Oil Investment Contract / Companies Commercial Law

¶ … Commercial Contract Law to Increase Oil Investment in Kuwait

When it comes to the industries of natural resources and energy, the law of investment protection is particularly of great concern. According to the statistics of July 2013, it was revealed that 25% of the cases that have been registered with ICSID have addressed the issues concerning gas, oil and mining sectors. Moreover, another 12% of the cases are relevant to other energy sectors that include electric power.

Investments in the energy sector, including oil, are usually very capital-intensive as well as long-term in nature. Moreover these investments are regulated at the greatest levels, and are of concern for the public, since valuable resources are involved along with the essential services. These are the main reasons why such investments are extremely vulnerable to national and governmental interface. The aforementioned attributes of investment in the energy sector increase the possibility of conflicts arising out of changing laws and regulatory policies over the duration of a project.

Considering the nature of such investments, many activities in the sector of energy will normally succeed for protection as a part of applicable investment contracts. Disputes can surface in association with grey areas that include hedging arrangements and pure services and sales contracts. In the aforementioned circumstances, changes will be made with respect to the specific nature of activities as well as the specific definition of an eligible "investment" pertaining to the applicable investment agreement.

Oil has always been the most precious natural resource of the State of Kuwait. According to the Constitution of the country, the State is the owner of all the oil resources, and controls these resources as well. However, the State alone does not have the power to exploit, safeguard and utilize these oil resources, as it has been stated in the Kuwaiti Constitution, Article 21; Law No. 1 of 1962. Considering that, the right to monopolies, or concessions for the exploitation of the natural resources of Kuwait, which includes oil, can only be created by the presence of a law, and that too for a restricted period of time, as it has been stated in the Kuwaiti Constitution; Article 152 and 153.

In the year 2012, Kuwait intended to amend its foreign direct investment law, since the producer of Persian Gulf oil embarked up to a $111 billion plan so as to modernize the Kuwaiti economy, as it was reported by a government official. The head of the Kuwait Foreign Investment Bureau, Sheikh Meshaal Jaber Al-Ahmad Al-Sabah, stated that the foreign investors that come to Kuwait to look for the achievement of important licenses a very hard and prolonged procedure, as well as to get the required land for their projects. He further went on to say that the suggested amendment should cover up for the pitfalls in the law.

The State of Kuwait expects the private investors in oil to make a contribution almost half of the four-year development program, which started in the fiscal year 2010-2011, in order to make the oil-reliant company economy of Kuwait even more diversified. Kuwait passed the foreign direct investment law in the year 2001, so as to make the foreign ownership limits lenient, and the State is looking out for investments in projects that include an oil refinery worth of $14 billion. In the year 2007, the parliament of Kuwait also passed a law pertaining to the reduction of tax burden on the international companies, for the first time in a time period of more than 50 years. In the same year, a law was also passed to reduce the corporate tax or foreign companies to 15%. The tax rate previously was 55%. In the year 2010, Kuwait was considered to be the lowest receiver of foreign direct investment among the six Gulf Cooperation Council states, even though it was the fourth-biggest producer of oil in the Organization of Petroleum Exporting Countries. The direct foreign investment of Kuwait was noted to be $6.5 billion, as stated in the data on the United Nations Conference on Trade and Development website. The biggest economy in Arab was Saudi Arabia, with a direct foreign investment of $170.5 billion, United Arab Emirates named second with $76.2 billion.

When the Constitution was drafted to include the clauses, which includes the private sector as well as the foreign oil companies were in control of the interests. Moreover, the private sector also has rights in Kuwait oil resources that were subjected to pursuant to many different concessions. In the year 1975, by engaging a series of legislation and agreements, these were the rights that were reverted back to the government of Kuwait. These rights were represented by many different State organizations, and State completely owned organizations, which included the Kuwait Petroleum Corporation, Petrochemicals Industries Company, Kuwait National Petroleum Company, and Kuwait Oil Company.

There many laws and legislations that is associated with direct investment in countries, which includes oil investment. The background has been provided for the understanding of the readers about the situation of oil investment and its laws in the world in general, and Kuwait in particular. It is important to note here that when investment in any sector is being made, the contract or commercial laws have a role to play. Through this paper, we seek to explore the contract and commercial laws, and then consider these laws with respect to the situation of oil investment in Kuwait.

Part I

General Contract Law

The agreements of sale transactions made between different countries, which act like parties, are termed as international commercial contracts. There are many methods that can be used to enter the foreign market. These approaches are made after considering the risk, control and balancing costs of the transactions. The first method is direct export, the second is the engagement of a foreign agent to distribute and sell. The third is the use of a foreign distributor so that he can make transactions with the customers directly. In order to make international contracts, the countries (or the companies) can also manufacture their products in any foreign country. There are two ways of doing this. Firstly, they can set up a business in the foreign country, or they can acquire a foreign subsidiary. One of the other ways of entering into an agreement with another country is by licensing a local producer, or by becoming a part of a joint venture that has a foreign entity. Apart from that, countries can also deploy a franchise in the foreign country to enter the international market.

KPC was established in the year 1980, as an organization that came under the category of public corporation. It is important to note here that is the primary player in the Kuwaiti oil sector, and therefore is of great importance when it comes to the laws that have been defined in Kuwait with respect to oil investment in the country. In general, the objectives of this corporation include the engagement of the corporation in all activities that are associated with the petroleum industries, as well as the hydrocarbon materials during all their stages. Apart from that it also engages in the industries that are situated in Kuwait as well as in other countries, as permitted by the Article 3 of Law No.6 of 1980. Taking the support of Article 5 of Law No. 6 of 1980, KPC also has the right to engage in any activities that could assist it in achieving its objectives by making the right kind of partnerships. These partnerships can be made with companies or organizations that take part in similar activities as KPC, and that have the potential to help KPC to realize its objectives. As we observe in the past, KOC, KNPC, and PIC were owned partially by the State in association with private investors. In the year 1960, a Decree was given by the government as a result of which KNPC was established. A partnership was made between the private sector and the State, and the share between the two was 40/60% respectively. The main objectives were to become a part of the oil industry inside, as well as outside Kuwait, as well as to become involved in any stage during the process of oil production, which would include exploration of natural gas and petroleum, transportation and refining. In the year 1963, PIC was established between the local private investors and the State, as commercial company, the purpose behind the establishment of this company was to establish a petrochemical industry for Kuwait. Finally, in the year 1974, the State became a part of an agreement, which is known as the Participation Agreement, with Gulf Kuwait and BP Limited, which resulted in the creation of KOC. The latest objectives of this organization are to explore, exploit, refine, and produce oil for the local market, as well as for the purpose of oil investment and export purposes. A series of legislations were passed in the mid of 1970s, through which it has been aimed that the oil sector should be nationalized. As a result of this objective, KOC, KNPC, and PIC are now owned by the State completely. Finally, by virtue of the law that was devised in the year 1980, KPC was established, and all of the companies were made a part of KPC.

At this point, it is important for us to bring into limelight the aspects of the Kuwaiti law that is particularly relevant to the investment of oil, inside as well as outside the country. A contract is defined as an agreement that creates obligations that are then enforced by law. The fundamental aspects of a contract are consideration, mutual assent, legality, and capacity. In some countries, the aspects of consideration can be fulfilled by a substitute that is reasonably valid. The potential remedies that exist once a contract is breached include consequential damages, general damages, specific performance, and reliance damages.

Basically, contracts can be referred to as promises that are enforced by law. The law is there to provide the two parties, which have entered a contract, with remedies in case a contract is breached. Moreover, assistance is also provided to the parties to recognize their performance of an agreement as their obligation or duty. Contracts come into existence as a result of the existence of a duty, or because of a promise that is made by both the parties or by one of the parties. It is important for contract to become legally binding once a promise is exchanged for sufficient consideration. Adequate consideration is considered to be an advantage of a detriment that is received by a party that fairly and reasonably pushes them towards making a promise or a contract. For instance, promises that are considered to be gifts in nature are not included in the category of enforceable contracts since the individual satisfaction that is received by the one who grants the promise is not the same as that is received in the case of adequate consideration. Some promises, which are not labeled as being contracts, may in some special conditions be implied if one of the agreeing parties has depended upon the detriment on the reassurances of the other party.

In most of the cases, the contracts are controlled by common (judge made) and state stator law as well as the private law. Private law fundamentally includes the terms and conditions on the basis of which an agreement between two parties has been made, after an exchange of promises. This private law has the potential to dominate many rules that have otherwise been established by state law. It is the requirement of the statutory law in some contracts to put the exchange of promises in writing, and therefore they need to be executed in a particular way with some formalities. On the other hand, in some other cases, the parties are allowed to become a part of an agreement even if they do not sign a formally written document of the contract.

Sections of the Contract and the Law

The Ministry of Oil (Kuwaiti Government) has provided the interested party with a complete document that includes the Kuwait Oil Company Policies And Regulations Of Purchasing. This paper was published in the year 2008, and it contains all the required information that the interested parties need to know about the law and legislation pertaining to the investment of oil in the country, especially with respect to the contract law. The document has been divided into various sections. After explaining the purpose of the document, the standing instructions have also been explained. The first section is based on the definitions; the second section explains the material requests and termination of the contract or agreements. The third section is about the competitive procurement. The fourth section goes on to describe the blanket purchase order. The fifth section of the document explains the single source procurement; the sixth section explains the repair order. The seventh section of the document goes on to explain emergency or major incident procurement, the eighth section is about vital procurement, the tenth section is about canceling the purchase order, meanwhile the eleventh section explains liquidated damages. As for the twelfth and thirteen sections, they are about claims and invoice respectively. In the section of regulatory provisions, all the articles pertaining to oil investment in Kuwait and the rules and regulations have been explained individually.

According to the commercial contract law, the written business contract is also divided into several sections. The first section of the contract mentions the names of the parties. The second section writes about the details of the agreement. The third section provides further details about the contract by mentioning and explaining the terms and conditions of the contract. As for the fourth section of the contract, it has to be based upon the signatures of both the parties and the date.

Breaking Law in Kuwait

As mentioned before, the state of Kuwait follows the civil law system. Article 2 of the constitution mentions that Islamic Sharia is the major source of law. Nonetheless, it is not the exclusive source. The legal system of Kuwait works within the Sharia for some laws and for some it permits actions outside Sharia as well. The Legal system of Kuwait is of a recent origin. In simple terms, it is a mixture of Islamic Sharia, Latin Civil Law and the French Law. There is a conditional court that acts as a judicial review and examines the constitutionality of the laws. All the decisions made by different states are then referred to this court.

The Kuwait Legal system has basically three levels of courts. There is first instance where the cases are taken according to their gravity. The second level is the appeals court and cassation is at the last level. The function of the Court of First Instance is to overlook the cases of personal, civil, commercial and labor affairs along with other administrative cases. If a person does not agree with the decision of the first level of court, they can take their case to the court of appeal. Therefore, regardless of what crime you commit, first you will be taken to the First Instance Court. The law and the punishment vary from crime to crime, as the legal system is an amalgamation of Sharia and Latin law.

The Character of Contract Law

A contract is a legally enforceable promise or a set of promises that have been from one party to another. A contract is created so the rules and regulations of a certain deal are laid out in plain terms. This is there is no confusion or ambiguity remaining. Whenever two companies are present in a business deal, there is no saying who is truly honest. There is no guarantee of a person or a company. To prevent any mishaps or any tricks, contracts are made right when two parties get into agreement with one another.

The binding effect clause reassures the common law principles that only the parties to the agreement can attain the benefits of the agreement. Furthermore, it is only these parties or their permitted successors or assigns who are obligated by this agreement. The major reason this effect is present in contract laws so third parties do not jump in to attain their right from the contract.

Binding effect of contract

Contract is sort of an agreement that is created with the idea of certain obligations. The validity of the contract can be confirmed by looking around the terms of the contract. The idea of terms of contract will be discussed in the sections to follow. Nonetheless, it is these terms that are important in creating that binding effect of the contract.

These terms that were agreed by the person created a sort of a binding agreement between the two parties. For instance, if the contract is about two people who were dealing in terms of property. The seller and the buyer are agreeing to one contract of that property. The buyer agrees to the binding agreement on the seller because the seller legally gave this property from under his possession to the buyer.

Many a times, the binding effect of a contract is also styled or combined in the no third party beneficiaries' clause.

Consideration is the idea of legal value in connection with contracts. Nature of consideration depends on what it is that has been promised in making a contract. This can be money, services, actions or physical objects. In simple terms, a contract is like a promise. This promise is not binding if there is no consideration for the promise.

When the contract is bilateral, it has to be supported by some form of consideration. If this is not supported, then it is not a contract. Many a times, parties do make contracts without the idea of binding or any nature of consideration. Even though they have enrolled themselves in some sort of contract, but the court cannot help them if something happens.

The consideration that is placed should be legal because if it is not legal, the contract is not binding. A failure of consideration occurs when the promise is not fulfilled, and this is what denotes a breach of the contract.

The content of a contract

The content of a contract are referred to as terms or clauses. An agreement is usually made up of various terms. Regardless of how big or small a contract is, it will definitely have terms. The major or more important terms refer to the price being paid or the goods and services that are being processed.

There are two types of terms when it comes to a contract.

Express terms are those that are written down by the parties themselves. I

Implied terms are read into the contract by the court depending on what sort of agreement is taking place.

The implied terms also talk about the parties' apparent intentions or on the sort of law that is important. When considering express terms, the courts go on to consider a variety of facts. The statement that has been qualified as an express term should be important. In other words, irrelevant details should be excluded from the contract. The timing of the statement holds importance but if the statement is otherwise strong enough, time delay can be overlooked.

Another very important point in defining and extinguishing express terms is the knowledge of the parties. For instance, when it comes to commercial law, the two companies should have knowledge about the trade of the good that is concerned. Furthermore, they should be aware of the policies that will guide their contract and ultimately affect their business.

When it comes implication by law, there are many terms that have to be added in commercial law. A very important term is the duty to act in good faith. This term should be added onto commercial contracts. Contracts are produced against a background of stated and unstated understandings of the parties. These then go on to give meaning to the terms enlisted in a contract. In 2013, even the High Court of the United States declared that all contracts must mention the idea of honesty and working in good faith in the contract.

Most the implications revolve around the behavior and the actions that are carried out by both the parties. Both parties should act honestly and avoid improper behavior. Any behavior that falls short of actual dishonesty is thus considered a violation of these terms.

Another important point in contracts is the exclusion clause. Exclusions clauses are basically terms in a contract that go on to restrict the rights of different parties to the contract. This can be included the idea of binding as well. A true exclusion clause is one that recognizes the potential breach of contract and then excuses liability for the breach.

Overall, when it comes to the definition of terms, both he parties should be extra careful. These terms define the entire essence of the contract and therefore ensure that all processes are carried out smoothly. There is a lot of attention given to the definition of the terms so that no party is at loss if a breach of the contract occurs. Both the parties should have a clear-cut idea on these terms so that conflict is reduced in the future.

Construction of a contract

When it comes to the construction of a contract, all the contractual agreements remained subject to the KOC Tender Committee review. In other words, whenever a contract is made between two parties, it needs to be reviewed to make sure that everything is well in place.

Whenever any party or business is entering in a relationship with a customer or a contract, they need to know the rules of business. The parties making the contract should be aware of the various loopholes that are present. This would ensure that the contract made encompasses the different areas of interest.

The Kuwait Oil companies ensure that all the terms remain the same and hence applicable in different areas. It has been mentioned in the Kuwait Oil Board Policies that a contractor should ensure that all subcontracts should include the various engineering and technical data in such a way that the relevant terms remained relevant. In simple terms, this means that the contract should be constructed in such a way that if it were to be subcontracted, the subcontractors would be bound by the same terms and conditions.

The terms should be clear in such a way that no ambiguity remains amongst any of the subcontractors or citizens of Kuwait. These citizens are therefore required to work in accordance with the terms and conditions that have been created.

No matter how many parties are present in the contract, the contract should be made as simple as possible. The terms should be constructed in such a way that a person can deduce the meaning from these terms. Nonetheless, there are many companies who make use of various strategies to confuse the other parties. They try to make terms so complicated that the other party is not able to figure out what is happening.

Even though this approach might be beneficial, it can go against the rule of law. Furthermore, it can also create more problems and chances of conflict in the future. When a statement is added to the contract and the contract is signed, that statement then becomes a term of the contract.

This term then becomes relevant and valid regardless of how complicated or clear it is. Another important thing to note is that it becomes part of the contract, even if the other part has read it or not. Therefore, both the parties should be extra careful in defining and distinguishing the express terms of a contract. They should ensure that these terms agree to the standards that they have themselves established. In addition, they should be suitable and acceptable by the Kuwait Oil Company so that no confusions are present in the future.

Vitiating factors and breach of contract

The violation of petroleum contract comes from various points that can be breached in the contract. In order to make this clear, we should provide the definition of a breach of contract. A breach occurs whenever there is a unilateral revocation of the contract by one of the parties. A breach can also occur when non-fulfillment or incapacity of one of the contracting party in respect to its obligations listed down in the contract.

There are many types of breeches that can occur in the Kuwait Oil company contracts. The Middle East is especially prone to violence or disorders such as civil wars. Any such mess or uprising that can cause damage to the investment or investments of a foreign investor in the Kuwait Oil company will thus be considered a breach of the contract. The host country, which is Kuwait, in this case is entitled to protect the interest of the foreigner. Surely, any war or unrest is not the responsibility of the oil company. However, the Kuwait Oil company should remain alert and try to protect its interests along with the interests of the foreigner as well.

Another breach of the contract can occur when it comes to legislation on the environment. It is here again that the idea of terms and clauses becomes significant. If there is a term or clause that talks about respect for environment, both the companies are entitled to follow. If any private company does not respect the environment, the host company can break the contract after giving many warnings. Therefore, we see that breach of contract is a highly sensitive matter and can cause many damages for the concerned parties.

Mistaken Terms

Mistaken Terms of contract that lack equity: This means that if the contract is void when it comes to law because of any mistake, equity follows the law. In simple terms, specific performance might be refused and the contract can then be declared useless. The contract that is made should be quite comprehensive and should not include any wrong information or facts. The presence of any doubtful assertions of facts can then question the validity of the contract and make it less powerful.

Mistaken terms of undue influence: A contract can truly become binding when both the parties consent to the terms and conditions laid down in the contract. In simple terms, a person should not be imposed to agree on a contract. It is an expression of free will and both parties should do it with their own choice. A contract is not something that can be placed through trickery or through fraud.

Undue influence arises when there is excessive authority or pressure brought onto a party. This is such that the free will of the party is compromised. The other party does not necessarily remain free anymore. Economic duress is an example of an undue influence. If an oil company is going in loss, it is likely to agree to a contract that is not very profiting. This contract would only be signed because there is some profit but not the profit that the company deserves. Kuwait oil companies are also placed in these positions when there is international pressure on them. Countries like United States politically manipulate the contracts and ultimately place their influence in the dealings.

Mistaken terms by illegality and the consequence of the contract being void:

If the mistake is made by both parties, the court gets to decide on the fate of the contract. However, if one party makes the mistake, then the other party has the upper hand in deciding whether the contract will be void or not.

Discharging the contract

Discharging a contract means that the rights and liabilities created by law under the contract have now been terminated. A party can therefore discharge a contract by many different means. Companies can discharge a contract by performance if the duties mentioned in the contract are completed. If these duties are completed, the contract will come to an end. Another way through which contracts can be discharged is through breach of contract. When a party violates the conditions of a contract, the other party can take action by discharging the contract. When a time limit for contract finishes, that can also provide a means for discharging the contract.