can take place in Oman or abroad.
With both money laundering and terrorist financing, it is interesting to note that the links to the activity do not need to be direct in order for the offence to be convictable; however, the person committing the offence must have knowledge of the underlying illegal action.
Thursday, May 12, 2011
Peaceful Strikes Under Omani Law
Although the Sultanate has avoided the degree of social unrest that has arisen elsewhere in the region, protests including employee strikes have occurred in Oman during the past few months. It is not well known that Omani law provides a framework for conducting peaceful strikes, which employers and employees alike would benefit from understanding more precisely.
This article sets out the procedures to be followed by employees to ensure that their strike is carried out lawfully and their demands are made legitimately, as well as the steps available for employers to try to resolve any disputes with their employees in cooperation with authorities in a fast and efficient manner.
The statutory basis for strikes
Ministerial Decision No. 294/2006, as amended (“MD 294/2006”), which was promulgated by the Ministry of Manpower pursuant to Article 107 (bis) of the Labor Law, regulates several aspects of employer-employee relations, including the procedures for holding peaceful strikes. MD 294/2006 states that employees may hold a peaceful strike to demand “the improvement of working conditions and circumstances”. It should be noted, however, that strikes are prohibited in establishments that provide essential public services.
The required procedure
MD 294/2006 sets out the following procedure for employees to hold a strike. First, the employees’ labor union or representatives must provide to the employer, at least three weeks prior to the planned date of the strike, written notice of the employees’ intention to hold the strike. The notice must indicate the employees’ reasons for holding the strike as well as the employees’ demands. This same notice also must be furnished to the Ministry of Manpower and to the relevant local government authorities.
Resolving the strike
MD 294/2006 provides that, upon receiving notice of the planned strike, the Ministry shall attempt to form a committee consisting of representatives of the employees, the employer and the Ministry itself, with the goal of resolving the employees’ demands and ending the dispute. The strike must cease and the employees must return to work upon the employer’s and employees’ representatives agreeing to take part in the committee and commencing negotiations. Upon commencement of the negotiations, the committee must reach an agreement within four weeks; otherwise, the dispute shall be referred to the court system.
However, MD 294/2006 is not clear on its face as to whether either party – the employer’s representatives or the employees’ representatives – is obligated to come to the table and join the committee to negotiate. For example, if the employees could ‘opt out’ of joining the committee, they might not have to end their strike and return to work. If workplace strikes continue in Oman, this likely will be an important area to watch for further clarification from the legislative or judicial system.
Friday, May 6, 2011
Precautionary Measures
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An issue which often causes a lot of concern is injunctive relief.
From time to time, bank accounts may be frozen and other precautionary measures put in place by the Omani court. Application is often made to the Judge in charge of Emergency Measures, which is an ex parte, paper application which involves no court hearings.
A typical scenario works like this: a Claimant sues a Defendant and becomes worried that the Defendant may have meagre assets against which to enforce a final, non-appealable court judgment.
This fear is perhaps justified given that it may take one or two years from the date of filing a case to actually obtaining a court judgment which can be enforced.
In such circumstances, the Claimant applies in writing to the Judge in charge of Emergency Measures, explaining the circumstances, and the traditional request is for all the bank accounts of the Defendant in Oman to be frozen, so that monies can flow into those accounts, but not out.
The Judge makes a decision on this application without informing the Defendant.
Indeed, it is often the case that the Defendant's first knowledge of an injunction being granted is when a representative of the Defendant attends the Bank to perform a routine transaction and is alerted by the Bank that an injunction has been put in place by court order.
However, the injunction can be challenged by the Defendant, but to do so, a fresh court case has to be filed against the Claimant, and in the meantime, the injunction remains in place.
A Claimant may also seek an injunction as regards property in the hands of a third party. For instance, if A sues B and comes to know that C is about to pay a large sum of money to B, a request might be made to the Judge in charge of Emergency Measures to injunct the monies so that C has to retain them and cannot pay them over to B.
Lawyers are often asked what is the standard of proof required to convince a Judge to issue an injunction order? The answer, unsatisfactory as it is, is that what is required is whatever documentary evidence and skilled written argument it takes to persuade the Judge! From experience, it does seem that the Judges are especially concerned about litigant parties who could be perceived to be a "flight risk" or who have strong ties with overseas countries, especially with countries outside the GCC region. It could well be that the Judges are mindful that an Omani court judgment may not be enforced by countries outside the GCC.
So, what is the first thing to do if your assets are injuncted? The starting point is for a lawyer to go to court to peruse the file and to obtain a copy of the injunction order.
The next step is to file a court case against the beneficiary of the injunction.
There are a number of statutory provisions which provide technical, procedural reasons as to why the injunction should be cancelled by the judiciary.
By way of example, Article 375 of Royal Decree 29/02 (as amended) states: "The judgment debtor should be notified of the attachment minutes and the relevant order within ten days from the date of levying it, otherwise it shall be considered null and void."
Accordingly, the Courts have a right to cancel the injunction if a Court official does not serve the injunction order on the affected party within 10 days after the Judge in charge of Emergency Measures signed that order.
In conclusion, the area of injunctive relief and precautionary measures under Omani law is an intricate and complex subject. It is also little-known that a party can still apply to the Omani courts for injunctive relief even when the contract in question states that any dispute will be settled by arbitration. This is because courts always have the right to make injunction orders because an injunction request is considered to be an ancillary request, which is separate and distinct from the issue of which body has jurisdiction over the substantive dispute.
Friday, April 29, 2011
Courts versus Arbitration
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There is often a lack of understanding about how Oman’s Arbitration Law (Royal Decree 47/97 as amended) works. The truth is that this law provides a viable alternative to having a dispute heard by the Omani courts.
The fundamental difference between the Omani court system as opposed to the Omani arbitration system is that an Omani court case may go through three tiers of justice (Primary, Appeal and Supreme), whereas an arbitral award is final, with no right of appeal, and it is extremely unlikely that the Omani Courts would nullify an arbitral award. This means that almost certainly an arbitral award will lead to the end of the dispute, without any ability to appeal or overturn the arbitral award.
The best time to agree on arbitration is in the contract at the start of the relationship with your counter-party. For instance, if party A desired to have any dispute heard by an arbitral panel, using Omani Arbitration Law as the procedure for such arbitration, it is best for the contract to state: “Any dispute will be finally settled via arbitration in accordance with Omani Arbitration Law (Royal Decree 47/97 as amended).”
However, the above clause can be further fine-tuned to states how many arbitrators will be on the arbitral panel. Article 15 of Oman’s Arbitration Law states that if the parties have not agreed on the number of arbitrators, the number of them will be three. Accordingly, if the parties wanted a sole arbitrator to hear any dispute, they should say so in the contract.
It is worth bearing in mind that with a panel of three arbitrators, a majority 2-1 decision is sufficient, unless the parties had agreed otherwise in writing before the commencement of the arbitration.
Article 17 states that the Court would decide the identity of the sole arbitrator, if the parties cannot agree on whom it should be. If the panel is to consist of three arbitrators, one party states his nominee as arbitrator, and the other party must then state his nominated arbitrator within the following 30 days. The two arbitrators thus chosen should select a third arbitrator within 30 days after the nomination of the second arbitrator. However, either party can apply to Court if these 30 day deadlines are breached.
An important part of the Omani Arbitration Law is what it states about the time procedural framework for an arbitration case. It is often forgotten that Article 27 says that – unless the parties have agreed otherwise - the arbitration clock starts ticking on the day the defendant receives a letter from the claimant stating that a dispute exists and that, as per the contract, it must be resolved via the agreed arbitration procedures. Article 45 requires that the arbitral award must be forthcoming within 18 months after the clock started to tick, unless the arbitral panel and the parties agree otherwise.
Another salient aspect of Omani arbitration is that the arbitral panel can appoint one expert or more to present a written or verbal report. The Law states that the parties will be afforded the opportunity to present their views on the expert reports. In addition, each party has the right to examine the documentation upon which the expert based his report. The parties are also granted the right to bring their own experts to an arbitral hearing, to present their views on the contents of the reports prepared by the expert appointed by the arbitral panel.
As mentioned at the start of this article, an arbitral award should be viewed as final as there are no rights of appeal and very limited scenarios where an application can be made to the Omani courts to try to have the arbitral award nullified. To the best of my knowledge, the Oman courts have never nullified an Omani arbitral award.
What, then, drives certain parties to agree in their contract to arbitration? The decision may be due to enforceability issues or due to a desire to have the dispute heard by specific arbitrators. The time frame is perhaps also more certain in arbitration as compared with Omani court cases. But weighing up the advantages and disadvantages of the courts as opposed to arbitration is always a complex matter which can only be determined after careful legal study of the specific facts in question at the time of contract preparation.
Monday, April 25, 2011
Oman Cybercrime Law
The Law for Combating Cybercrime (the Law) issued by Sultani Decree 12/2011 last month seeks to address a wide array of illegal activities involving a computer device, computer system or network. A cybercrime can be two-pronged: (i) a crime that targets a computer device or network; or (ii) a crime that is facilitated by a computer device or network.
The Law does not attempt to offer a ‘capture-all’ definition of ‘cybercrime’ but merely states that each crime listed in the Law would constitute a cybercrime. The designated authority for combating cybercrimes is the Information Technology Authority established a few years ago.
The Law defines each form of cybercrime and prescribes a penalty which ranges from a fine to imprisonment from a month to fifteen years. The cybercrimes described below are defined in the Law.
Crimes targeting computer networks or devices
Hacking: is described as intentional and unauthorised access of a website, computer system, or computer network. Varying levels of punishments are prescribed depending on the severity of the crime. For example, the following instances of hacking evoke heightened penalties:
Malicious Software or Malware: The production, sale, purchase, import, distribution or display of software or a computer resource (widely termed ‘Malware’) designed to access a computer system for committing a cybercrime is a punishable offence under the Law.
Crimes facilitated by computer networks or devices
Phishing: The Law appears to have treated rather lightly this important tactic of obtaining vital information from internet users by persons masquerading as a trustworthy source in the cyberspace. It is typically carried out using bogus emails or instant messaging and most of these mails can be tracked to sources outside the country. Some of these bogus emails manage to elude the spam filters installed by service providers in individual email accounts for filtering out these emails. Recently, Oman’s premier telecom service provider, Omantel, issued an alert to internet users to be watchful of suspicious emails, particularly those seeking personal or sensitive information such as username, password, credit card or account details. An attacker could use the information caught using these baits for accessing and using the victim’s account for fraudulent purposes or for spamming. Many affected authentic sources now consequently deem it necessary to add a line to their emails and messages stating that they will never seek ‘password’ or ‘billing information’ from their customers via emails.
Internet Fraud and Forgery: is defined as a fraud or forgery committed via a computer device or network would be classified as cybercrime. This would include modifying electronic data or information with the intention of committing forgery, which attracts the highest punishment under this Law of fifteen years of imprisonment when committed against the government.
The Law defines an electronic fraud as intentional and unauthorised introduction, modification or cancellation of data or information or deactivation of a computer system or network with the intention of committing fraud or causing damage to an end-user or for an illegal gain.
Identity Theft: is defined as the forgery or unauthorised use of a credit card or debit card or the use of a computer resource for gaining illegal access to information in a financial card or unlawful gains made through any of these means are all classified as cybercrimes.
Thursday, April 21, 2011
Procedures of the Omani Courts
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People often ask me about the various stages of an Omani court case.
They usually begin with a statement of claim filed at the Primary Court.
The Claimant grants a power of attorney in favour of their lawyer so that the latter can file the case.
The power of attorney needs to be signed in front of a Ministry of Justice notary.
The Court staff usually want to see - on the statement of claim - the exact physical location details of the defendant's premises.
It therefore makes sense to always obtain the full physical location details of the parties with whom you contract, including your employees, right at the start of a relationship.
The court serves the statement of claim on the defendant and also sets a date for the first hearing.
It is quite common for the defendant's lawyer to attend the first hearing and request an adjournment. The Courts normally grant such an adjournment, especially if the defendant hasn't at that point provided a power of attorney to its lawyer.
When, later, the defendant's defence is filed, it is important that the document should include any procedural defences. For instance, the defendant may allege that the claim is time-barred or that the Courts lack jurisdiction owing to an arbitration clause in the contract. These procedural arguments must always be raised by the defendant in the first court submission lodged on its behalf (ie, in the Defence).
The Primary Court usually orders the Claimant to file a written reply in response to the defendant's Defence.
Soon after that, the Primary Court takes a view on whether or not to appoint an expert to assess the case.
The expert is normally working in the private sector and receives a mission letter from the court telling him the scope of work to be performed.
The expert will normally then hold separate meetings with the claimant and defendant, who can also bring their lawyers to such meetings.
Some experts ask many questions and others prefer to hear a verbal explanation of the litigant party's position.
My view is that lawyers should always be involved in helping their clients prepare for meetings with experts. I also firmly believe that the lawyers should be present at all times when discussions are being held by the expert with each litigant party. This strategy best protects the client and also ensures that they have meaningful back-up when the expert talks about any legal issues.
Also, the lawyer should be working hard on the client's behalf and should help in collating all necessary documents so that the entire scenario is explained in full and accurately to the expert.
The lawyer should also be ensuring that the client will be able to answer any and all questions which the expert may pose.
The lawyer's role, in part, is therefore to help the client explain their position eloquently to the expert, with proper documentary evidence which leaves the expert feeling that all his concerns and questions have been answered.
It is all too easy for an expert to reject an argument if the required paperwork is not provided.
Ultimately, the expert files his report at court, with the claimant and defendant receiving copies.
The Primary Court normally affords each litigant party the right to file a submission, commenting on the expert's report.
The Primary Court, having seen those submissions, may order the expert to provide an additional report, which should address all the concerns about the first report which have been raised.
Sometimes, the Primary Court agrees to appoint another expert if one party is unhappy with the first expert.
But usually the Primary Court reaches its own judgment decision after one expert has filed two reports.
It is not a fait accompli that the Court will agree with the expert whom they have appointed.
It is the lawyer's job to continue to file robust, convincing and persuasive submissions even if the expert's findings are in favour of the other party. This is especially true as the Court may agree that the expert is wrong.
Once a Primary Court judgment is pronounced orally at a hearing, each party has 30 days in which to file an appeal.
During those 30 days, the lawyer can first peruse the court file to see the draft Primary Court judgment and, after that, the written Primary Court judgment will become available.
Any appeal filed with the Appeal Court should document any and all alleged defects in the Primary Court's analysis and the expert's reasoning.
The Appeal Court has the right to appoint one or more additional experts to investigate the issues in dispute.
Once the Appeal Court orally pronounces its judgment at a hearing, each party has 40 days to file an appeal to Oman's third and final tier of justice, the Supreme Court.
It is very rare to have any hearings in the Supreme Court. This is partly because the Supreme Court looks at matters of law only, and is not designed to look at evidential issues.
The Supreme Court, once it has its judgment ready, normally calls both parties to court to hear their judgment. A Supreme Court judgment cannot be appealed.
Sometimes the Supreme Court refers the case back to a different panel of the Appeal Court. In such scenarios, the Supreme Court instructs the Appeal Court to look at the matter again in the context of the Supreme Court's instructions.
So, it is possible for a case to be the subject of two Supreme Court judgments - but the Supreme Court will only once refer the case backwards to the Appeal Court.
This article has hopefully given you a brief but helpful "helicopter view" of the Omani court system.
At times, litigation can be frenetic and it is always best to obtain legal advice long before a dispute arises. In this way, many court cases could be avoided.
Monday, April 18, 2011
Omani LLCs: The Optimum Approach To Drafting Constitutive Documents
Key features of the Oman LLC - is it the appropriate corporate form for a particular business venture and investor relationship?
An “LLC” is probably in practice the form of limited liability Omani company (whether wholly Omani, or mixed Omani/foreign owned) most frequently chosen by investors for the conduct of business in Oman. The reasons for this choice are typically the lower minimum capital requirement of an Oman LLC, and a perception that an LLC is generally simpler and cheaper to operate, with fewer regulatory requirements, in comparison with an Oman joint stock company (an SAO) (either closed or public).
However, if an LLC is the chosen corporate vehicle, it is important for its founding shareholders to recognise at the outset the key differences between an Oman LLC and joint stock company, to be sure that the LLC form is in fact the optimum form of corporate vehicle for their proposed shareholder relationship and the achievement of the proposed corporate objective. Key LLC features which differ from those of an Oman SAO are as follows:
Having said this, if the statutory features of an Oman LLC as described above are considered by investors to be generally appropriate for their purposes, the law applicable to an LLC allows its partners significant flexibility as to the terms on which they contract with respect to the LLC.
An LLC’s corporate agreements - constitutive contract and partners’ agreement
An LLC’s primary corporate document is its constitutive contract which is required to be registered with the Oman Ministry of Commerce & Industry (MOCI). LLC founders often elect to use the MOCI’s standard short form constitutive contract (which contains the bare minimum of corporate terms, e.g. the agreed corporate name, address, capital, partners and their participating interests, objects, etc). In accordance with its terms, the short form contract will be supplemented, where it is silent, by the applicable provisions of the CCL. In addition, LLC founders typically further supplement the short-form constitutive contract by an unregistered partners’ agreement, which may contradict the registered constitutive contract or mandatory provisions of the CCL.
We would not recommend that LLC founders adopt this approach to the incorporation of their LLC for the following reasons. Firstly, the standard terms of the CCL, which will as a matter of law be incorporated into the short-form constitutive contract, may not reflect the founders’ intentions as to their relationship as LLC partners and the operation of the LLC. Secondly, terms of a partners’ agreement which contradict those of a registered short-form constitutive contract, as amplified by the CCL, will not be enforceable. The CCL, although containing some mandatory requirements, allows much greater flexibility to founders as to the terms of their constitutive contract than might be initially thought. Accordingly, contracting on the basis of an expanded and “customised” constitutive contract in the manner permitted by the CCL, together with a partners’ agreement that merely amplifies and does not contradict this form of constitutive contract, is much more likely to provide an LLC’s founders with enforceable corporate contracts on terms which reflect their mutual intentions.
Customising a constitutive contract - key areas where the CCL permits flexibility in constitutive contract terms
As mentioned above, the CCL imposes some mandatory (including some minimum) requirements with respect to an LLC’s constitutive contract. However, the CCL also permits a substantial degree of flexibility as to constitutive contract terms. The following are three key areas in respect of which the CCL permits flexibility, and which can therefore be provided for in a constitutive contract in a manner which reflects the founders’ intentions as closely as the CCL permits.
Partners’ meeting approvals
The CCL prescribes the minimum quorum for an LLC’s partners’ meetings. This minimum quorum can however legitimately be increased in a particular constitutive contract, if the founders wish to ensure that a certain percentage (including 100%) of the “shareholding” is required to constitute a valid partners’ meeting.
The CCL also prescribes minimum percentage approvals for various kinds of partners’ resolutions. Once again, a constitutive contract can legitimately require increased approval percentages for particular types of partner resolutions, if this reflects the founders’ intentions as to partner decision-making.
Partners’ participation in LLC profits and losses and net assets on dissolution
The CCL does not require an LLC’s partners to participate in the LLC’s profits and losses in the same proportions as their capital participations. The CCL merely provides that a constitutive contract may not deprive a partner from any profit/loss participation. Accordingly, under both law and practice, a constitutive contract may specify each partner’s profit/loss participation as agreed by the founders, even down to a very small percentage participation, so long as it does not amount to nil.
Management control
The CCL provides that an LLC’s mangers will be appointed by or pursuant to its constitutitve contract, provided that the same does not contravene mandatory provisions of law. The MOCI’s standard short-form constitutive contract actually names the first managers, incidentally requiring an amendment to the constitutive contract (and thus 75% capital approval) on each change of manager. However, naming the individual managers from time to time in the constitutive contract is not a mandatory requirement of law. A constitutive contract can legitimately be drafted so that, for example, a manager may be appointed either by the partners’ meeting (on majority approval of those attending a quorate meeting) or by the decision of one partner only. As regards dismissal of a manager, the only mandatory CCL provision is that the partners’ meeting cannot be deprived of its statutory right to dismiss a manager. However, once again, providing in a constitutive contract that one partner only may also be so empowered is not contrary to mandatory law. Accordingly, by customising in this way the management provisions of a constitutive contract, it is possible to ensure, if desired, that in almost all circumstances an LLC’s management is within the control of a named partner.
Conclusion
In conclusion, we would recommend the following for investors considering the incorporation of an Oman LLC as the vehicle for their conduct of business within Oman. First, investors should consider whether the statutory characteristics of an LLC as described at the beginning of this article are compatible with their objectives, particularly in terms of their relationship as corporate shareholders/partners. If so, investors should seek to expand on the MOCI standard short-form constitutive contract and additionally customise it to achieve their mutual objectives in a manner permitted by law. In so doing, investors will be ensuring that their mutual agreement regarding the LLC is to the greatest extent possible enshrined in a registered contract which complies with the law, thus rendering its enforceability more certain. Finally, to be enforceable, any additional partners’ agreement should merely amplify matters agreed in the constitutive contract, and in particular should not contradict matters of Oman law as agreed under the constitutive contract.
Thursday, April 14, 2011
The Complexity of Jurisdiction
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An issue which is often overlooked when drafting a contract is the clause about jurisdiction.
“Jurisdiction” refers to the entity which will hear any dispute between the two parties. Dispute resolution is normally performed by the courts or via an arbitration panel. However, it is not uncommon to read legally inaccurate contractual provisions, which state something such as: “The Oman Courts will settle any dispute via arbitration.” Sentences such as these can lead to confusion as regards what the parties’ intention actually was; one party will argue that it is clear that the Oman Courts have jurisdiction to hear the dispute, whereas the other party might argue that the Oman Courts cannot hear the dispute, as the Oman Courts are only empowered by the clause to decide who will act as arbitrator. The confusion arises because resolution via the courts is something different to resolution via arbitration.
Strictly speaking, when the parties agree in a contract that the Courts of a certain country will have jurisdiction, the ensuing case is known as “litigation” and the ultimate decision by the judges is known as the Court’s “judgment”.
In contrast, when the parties agree in a contract that the dispute will be settled by arbitration, the ensuing proceedings are known as “arbitral proceedings”, and the ultimate decision of the arbitrator(s) is known as the “arbitral award”.
It is vital, before entering into a contract, to think very carefully about the entity which would have jurisdiction to hear any later dispute. Let us say that an Omani entity is considering entering into a contractual relationship with an English company. The Omani company may want the jurisdiction to be “Omani Courts”, on the basis that the procedures, etc of the courts here are well-known and familiar to that entity. However, what happens if the two entities later have a dispute which is settled by a final, non-appealable Omani court judgment? The difficulty may only be faced by the Omani entity at that juncture, because obtaining a court judgment is not the same as actually receiving the monetary damages/compensation in your company’s bank account.
The truth is that one has to think, before even entering a contract, as to what might happen if you have a dispute at a later date with your contractual counter-party. Let us say, in the example above, that the English company simply decides not to abide by the final Omani court judgment and, frankly, tries to disregard and avoid it. Let us also suppose that the English company has no assets in Oman and no presence in Oman.
The Omani company has a paper final Omani Court judgment in its favour, but how will it enforce that judgment (ie get the money which the English company has been ordered to pay)? The fact of the matter is that the Omani company may then have to start fresh court proceedings in England, where the Omani court judgment may only have evidential, rather than binding, weight. This could lead to extra cost and years of dispute, at the end of which the Omani company may not get what was decreed by the Omani Courts.
But what would have happened if the contract in question stated that any dispute between the Omani company and the English entity would be settled by arbitration in Muscat? The answer is that the Omani arbitral award would be automatically enforceable in England against the English entity. The reason for this is because both Oman and England have signed the New York Convention on the recognition of foreign arbitral awards. In the above specific circumstances, an Omani arbitral award would have much greater value to the Omani entity as compared with an Omani court judgment.
To conclude, legal advice is always recommended as regards the drafting of the jurisdiction clause. The decisions made pre-contract in this respect could be crucial to your business in a few years’ time.
