Within the purview of the legal arena, 2016 has been remarkable for Kuwait. The year brought a raft of regulatory changes in a bid to harmonise commercial objectives with the international vista; the most notable of these changes being those surrounding Kuwait’s mercantile sphere, an area often at the centre of discussions for reform and development in the Gulf.
As a result of the perpetual focus on this sector, the last few years in particular have witnessed the issuance of many laws regulating various commercial activities and ratifying several international treaties, specifically in the commercial sector.
Outlined below are some of the most notable legal developments demonstrating the aforementioned commercial objective in Kuwait and the prominence of the commercial sector in the purview of the progressive expansion of Kuwait, as part of the vision of Emir Sheikh Sabah Al Ahmed Al Jaber Al Sabah to develop Kuwait into a financial hub by 2040.
Law No. 25 of 2012 (the Companies Law) saw the replacement of the predated Law No. 15 of 1960, and is considered the regulatory foundation of companies in Kuwait. The law provided more detailed clarity on several issues not available in the previous law, such as non-profit companies, holding companies and shareholders’ agreements. This led to some practical obstacles after the enforcement of said law, and resulted in a push for quick amendments to some provisions. The amendments led to the issuance of Law No. 97 of 2013 and later Law No. 1 of 2016, which was mainly issued due to suspicions that the previous Law No. 25 and Law No. 97 may be subject to nullification for being unconstitutional.
A more recent amendment to the Companies Law was published in the Kuwait Official Gazette by virtue of Law No. 15 of 2017. It is noticeable that the new amendments were made based on practical experience and in an attempt to resolving the difficulties faced in the enforcement of the law. Three out of four amendments were related to limited liability companies as follows:
• The first amendment relates to email and/or postal addresses and the ability to add or replace the full address of the head office of the company in order to facilitate communication, and to conform to international standards and the development of the companies and commercial sector;
• Payment of the full amount of the company’s capital is no longer required, and this shall effectively help small businesses run and obtain financial facilities from banks and financial institutions, which require the company to be established to grant such facilities. The minimum capital of the company and the amount to be paid pre-incorporation shall be determined through the executive by-laws and according to the activities of the company;
• Deletion of the “minimum nominal value” of the share/unit, which was KD100 ($331) as per the previous law. According to the new amendment, the partners will determine the nominal value of the shares without any observation to a minimum or maximum amount, provided that all shares/units be of the same value; and
• Deletion of the “sufficiency of capital” condition for the shareholding companies. According to the new amendment, the minimum capital of the company shall be determined by executive by-laws according to the activity of the company. This amendment will allow all companies with the same activities to have the same capital and conditions, without leaving the decision to the discretion of the officials, thus providing more equality.
Public Tenders Law
In 2017 Kuwait has also revamped some of its restrictive laws in order to make room for foreign investment. Kuwait’s aspirations to attract foreign investors commenced with the promulgation of Law No. 116 of 2013 (the Direct Investment Law) and the establishment of the Kuwait Direct Investment Promotion Authority, allowing for the establishment of a wholly foreign-owned Kuwait entity. This progressive trend has been sustained with the introduction of Law. No 49 of 2016 (the New Tenders Law), which superseded Law No. 37 of 1964.
One highlight of the New Tenders Law is the noticeable protection of the local population in the Kuwait market. Now a foreign contractor is obliged to purchase no less than 30% of its contractual requirements from the local market or from local suppliers registered with the Central Agency for Public Tenders (CAPT). Moreover, the CAPT, in a step towards allowing for more Kuwaiti presence in the public procurement marketplace, also manages the compliance of foreign contractors who must award not less than 30% of contracting work to local contractors.
The most notable change to the New Tenders Law is the transformation of bidding requirements for public tenders. Prior to the New Tenders Law, foreign contractors were unable to bid on public tenders without a local agent. This restriction has now been removed in order to usher in a new era of easing regulations for foreign investment.
It is also worth noting that despite not needing an agent to bid, the foreign bidder may still be in need of a local agent for the execution phase of the project to sponsor the employees, being that a foreigner can only conduct business in Kuwait through the establishment of an entity with a local partner, arrangement of a local agency or establishment of a wholly foreign-owned Kuwaiti entity. Thus, unless a foreign contractor has previously established a Kuwaiti entity, the need for a local agent may inevitably be required at some stage.
In addition to opening doors to potential investors, the New Tenders Law has also developed an organised criteria for potential bidders to follow. Any company that appears to have issues with completing existing projects will not be awarded new projects until the issues are resolved and the project is completed.
Furthermore, the previous tenders law did not recognise or regulate the technical evaluation of the various project tenders. Now, under the New Tenders Law, a points system is used by the CAPT in allocating project work of a technical nature to a selected bidder based upon successful scores against a specified points-based criterion.
A summary of the key provisions in the New Tenders Law is as follows:
• Foreign bidders can now bid on public tenders without a local agent;
• Foreign bidders must now purchase no less than 30% of its goods from the local market;
• A sophisticated criterion for approval of tenders was created;
• A Grievance Committee to express any issues during tendering process was developed; and
• Bidders are allowed to contract for any purpose without permission from the CAPT as long as the contract value does not exceed KD75,000 ($248,000) – an increase in contract value from KD5000 ($16,500) in the previous tenders law.
Overall, The New Tenders Law illustrates Kuwait’s ambitions to expand within the international commercial market by allowing more opportunity for foreign investors while simultaneously providing a dependable market for the local population to cultivate growth potential.
In recitation of the budding developments in the business area of law, following almost four decades of enforcing the previous commercial agency Law No. 36 of 1964, the Kuwaiti Parliament considered it necessary to reconsider the articles of the previous commercial agency law and lay down new and more suitable regulations in order to support the rapidly developing domain of commercial agencies in the state of Kuwait.
March 13, 2016 saw the anticipated publishing of Law No. 13 of 2016 regulating commercial agencies (the Agency Law), which aimed to supersede the previous law and set forth the regulatory and legal framework to be utilised in the organisation of commercial agencies. The Agency Law is to be read alongside Law No. 68 of 1980 (the Commercial Law).
The Commercial Law permits a foreign principal to carry out business activities in Kuwait by means of a distributorship contract with a local merchant, under which the latter undertakes the duty to distribute the principal’s products in the state of Kuwait. The Commercial Law distinguishes between agencies and distributorships, and provides the basic framework for regulating commercial agencies together with compensation provisions consisting of the right to claim early termination and/or non-renewal upon expiration. Article 286 of the Commercial Law states that if the appointed distributor is the sole distributor therein, then by Kuwaiti law, the exclusive distribution is assimilated to a contracts agency.
The most salient articles in the new Agency Law particularly address anti-trust provisions, the ability to appoint more than one agent or distributor (in accordance with Article 273 (1) of the Commercial Law), and resolving disputes pursuant to an arbitration clause. Supplementary to the aforementioned, the Agency Law has incorporated in its interpretation the concept of parallel distribution and emphasised the mandatory registration requirements previously stated in the law. Furthermore, as recently codified under Article 20 of the Agency Law, the courts will most likely not hear any disputes brought by an agent/exclusive distributor if there is a provision subjecting the exclusive distributorship agreement to foreign arbitration, as well as foreign law as governing law, given that Kuwait is a signatory to the New York Convention regarding enforcing foreign arbitral awards. Alongside governing the agency/distributorship relationship from a procedural perspective, the Agency Law also contains much of the substantive content in this subject area. A summary of the key changes in the Agency Law is as follows:
• The definition of a commercial agency has been more explicitly addressed in Article 1 of the Agency Law as “an agreement whereby the party holding the legal right entrusts a merchant/company in the state of Kuwait to sell, promote or distribute goods/render services in his capacity as an agent, distributor, franchisee or licensee of the product or the original supplier against a profit or commission”;
• Ability of a principal to appoint more than one agent/distributor (Article 2);
• The provisions of Article 4 of the Agency Law state that “the import or supply of any goods or products shall not be confined to its agent or distributor, even if he is exclusive and even if it includes the right to use the trademark, provided that the party importing or supplying them complies with the terms and conditions of the Agency Law and its executive regulations.” By way of interpreting this article, we deduce that this provision permits parallel distribution, even if the distributor is exclusive and includes the right to use the trademark;
• In the past, registration of commercial agencies was required by law, but the Kuwaiti courts veered from this requirement when the writing requirement for an agency was introduced in the Commercial Law. It appears that the Agency Law is reinstating the registration requirement. Article 6 requires registration of agency agreements, stating “the existing Commercial Agencies Register in the Ministry shall continue to operate, in which all the accepted commercial agencies are registered according to the provisions of this law. Any commercial agency which has not been entered in the Commercial Agency Register shall not be considered valid and shall not be eligible to be heard by a court of law”;
• In addition to the aforementioned provision, the Ministry of Commerce and Industry does not allow agency registrations at the Commercial Agency Register after the passing of two months from the date of signing the agreement, and accordingly any claim that may be brought under the agreement shall not be eligible to be heard by a Kuwaiti court; and
• Article 7 of the Agency Law discusses the registration application and how the registration of an agency must be announced in the official gazette with all its substantial details. It also requires announcement in two daily newspapers if “the product or commodity has another agent, within two weeks of registration or otherwise the registration would be suspended until such announcement takes place.” However, Article 9 of the above-mentioned Agency Law stipulates that “taking into consideration provisions of the commercial agencies in the Kuwaiti Commercial Law, the agency may be re-registered in the Commercial Agencies Register under the name of a new agent in the following events:
• The agency registered previously is terminated amicably by its parties;
• The agency registered previously is revoked by an executable court judgment; or
• The agency registered previously is terminated according to its duration, as specified in the agency contract. The principal may not terminate the contract without a breach on part of the agent, otherwise the principal shall be obliged to compensate the agent for the damage sustained to the agent as a result of the termination. Every agreement to the contrary shall be invalid.”
It is evident that the legal developments in Kuwait are heading toward the direction of growth that has been eagerly anticipated by local and international businesses and investors. Not only has the past year seen a number of notable enactments as touched upon above, but there have also been numerous proposals in line with the foreign investment objective that are still being deliberated.
The last few years has seen the Kuwaiti government take numerous positive steps towards sustainable development and economic growth by reducing bureaucracy, speeding up administrative processes and generally by way of promoting the Kuwaiti economy. In addition to the aforementioned developments made to existing laws and regulations, a number of new laws have been devised and ratified in a bid to tackle the fundamental obstacles facing investors operating in the state of Kuwait.
Alongside the intended commercial improvements that are forecasted, there appears to be much discussion relating to alternative sources of income to replace oil in order to diversify the economy and develop other sectors, such as health, transportation, energy, water and housing. Historically, Kuwait was referred to as “the pearl of the Gulf” because of its interest in developing the trade and industry sectors, and it appears that the economic strategy seeks to reinstate this reputation.