Middle East Commercial Law Developments -- Year In Review (1998)
(March 7, 1999)

  By Howard L. Stovall


Some Middle East governments, in the face of slumping oil revenues and stagnant economies in recent years, may have been tempted to retreat from the rough-and-tumble vagaries of world trade. Much to their credit, however, most Middle East governments have maintained a strategy directed towards integration into the global economy. On the legal front, the year 1998 appears to have been a time for consolidating previous gains, rather than spectacular new advances.

In the following summary, we review some of the more significant commercial law developments which took place in the Middle East during 1998.

1. Investment/Privatization

The Egyptian government continues to encourage foreign investment as an engine for local economic growth. In the past year, the Egyptian government enacted a series of laws designed to facilitate foreign investment. For example:

Egyptian Banking Law No. 155 (1998) permits foreign ownership of Egyptian banks, up to a 10 per cent cap on shares owned by any one party. (That law also provides for the privatization of one of the public sector banks.)
Law No. 156 (1998) amended the Egyptian Insurance Law, removing the 49% ceiling on foreign ownership, permitting privatization of national insurance companies, and abolishing the ban on foreign nationals serving as corporate officers.
Law No. 1 (1998) amended the General Egyptian Maritime Organization Law, permitting the private sector (including foreign investors) to conduct most maritime transport activities, including loading, supplying and repairing ships.
Law No. 18 (1998) authorized the sale of minority shareholdings of electricity distribution companies to private shareholders.
Law No. 19 (1998) changed the status of the telecommunication authority (Telecom Egypt) to a commercial shareholding company, with the government as majority shareholder.
Over the past year in Saudi Arabia, various government ministries and the Consultative Council (the Majlis Al-Shoura) have actively considered amendments to the Foreign Capital Investment Code, intending "to create an atmosphere more attractive to the foreign investor, through reduction of a great deal of bureaucratic measures, to review existing incentives and to develop new ones." Among the additional incentives under consideration: waiving the de facto 25% minimum Saudi ownership requirement for companies established to perform strategic or export-oriented projects; granting a supplemental 5-year holiday from Saudi income taxes for projects in qualified areas; and (albeit more controversial) a reduction in Saudi income tax rates (which currently rise to 45% of net taxable income).

Saudi Arabia made notable strides in 1998 toward privatization in the telecommunications and power sectors. Privatization of the telecommunications sector moved forward with the creation of the Saudi Telecommunications Company ("STC") -- as an incorporated commercial entity, the STC will facilitate privatization in this important sector. Later in 1998, the Saudi Council of Ministers announced plans to restructure the power sector as well. The proposal adopted by the Saudi government will create a single unified electricity company for the Kingdom, called the Saudi Electricity Company, absorbing the four current regional Saudi power companies.

Abu Dhabi Law No. 2 (1998), Concerning the Regulation of the Water and Electricity Sector, is among the most recent initiatives of the Abu Dhabi government in pursuit of its privatization program. That law creates the Abu Dhabi Water and Electricity Authority, designed to replace the Abu Dhabi Water and Electricity Department. Pursuant to that law, the Authority will be responsible for organizing and developing government policy pertaining to the water and electricity sector, including matters relating to privatization. The Abu Dhabi law also: establishes the Abu Dhabi Power Corporation which will, among other things, be authorized to conclude agreements relating to the management of production, transmission, distribution and service companies owned fully by the government; and provides for the creation of the Bureau of Regulation and Supervision for the Abu Dhabi Water and Electricity Sector.

2. Companies Law

Early in 1998, the Egyptian Peoples Assembly approved Law No. 3 (1998), amending the Egyptian Companies Law. Under Law No. 3, the procedures for establishing an Egyptian company are streamlined, in a fresh effort to trim bureaucracy and stimulate investment -- permitting most companies to begin operating as soon as the requisite corporate documents are submitted to the Egyptian Ministry of Economy (Companies Department). Egyptian government authorities are given ten days in which to review the submitted documents and, if those government authorities do not object within that time, then the company is automatically registered without further proceedings. Law No. 3 also lowers the required subscription of paid-up capital from 25 per cent to 10 per cent for the first three months on incorporation (after which time such capital requirement is increased to 25 per cent); grants companies more flexibility in dividend distribution, repurchase of shares, and employee profit-sharing plans; and exempts some companies from the requirement of maintaining Egyptian nationals on their boards of directors.

Also in 1998, UAE Federal Law No. 15 (1998) amended the UAE Commercial Companies Law ("CCL"), stating that -- with respect to companies established in UAE free zones (known as "Free Zone Establishments" or "FZEs") -- the UAE Free Zone Regulations will take precedence over conflicting provisions of the CCL. The CCL and the Free Zone Regulations contain conflicting provisions on several issues, one of the most prominent examples being reflected in Article 22 of the CCL, which provides that at least 51% of UAE companies must be owned by UAE nationals; however, FZEs are allowed to be 100% non-UAE owned. Thus, UAE Federal Law No. 15 further legitimizes certain provisions of the Free Zone Regulations. (The 1998 amendment to the CCL is also relevant to the oil, gas and power sectors, as it states that the CCL shall not apply to a company engaged in oil (exploration, drilling, marketing and transportation), electricity and gas production, water desalination and/or a company granted a Council of Ministers' exemption, where said company's memorandum of association specifically provides otherwise.)

Market integrity appears to underlie Omani Decree 80/98, regarding that country's securities market. The main structural reform contained in Decree 80/98 is the creation of the Capital Market Public Authority ("CMPA"), authorized to oversee and regulate the Omani Securities Market (which was previously the responsibility of the Muscat Securities Market itself). Decree 80/98 also imposes a wide range of new disclosure and reporting obligations on companies quoted on the Muscat Securities Market and those seeking to be listed in the future. Under the new decree, the CMPA is granted broad power to supervise and regulate market brokers and others providing financial market services in Oman.

3. Government Procurement

In May, the Egyptian government enacted a new Tender Law, Law No. 89 (1998), with implementing regulations following in September. The Egyptian Tender Law governs government procurement of goods and services by all Egyptian "ministries, departments, local government units, and public and general organizations", unless otherwise excepted. The Tender Law was enacted in an effort to improve transparency and predictability in the Egyptian government tender process. For example, the Tender Law requires government purchasers to explain why a bid was accepted or rejected; gives consideration to the technical and qualitative aspects of a tender (not merely lowest bids); and seeks to reduce delays in the return of bid bonds (which cannot exceed 2% of the estimated contract value) to unsuccessful tenderers or upon expiry of the bid. The Egyptian Tender Law expressly permits arbitration of disputes, provided that the necessary prior government approval has been obtained (as required by the Egyptian Arbitration Law). That Tender Law provision may end the long debate on whether contracts with the Egyptian government may be subject to arbitration.

Recent amendments to the UAE Federal Tenders Regulations gave individual Federal ministries some (limited) authority to make direct purchases, rather than effecting all purchases through the Federal Ministry of Finance and Economy. (Contracts valued at UAE Dirhams 100,000 or less may be executed directly by the purchasing ministry, with the Federal Ministry of Finance and Industry retaining authority to supervise the documentation relating to such transactions.) These amendments to the UAE Federal Tenders Regulations also create a register of approved suppliers and contractors, to be kept at the Federal Ministry of Finance and Industry.


4. Commercial Agency/Distributorship

Bahraini Amendments
Early in 1998, Bahrain enacted some substantial amendments to its commercial agency law. These amendments liberalize a number of provisions of existing Bahraini law -- including abolition of the statutory requirement of exclusivity for local commercial agents. The amendments, which should have substantial effect on future Bahraini commercial agency arrangements, and on the resolution of disputes arising from their termination or non-renewal, reflect the Bahraini Government's continuing efforts to allow for a more equitable relationship between principal and commercial agent, and to open the market for competition among local traders and thus expand the consumer's options.

Despite these significant changes, Bahraini law continues to provide statutory support to a qualified commercial agent's claims for compensation in the face of a principal's unjustified termination or non-renewal. However, such compensation claims will now be complicated by the fact that a principal may appoint more than one Bahraini commercial agent for the same products. (Similar issues are raised by recent liberalization of the Omani commercial agency law, which now also permits multiple non-exclusive commercial agency appointments.)

Saudi Circular
In October 1998, the Saudi Ministry of Commerce issued a circular commenting on a number of issues relating to commercial agencies and distributorships, including registration requirements. The circular urges Saudi merchants acting as commercial agents (and distributors) for foreign firms to register their agreements with that Ministry. The circular also states that commercial agency agreements will not be accepted for registration unless they include provisions:

obligating the principal and commercial agent to comply with any applicable standards set by the Saudi Arabian Standards Organization ("SASO") and the supply of spare parts (with the additional requirement that the agent be obliged to provide spare parts and maintenance service in all regions of the Kingdom), throughout the term of the agency and for one year thereafter or until the appointment of a new agent;
requiring the foreign supplier to provide a certificate of origin for the goods and products;
requiring the parties to announce any defects in the products and to undertake to withdraw such defective products from the market for repair or replacement at the expense of the producer;
calling for disputes involving the commercial agency relationship to be resolved by the competent authorities in Saudi Arabia (since 1988, the Ministry of Commerce had accepted agreements for registration which provide for foreign dispute resolution); and
requiring the agent to provide technical and managerial training to Saudis.
It will take some time to determine how strictly the Saudi Ministry of Commerce will apply these new requirements in practice.

Yemeni Law
In 1998, Yemeni businessmen and lawyers sought to address the implications of Yemen's new law on commercial agencies and branches of foreign companies, Law No. 23 (1997). Although Law No. 23 cancelled the prior Yemeni law regarding commercial agencies and branches, the applicable rules for branch offices were mostly unchanged. However, Law No. 23 did contain some changes to the substantive rules relating to commercial agencies.

Law No. 23 applies to a wide range of agents, defined to include buy-sell distributors ("distribution agent for its own account"). Law No. 23 adds a new category of agents not explicitly included in the prior law, "maritime agents" (defined as agents who seek to procure maritime contracts in the name and for the account of a foreign company in Yemen).

Law No. 23 also contains some "dealer protections" which were not expressly stated in the prior Yemeni legislation. For example, Article 20 of Law No. 23 gives exclusive jurisdiction to the Yemeni courts to resolve all Yemeni commercial agency disputes. In addition, Article 19 of the new law permits a terminated Yemeni commercial agent to block the registration of a foreign company's replacement commercial agent in Yemen, pending an amicable or judicial resolution of the terminated commercial agent's claims.

5. Licensing/Intellectual Property
Omani Decree 63/98 approved the accession of Oman to the Paris Convention for the Protection of Industrial Property and to the Berne Convention for Protection of Literary and Artistic Works. Oman's accession to the Paris and Berne Conventions may be seen as part of that country's efforts towards membership in the World Trade Organization ("WTO"), and as a further legislative measure intended to encourage inward foreign investment and technology transfer. Decree 63/98 might also serve to defuse some criticism expressed by the US Trade Representative ("USTR") as to current intellectual property protection in Oman. (Similarly, Omani Ministerial Decision 43/98 was issued in 1998, providing for a special register -- at the Agencies and Trademark Department with the Directorate General of Commerce -- in which will be recorded details of the literary, artistic or scientific work to be protected.)

Although many Middle East countries have enacted and/or supplemented their intellectual property laws in recent years, a number of Middle East countries seemed to stumble in 1998, according to the Special 301 annual review by the USTR. For example, Kuwait joined Egypt on the USTR's 1998 "priority watch list". Middle East countries on the USTR's "watch list" in 1998 were Bahrain, Jordan, Oman, Qatar, Saudi Arabia and the UAE. The USTR also made special observations concerning inadequacies in intellectual property protection in Lebanon and Yemen.

In October, Jordan enacted Law No. 14 (1998) amending its Copyright Law. However, observers continue to debate whether these amendments will adequately address the inadequacies in the Jordanian regulations (and enforcement practices) highlighted by the USTR.

Under the auspices of the Gulf Cooperation Council ("GCC") patent office, which officially opened in Riyadh in late 1998, patent holders are able to register their patent at one location to cover the six GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). The unified GCC patent office is designed so that a patent owner, once registered with that office, is automatically afforded protection throughout the member GCC states.

6. Environmental Regulations

The year 1998 was to represent a milestone under Egypt's Environmental Law, enacted by Law No. 4 (1994). That law provides for the establishment of an Agency for Environmental Affairs, empowered to draw up general environmental protection policy, prepare plans needed to preserve and develop the environment, and follow-up implementation in coordination with other competent government authorities. That law requires existing companies to comply with its provisions during a four-year grace period, expiring in February 1998. However, the Egyptian government informally extended the grace period until the end of 1998.

In accordance with Federal Law No. 7 (1993), the UAE created a Federal Environmen-tal Author-ity ("FEA"). The FEA's functions are to: draft laws, carry out stud-ies, propose poli-cy, con-duct research, monitor the sea, land and air environ-ment, and protect against hazards that may harm human health, crops, wild-life, other natural resources and the atmo-sphere. The FEA is authorized to monitor both the public and private sec-tors, and to have a licensing role over economic activities that might affect the environment. The FEA has been helping to prepare a supplemental environmental protection law, reportedly awaiting approval by the UAE President, and containing harsh sanctions on polluters.

In another recent initiative, UAE Federal Council of Ministers Resolution No. 5 (1998) prohibits the use of marine tankers, barges and other vessels as floating warehouses for the storage or transport of oil or its derivatives. The storage and transport of contraband Iraqi oil became a serious environmental problem in the UAE in 1998, with oils spills (caused by improper storage) rendering coastal water desalination facilities temporarily inoperable.

7. Courts/Disputes

For many years, Omani law had not adequately addressed the legal status of foreign arbitral awards (recognition and enforcement) before the Omani courts. However, Omani Decree No. 36/98 has now provided for Oman's accession to the 1958 United Nations Agreement on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"). Oman's accession to the New York Convention is consistent with that country's recent enactment of Decree 13/97, authorizing Oman's commercial courts to recognize and enforce qualifying foreign judgments and arbitration awards.


In coming years, Middle East commercial laws are likely to strengthen the "free trade" trends suggested in this summary -- as countries in the region meet their commitments to WTO, and as the oil-exporting countries of the region continue to adjust to the reality of limited oil revenues.

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