This is the second part of four articles on Offset Program.                    — Editor

By Mohammed Al-Twaijri - Attorney & Arbitrator

Emanating from the belief of lawmakers who has drawn the provisions pertinent to the Offset in the significance and importance of the body supervising the Offset Program, the latter is granted extensive powers and has drawn certain goals for it to achieve in a flexible manner within the framework of a discretionary power to be enjoyed by it. However, this does not prevent the existence of some issues upon requesting contractors to perform their Offset Obligations in light of the change of the administrative structure supervising the Offset Program from the Ministry of Finance to the NOC (National Offset Company) in addition to the previous Offset Obligations prior to 2004 which is the date of suspending the Offset Program as a whole.

Powers of National Offset Company
The NOC was established by virtue of the Ministerial Resolution No. (863) dated 7/82005. The Ministerial Resolution No. 41 of 2006 dated 16/8/2006 was issued pertinent to the transfer of the tasks of the Offset Program to the NOC after signing the establishment contract on March 28, 2006 and started working on behalf of the Ministry of Finance on Sept 2, 2006. As a result of signing the Management Agreement with the Kuwaiti Ministry of Finance by virtue of which the management of the Offset Program has been assigned to the NOC.
Although the new supervising authority is tasked with the management and supervision over the Program as stressed in the objectives for which the company was established on March 28th 2006 where the company is authorized to take the responsibilities of implementing the procedures of the Offset Program as approved by the Ministry of Finance or the competent governmental authority  along with the amendments to the Program, the Management Contract concluded between the NOC and the Ministry of Finance which determines the powers and authorities of the NOC and the manner of implementing the Offset Program is not available for the public domain, thus, this matter represents a source of worry for contractors.
Hence, there is none-clarity about the unpublished powers to the public. We suggest that the Management Contract should be published to stress transparency and to avoid any disputes which may affect the timely stages for the performance of the Offset Obligations as planned.

It is supposed that the foreign contractor should sign an MOA with the management supervising the performance of the Offset Obligation. However, should the later procrastinate the request to sign an MOA with it, the foreign contractor should discuss the same with the NOC and state that the practical request of performing the obligation may be faced with procedural problems the most important of which is the non-signature of the MOA.
However, the resolution of the Council of Ministers of 2005 related to the reactivation of the Offset Program provides that previous contracts that include the Offset Clause shall bind their parties with the Offset Program, however, the decision shall remain in the hands of the Management and its discretionary powers.
Upon reviewing this resolution, it becomes clear that it changes the criterion and the basis for the origination of the Offset Obligation as it ignores the need for an MOA prior to the supply contract in order to claim the performance of the Obligation, rather, being sufficient with the supply contract including the Offset Clause.

This change in the criterion and the basis of claiming the performance of the Offset Obligation would make it necessary for the NOC to be flexible upon claiming the performance of the Offset Obligation upon studying each case respectively.
The Offset Program was suspended by virtue of the Resolution of the Council of Ministers No. 911/1 dated 15/8/2004 in both the Civil and the Military sectors and the Ministry of Finance was assigned with conducting a full study and review about the reasons for not achieving the goals of the Program. On 7/8/2005 and by virtue of the Resolution of the Council of Ministers No. 863, the Offset Program was reactivated as per the basis mentioned therein.
The last decision would come within the framework of reactivating the program; however, the Resolution No. 13/2005 dated 21/8/2005 is considered the basis for the activation of the program and the implementation of its procedures on the military and civil contracts in detail.

Since the commencement of the program in 1992 and namely since 23/1/2002 where the system of the Offset Program was amended in order to expand the scope of its application to include civil contracts which are equal to or in excess of 10 million in addition to the Military contracts which are equal to or in excess of KD 3 million, and after the issuance of the Offset Guidelines on 18/8/2002 by the Ministry of Finance, the civil supply contracts whose value is in excess of KD 10 million where there is a legal entity subject to the Offset Program, it would be subject to the Offset Obligation as per the procedures and the practical stages required by the Offset Guidelines of 2002 as the latter expressly provides in Article No. 6-1 that the Offset Obligation shall be effective from the date of signing the supply contract; such date will be referenced as the commencement date for the Offset meaning the resolution considers that the commencement  of the offset obligation and the date of effectiveness is the date of signing the supply contract.
Thus, should the Offset Clause be included in the supply contract, this means that the current resolutions would be considered a sufficient reason for the application of the Offset Obligation legal-wise despite the non-signature of an MOA legal-wise, while noting that it is difficult practically to imaging claiming the performance of an obligation which does not have clear elements.

In consideration of the above, and as per the requirement of the resolution of the Council of Ministers dated 15/8/2004 pertinent to the Suspension of the Offset Program in the civil and military sectors, namely Article No. 2 thereof which suspends the application of the program to new government contracts, provided that the program should remain effective in regard to previous contract, the obligation arising from the contracts concluded prior to 15/8/2004 (the date of suspension) may be requested to perform the obligation, especially that the Resolution of the Minister of Finance No. 13/2005 dated 21/8/2005 in regard to the reactivation of the Offset Program tackled the scope of application and the validity thereof in Article No. 5 by providing that... (.. shall be effective from the date of issuance in regard to all the contracts offered for tendering or those signed by direct negotiations, however, in regard to contracts offered for tendering/ special negotiations before the date of the issuance of the resolutions, they should be subject to the procedures of the Offset Program should the Offset Clause be incorporated among the clause of such tenders/direct negotiations).

Thus, it is difficult for the foreign contractor to deny the performance of the Offset Obligation in regard to contracts concluded before the year of suspension in 2004 due to the express and clear provisions of the relevant Ministerial resolutions which cannot be reinterpreted except in Court.
Performance of the Offset Obligation by a Third Party: Issues and Restrains
As per the Provisions of the Offset Guidelines No. 9 of 2007, the Offset Obligation is imposed on the foreign contractor as defined in Paragraph 4-1 of the guidelines which makes it necessary to execute all the stages of the Offset Obligation which is directly linked to the foreign contractor who is awarded a direct supply contract as he would be an Offset Obligation debtor.
This is the principle established in all the procedures and the stages of executing the Offset Obligation from its origination until its completion, however, those who drew the provisions of the Offset make it permissible to perform the Obligation which is imposed principally through a third party as per determined conditions.

As per the provisions of Article No. 6-8 of the said guidelines, it is permissible for the Offset Obligor to opt for the performance of the Obligation via concluding local or international agreements with third parties and in this case the Offset Obligor should pay attention to the following:
First: The Third Party should be approved by the NOC company.
Second: The Offset Obligor should remain fully responsible for the performance of the Offset Obligation that originated from the supply contract and he will not be released until the Obligation is fully performed.
The express provisions of this article cannot be interpreted otherwise. Although the provisions allow the transfer of the Offset Obligation to a third party, they restrict such a transfer and the possibility of by providing the satisfaction of the said two conditions. 

This is attributed to the permissibility of performing this obligation by a third party as n exception, considering that the performer should be the foreign contractor. Due to the exceptional nature of such a possibility, allowing the same is restricted by the guidelines and pending the satisfaction of both conditions which are considered a guarantee to the NOC until the performance of the Offset Obligation as per the hoped-for policy and philosophy.

Should the national Offset Company care for the foreign contractor’s performance of the obligation whether by himself or via a third party, being the legally authorized body to supervise and successfully implement the program, it is keen upon the satisfaction of the said conditions.
Upon referring to the definitions clause in the said guidelines, we will find that the third party is defined as (a third independent party to be appointed by the foreign contractor to perform the Offset Obligation on his behalf after the approval of the NOC). Thus, the foreign contractor which is an Offset Obligor may appoint a third independent party to perform the Obligation after the approval of the NOC, however, the ambiguity of the concept of a third independent party may cause practical issues.

For example, would it be permissible to consider that any of the members of a consortium to be an independent third party and thus transferring the obligation to it by the original foreign contractor which is a member in the same consortium, i.e., performing the obligations on it as a member of the consortium and in its capacity as an Offset Obligor on behalf of the consortium as an independent third party.
Even if we take the legal independence into consideration considering the members of the consortium have separate legal personalities and thus be independent, we think that in such a a case the NOC would have the discretionary power to decide and accept such a member as a third party on behalf of the consortium considering that the implementation of the Offset Obligation by a third party would not be permissible except after having obtained the approval of the NOC by virtue of the express provisions of Article No. 6-8 after assessing the independence of the third party from the foreign contract or appointing it.
The Legality and Obligation of the Agreement for the Transfer of the Offset Obligation Concluded between the Principal Foreign Contractor (the Offset Obligor) and the Third Party Should they include an Illegal condition.

As per the provisions of the Civil Law, namely Article No. 196 thereof, (a contract is the governing law of the parties thereof; it shall neither be solely revoked nor amended except within the limits of the agreement of the requirements of Law). Since it is permissible that (... the contract may include any provision agreed upon by the contracting parties so long as such is not prohibited by Law or in violation of the Public Order or the Public Morality), thus, should the condition included in the contract be illegal, it would be rendered invalid while the contract remains valid unless it is proven that either contracting party would have never accepted the contract without such a condition; in which case the contract would be rendered invalid as per the provisions of Article No. 175 of the Civil Law.
As the contractual will is free to effect any liabilities and to draft contractual conditions, such conditions should enjoy a legality, thus driving us to scrutinize the legality of the conditions mentioned in the Agreement for the Transfer of the Offset Obligations to a third party whose subject shall be the full assignment of the responsibility and the risks arising from the performance of such an obligation as a special obligation.

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