For construction contracts with the Omani government, the typical standard terms and conditions are modeled broadly on the early 1980s version of the International Federation of Consulting Engineers (FIDIC) terms and conditions. In light of the prevalence of such off-the-shelf standard terms in government-sponsored construction projects, there has historically been little focus or effort toward enacting a comprehensive legal framework for the construction sector.
However, this lack of a comprehensive legal framework sometimes can pose difficulties in relation to private sector construction contracts. Private parties often eschew standard terms like those used by the government, and instead prefer bespoke, project-specific construction contracts. The problem is that, in the absence of a specific, construction-focused law in Oman, the parties to these customized private construction contracts may find themselves in a legal vacuum in the event of a dispute. While private construction contracts may be well negotiated, it becomes difficult to form a view on the enforceability of certain crucial terms under Omani law. Although most construction contracts are subject to arbitration, it is critical to ascertain the enforceability of certain provisions such as limitation of liability, allocation of risks, exclusion of or caps on liability, consequential damages, and liquidated damages.
For this reason, the relevant authorities would do well to consider enacting a dedicated construction law for Oman.
In the meantime, the most viable approach is to reason by analogy and extrapolate from existing laws to various scenarios specific to the construction industry. This article highlights a few such principles from the Law of Commerce (Royal Decree No. 55/1990), the Consumer Protection Law (Royal Decree No. 81/2002) and the Law Regulating the Establishment and Functioning of Engineering Consultancies (the “Engineering Consultancy Law”) (Royal Decree No. 120/1994), which are often cited as bearing most relevance to the construction industry. While the foregoing laws offer limited guidance in interpreting contractual terms of construction contracts, this of course does not vitiate the need for a robust, construction-specific law to provide greater clarity in one of Oman’s most critical industries.
From the Law of Commerce
The Law of Commerce embodies the fundamental principles for doing business in Oman and contains many implicit terms for sale-and-purchase-of-goods transactions that would apply in the absence of a contract, and that could also be extended by analogy to the sale and purchase of services, including construction services. Thus, in the construction context, generally applicable principles from the Law of Commerce could be cited to argue for the enforcement of milestone requirements, termination provisions or other commercially important clauses of the contract.
From the Consumer Protection Law
Unlike the Law of Commerce, which broadly encompasses all commercial transactions, the Consumer Protection Law applies only to business-to-consumer transactions. However, certain principles from the Consumer Protection Law, such as the obligation to provide defect-free service (failing which the consumer is entitled to compensation), could be cited in the business-to-consumer construction context, for example to argue for the enforcement of warranty clauses.
From the Engineering Consultancy Law
The Engineering Consultancy Law is specific in its approach and applies directly to certain key aspects of construction, such as providing for the joint liability on the engineering consultant and the contractor for defects in the construction of a building or structure even if such defect is attributable to the land upon which such structure is constructed. The ten-year liability period of the engineering consultant and the contractor runs from the date of delivery of the structure; however, any legal action must be brought forth by the owner within three years of detection of the defect.
Thursday, October 6, 2011
The Need for a Dedicated Construction Law in Oman
Friday, September 30, 2011
Limited Recourse to Guarantors in Personal Bank Loans
Guarantees (along with their cousins, indemnities) are an important feature of banking law, which we have discussed in previous issues of the Client Alert. Conceptually, the main purpose of having a guarantor is to give the lender the comfort of having a reliable third party stand behind the obligations of the borrower, so that the lender may have recourse against the guarantor in the event that the borrower breaches its obligations to the lender. As a practical matter, the question often arises: if the borrower defaults, at what point may the guarantor be forced to satisfy the borrower’s obligations?
Until recently, Oman’s Law of Commerce (Royal Decree No. 55/1990) provided that a lender could always claim payment from a guarantor upon default by a borrower, without the lender having to first attempt to recover payment from the borrower. This rule meant that the borrower could effectively walk away from a default situation unscathed, while the guarantor would be left obligated to pay the borrower’s debt without having any defence that the borrower should be pursued first, or at least joined with the guarantor in any proceedings relating to the payment of the debt.
However, in June 2010 an amendment was made to the Law of Commerce to provide an exception to this rule in relation to guarantees of personal loans from banks. The practical effect of this amendment is that a guarantor of a personal loan from a bank may now request the inclusion of language in the guarantee stating that, in the event of a default by the borrower, the bank may not pursue the guarantor unless and until it has (i) obtained judgment against the borrower for the debt and (ii) enforced that judgment to the point where it has recovered all it can from the borrower to repay the debt. The purpose of such a clause is to ensure that all means of recovery against the borrower have been exhausted before the guarantor is called upon to pay the debt or any sums owing in relation thereto.
Please note that the aforementioned amendment does not apply to loans by institutions other than banks or to loans other than personal loans from banks. The amendment also does not go so far as to obligate banks to accept the guarantor’s request to include language requiring first recourse to the borrower.
Yet, at least this amendment does open the door to a more protected position for guarantors. Previously, any such provision in a guarantee requiring that a bank first obtain and enforce judgment against a principal would likely have been declared void by courts on grounds that it was against public policy. Now, if negotiations are sufficiently well-balanced, a guarantor may find it can obtain the bank’s agreement to incorporate language that will provide the guarantor with a certain level of protection.
Wednesday, September 21, 2011
Construction Disputes and Negligent Supervision Claims
Many construction disputes in the Middle East arise out of the alleged negligent supervision of a project. There can be a tendency for judges and arbitrators in the region to assume that, by undertaking to “supervise” a project, an entity is assuming wholesale responsibility for everything that happens in relation to the project – and anything that goes wrong.
But what if the “supervisor” had no role or responsibility in the design of the project? What if the “supervisor” was only being paid to supervise two days per week? What if the constructing/installing entity deliberately ignores or overrides the recommendations of the “supervisor”?
The upshot of all this is that, from the point of view of the so-called “supervisor”, it is important to precisely define and caveat in every contract what exactly is meant by “supervision.”
In many cases, the word “supervision” should probably be left out of the contract entirely, given that “supervise” can be a loaded word in the Middle East construction sector and may connote to some of the region’s judges and arbitrators an unreasonably heightened standard of responsibility.
Instead, it might be preferable for the supervising entity to describe itself in the contract using a different term, such as “monitor” or “compliance monitor”. This would be particularly appropriate when the entity is merely monitoring the other parties on the project and providing suggestions, with no power to bind those other parties or control their actions.
More importantly, the contract should clearly state:
(i) what the monitor’s/supervisor’s responsibilities are;
(ii) how these responsibilities are to be fulfilled (e.g., by maintaining a log noting observed instances of non-compliance); and
(iii) any limitations on the powers to carry out these responsibilities (e.g., if the monitor/supervisor has been granted no powers to bind the other entities involved in the project, this should be explicitly stated in the contract).
In sum, given the tendency of some tribunals to assume that “supervisors” bear wholesale responsibility for the project, it behooves supervising and monitoring entities to negotiate a contract that clearly states what their mandate includes – and explicitly carves out what their mandate does not include.
Wednesday, September 14, 2011
Hotel Management Agreements – Operator Fees
In a previous post we presented an overview of what hotel management agreements are and why they are crucially important to hotel development transactions. Now we shall discuss one of the key specific issues that hotel management agreements cover: operator fees.
The fees that the hotel owner pays to the operating company for managing the hotel, which can be thought of as the contract price of the hotel management agreement, are naturally of paramount importance. Indeed, operator fees are one of the critical issues that are often agreed by the hotel owner and the operator up front via an initial letter of intent or memorandum of understanding, before the parties even begin to negotiate the hotel management agreement in earnest.
Operator fees typically consist of the following:
• the base fee;
• the incentive fee; and
• other fees and/or reimbursements.
Base fees
Under most hotel management agreements, the operator receives an annual base fee equal to a percentage of the hotel’s gross revenues for that year. The base fee percentage is heavily negotiated between the hotel owner and the operator. Although base fees for large, international-grade hotels frequently range between 1 to 2 percent of the hotel’s gross revenues, the figure which the owner and operator arrive at will depend on a variety of factors, including:
• current market conditions;
• the parties’ relative bargaining power; and
• the unique characteristics of the hotel in question.
Incentive fees
In addition to base fees, many hotel management agreements also provide for the operator to receive an annual incentive fee equal to a percentage of the hotel’s operating profits for that year. The percentage level of the incentive fee often will be keyed to a sliding scale based on the hotel’s profit margin (e.g., operating profits divided by gross revenues) – the higher the hotel’s profit margin for the year, the higher the percentage of that year’s profits the operator will be entitled to receive as its incentive fee. This structure, of course, is designed to encourage the operator to run the hotel efficiently and to achieve a high profit margin as well as a high level of gross revenue.
Other fees and/or reimbursements
Although base fees and incentive fees comprise the core compensation for hotel operators, the owner might also need to pay additional amounts to the operator (or its affiliates) pursuant either to the hotel management agreement or to a related agreement. These additional amounts, which are sometimes characterized as fees and other times characterized as cost reimbursements, may include payments for such things as (i) technical assistance by the operator or its affiliates in designing or renovating the hotel, or (ii) marketing efforts for the hotel or training programs for staff provided by the operator or its affiliates.
Tuesday, August 30, 2011
Focus on Real Estate: Rental Bonds
Striking a balance in affording statutory protections to both landlords and tenants can be a thorny affair for real estate regulators. In most jurisdictions, the laws tend to shield tenants more than landlords due to the perceived unequal bargaining power between the parties. Certain market-driven measures, such as rent control restrictions and severe constraints on eviction of tenants, often are directed against and work to the disadvantage of the landlords.
Further, in a less regulated market, the breach of a tenancy agreement or loss or damage caused to the leased premises by the tenants can leave the landlords with little legal recourse. This article seeks to shed light on the ‘rental bond’ or ‘rental deposit’ practice used in some jurisdictions to protect landlords against a potential breach of the tenancy agreement by tenants.
A rental bond is the money paid by a tenant as security deposit which the landlord can claim in the event that the tenant causes damage or loss to the premises or otherwise violates the terms of the lease. The legally stipulated value of the rental bond seldom exceeds one month’s rent. A rental bond is not the same as the payment of rent in advance. It is typically lodged with a rental authority when the landlord and the tenant sign the tenancy agreement. At the end of the tenancy, the rental authority inspects the premises to determine whether any amount from the deposit can be claimed by the landlord as compensation for any loss or damage caused by the tenant. A tenant also can transfer the bond from previous tenancy to a new tenancy with the relevant authority holding the bond money until the expiry of the new tenancy.
In the absence of specific regulations governing rental bonds (such as in Oman), the landlord and the tenant may agree in a lease agreement to place the rental deposit in an escrow account. The account may be interest-bearing with the tenant named as the beneficiary for the interest from the deposit. The agreement could provide for the landlord to return the security deposit to the tenant at the end of the lease if no violation of the lease terms has occurred. The landlord, however, may seek to be reimbursed from the deposit for any loss or damage caused to the premises by the tenant as may be assessed by an independent assessor upon expiry of the lease.
The furnishing of rental bonds can ensure proper upkeep of the leased premises. Although there is no specific legislation addressing this area in Oman, the practice of seeking rental bonds is becoming increasingly common among landlords. An appropriate legislative framework for rental bonds can aid in minimising the potential for arbitrary behavior and in streamlining the real estate rental market.
Wednesday, August 24, 2011
Foreign Community Clubs in Oman
In a post last month, we discussed local Omani associations, which are groups formed to carry out not-for-profit social, cultural or charity activities and are registered with the Ministry of Social Affairs, Labour and Vocational Training (the “Ministry”).
This month, we cover a related topic: foreign community clubs. A foreign community club (or a foreign association) is similar, regarding its function and formation, to a local Omani association. However, there are some additional legal requirements for a foreign community club.
As with local associations, the Ministry supervises all foreign community clubs in the Sultanate of Oman. This includes monitoring their activities and issuing instructions and directives to them to maintain the purpose for which they were set up.
Eligibility for foreign community clubs
Each foreign community may establish only one club in the Sultanate of Oman and only one branch thereof in a region (provided that the number of community members is not less than five hundred in that region). Terms and conditions for the establishment of a foreign community club include:
• the number of the foreign community members working in the Sultanate of Oman is not less than two thousand;
• the number of founders is not less than one hundred (excluding those involved in diplomatic missions);
• each founder is above the age of twenty-five years; and
• a fee of OR 200 for the license is paid on establishment and renewal of the foreign community’s club or any of its branches.
Establishing a club
Applications are to be submitted to the relevant department at the Ministry along with the proposed articles of association. The articles of association are then approved by the Ministry and must be signed by all the founders and accompanied by a profile stating the founders’ names, community and professions.
The Ministry then reviews the application to ensure the foreign community club fulfills the necessary requirements to allow the granting of a license. Licenses are valid for two years, and may be renewed via the same process as the original application (except for the signature of the founders), provided approval of the renewal from the annual meeting of such club is submitted by the chairman together with other documents. The renewal application must be submitted to the Ministry at least two months prior the end of the license period.
The name, headquarters, purposes, financial year, number of directors and name of the chairman shall be recorded for each foreign community club at the Ministry. Any amendments must be approved by the Ministry.
Monday, August 15, 2011
Government Directors in a Joint Stock Company
Following the recent changes to the composition of the cabinet of Ministers in the Sultanate of Oman, a number of joint stock companies which are partially or fully owned by the government have been essentially paralysed, from the perspective of corporate action, by the lack of a functioning board; the existing government directors were removed without any new directors having been appointed.
It goes without saying that the board of directors plays a fundamental role in corporate governance. Where the joint stock company is partially or fully owned by the government, the government appoints directors to represent the government’s interests, objectives and goals on the board. Such joint stock companies specify in their articles of association the number of directors who represent the interests of the Sultanate of Oman or any of its administrative units that own shares in the company.
The procedure for appointing a government director is both simple and straightforward. Article 132 of the Commercial Companies Law requires that the appointment of government directors is a decision taken by the Council of Ministers pursuant to the nomination of the Ministry of Finance and the relevant minister.
Furthermore, the law specifies that government directors cannot be removed from their offices except by approval of the Council of Ministers. This clearly indicates that the government is the only party which is able to appoint or remove its directors, without any constraints. The appointment and removal of directors is effective once the ministerial decision from the minister supervising the Ministry of Finance is issued. Upon issuance of this decision, the company then can appoint or remove the director by submitting the ministerial decision to the commercial registry in the Ministry of Commerce and Industry along with the revised list of authorised signatories and other relevant documents.
As a final point, we note that the government directors’ powers are similar to the powers of any other directors. However, the law points out that acts performed by government directors shall not subject the government directors, the Sultanate of Oman or the public entity to liability under Omani company law.
Tuesday, August 9, 2011
Focus on Litigation: Joining Co-Defendants
A defendant in an Omani court case always should consider whether the culpability in fact lies with a party who has not been named as a defendant by the Claimant.
The ability for a defendant in an Omani court case to join in co-defendants is more straight-forward than might be appreciated. This applies equally to joining in Omani and non-Omani parties.
The procedure for joining a co-defendant involves the named defendant making a paper application to the court, attaching copies of the commercial registration documents in respect of the prospective co-defendant(s). This corporate documentation should be obtained from the relevant public register in the country where the entity in question is incorporated.
The defendant also needs to provide the court with full addresses in respect of the co-defendants. Accordingly, we habitually advise that a written Defence always should start with procedural defences, and also should include substantive defences as well.
Provided that a prima facie case is made out, the Omani courts are usually willing to join the other parties into the existing court action as co-defendants.
As an important caveat, we should mention that joining a non-Omani entity may delay the case by some months, as the Omani courts serve such entities with the documentation via diplomatic, country-to-country channels.
Thursday, August 4, 2011
An Introduction to Hotel Management Agreements
With the continued growth of Oman’s tourism sector serving as a centerpiece of the government’s ‘Vision 2020’ economic development plan, one can expect a significant number of new hotels to open in the Sultanate over the coming years.
This article explains what hotel management agreements are and why they are crucial to most hotel development transactions. Next month, we will cover some of the key issues that typically arise in the negotiation of management agreements.
What is a management agreement?
Many hotels, particularly the large-scale, luxury hotels on which the Omani tourism sector is focused, are managed by one of the major international hotel operating companies. These operating companies are the household names whose signage adorns hotels across the globe, such as Ritz-Carlton, Hyatt, Intercontinental or Mandarin Oriental. A number of the international operating companies own some of the hotels they manage. However, many of the operating companies are engaged principally in the business of managing hotels owned by other investors, in exchange for fees.
The management agreement is the primary written contract between the hotel owner and the operating company, setting out the parties’ respective rights and responsibilities, typically in exhaustive detail. There are often other ancillary agreements between the hotel owner and the operating company as well, covering such matters as the use of the operating company’s intellectual property or the payment of the hotel owner’s share of expenses related to activities – e.g., staff training, reservations or marketing – that the operating company conducts jointly for all of the hotels under its management on a regional or worldwide basis.
Why are management agreements so important?
Hotel management agreements are crucial for two main reasons. First and most obviously, large luxury hotels are big business – there is a great deal of money, jobs and prestige on the line for both the hotel owner and the operating company, so management agreements must be negotiated thoughtfully and drafted carefully, commensurate with their high-quantum, high-stakes nature.
Second, hotel management agreements are important because they are the framework that govern a very long-term business relationship. Most hotel management agreements run for a term of at least 10 years and often 15 to 20 years, typically with the option for the parties to extend for an additional 5 or 10 years by renewal. The hotel management relationship often lives on long after the individuals who entered into the relationship – on both the owner and operator sides – have left their respective organizations. Thus, a well-drafted management agreement can play an important part in maintaining a long, mutually prosperous and harmonious relationship between the hotel owner and the hotel operating company.
Monday, August 1, 2011
Oman Investment Funds
Over the next several months, we will examine certain provisions of the Omani Capital Market Law (Royal Decree No. 90/98) and the implementing executive regulations (Ministerial Decision No. 1/2009) pertaining to investment funds. The regulations apply to all forms of investment funds proposed to be established in Oman, including, for example, all forms of collective investment vehicles traditionally known as ‘private equity funds’ and ‘hedge funds’. Earlier this year, the first private equity fund in Oman was launched by a local investment company. The fund managers requested the Capital Market Authority (CMA) to waive certain provisions of the executive regulations to bring the fund more in line with general market practice and make it more attractive to investors and money managers.
Problems with a ‘one size fits all’ approach
Without an express waiver by the CMA, the regulations effectively would prohibit activity in one of the most important segments of the investment funds industry ─ traditional private equity funds and real estate funds. One problem which arises under Article 208 of the regulations provides that ’The capital of the fund shall be divided into investment units with equal rights’. Strictly interpreted, this regulation would prohibit the fund from issuing different classes of units with different voting and/or economic rights. For example, it is common in private equity funds to issue ‘side-letter’ agreements which provide certain investors with special voting, economic, exit and/or other rights. The referenced language would not allow such side letters and, as a consequence, would be problematic for fund managers interested in establishing an Oman fund.
The ‘one size fits all’ approach mandating the issuance of units of equal rights effectively ignores the fact that different kinds of funds are operated for different reasons because they can offer portfolio diversification opportunities, tailor-made solutions and higher returns.
Frequently negotiated investor rights and terms
It is standard within the fund industry to structure a fund, for purposes of both fund marketability and governance, so as to attach different rights to different classes of fund units, whereby certain units may carry economic rights only, and other units may carry voting rights only or both economic and voting rights. The spectrum of different economic and voting rights associated with units issued by funds, and the varied characteristics of a class of fund units, are usually the result of intense and prolonged negotiations between the manager and one or more sophisticated investors, where the investors may not subscribe to the fund (and the fund therefore may not launch) in the absence of the negotiated, preferential terms. Such preferential terms might include:
• shorter lock-up periods (or more frequent redemption dates) or commitment periods;
• reduction of management fees and carried interest payments;
• special redemption or excusal rights upon the occurrence of “key person events”;
• enhanced fund reporting and/or valuation requirements, carve-outs to transferability restrictions relating to the fund interest and other rights accommodating tax and/or regulatory issues specifically applicable to the investor; and
• specifically in relation to Omani pension funds acting as investors in funds, such pension funds generally negotiate special rights to accommodate the Omani law requirements that a pension fund invest at least 50% of its assets under management in Oman.
In respect of the recently launched Omani private equity fund, the CMA has demonstrated its willingness to waive the referenced restriction in Article 208 of the executive regulations. An amendment of the regulations to remove the blanket restriction on the issuance of different classes of investments units in a fund by the CMA undoubtedly would provide more certainty to the market and assist in attracting sophisticated investors and money managers to Oman investment funds.
