This is the second part of ‘The legal nature of offset obligation’                — Editor

The Offset Obligation is a primary obligation that arises from a supply contract and from which sub-obligations emerge. As per the Memorandum of Agreement contained in Article No. (12) of the Guidelines of the Offset Procedures No. (9) of (2007), the contractor agrees that the supply contract is subject to the Offset Program and consequently the contractor shall be committed to fulfilling his obligation toward the Offset Program.
Also, the said Guidelines provide that the beginning of implementing the Offset Obligation shall be the date of the supply contract and consequently the Obligation shall be imposed from the effective date of the supply contract from which the obligation emerges according to what is mentioned in the reduction certificate form contained in the Guidelines.
The contractor is committed to carrying out its duties as per the provisions of the Offset Program and the Offset Obligation has a special nature because it exists under a supply contract as an administrative contract, but the Offset Obligation is not fulfilled according to the contractual will, rather, it is fulfilled according to the will of the Law and as per the provisions and resolutions regulating the Offset Program and the resolutions of the Offset Management.
This explains the nature of the penalty for the non-performance or the breach of executing the Offset Obligation. Thus, if the Offset Obligor refuses to fulfill the Offset Obligation as per the conditions contained in the Memorandum of Agreement, i.e., the entire provisions and resolutions on the Offset Program, penalties shall be imposed on the Offset Obligor of not less than (6%) of the supply contract which is subject to the Offset Obligation.
The value of penalties will be deducted from any payment due to the Offset Obligor under the supply contract in cooperation and coordination with the government authorities which concluded the contract with the Offset Obligor. In case of imposing penalties, the National Offset Company shall contact the concerned bodies in order to inform them about the Offset Obligor’s non-fulfillment of his obligation and advise them to exclude the Offset obligor from any future supply contracts.
Upon considering the contractual parties, we will find out that the supply contract is concluded between a government authority and a foreign contractor. The contract is executed as per the contractual conditions and manual of general conditions approved by the Central Tenders Committee.

However, because the supply contract includes the Offset Obligation Clause which results in an obligation that stems from the supply contract, a third body that is not included in the contract will get involved in order to oblige the contractor to fulfill his obligation contained in the supply contract.
This third body is the body supervising the management and application of the Offset Program. Before signing the supply contract, the supervising body has no direct or indirect contractual relationship with the contractor, but in order to have this legal connection, the Kuwaiti Law makes it obligatory for the foreign contractor to conclude a Memorandum of Agreement with the National Offset Company before or upon signing the supply contract.
Signing the Memorandum of Agreement is regarded as an obligatory requirement prior to signing the supply contract. In other words, the contractor does not willfully choose to conclude the supply contract; rather concluding such contract and consequently the obligation resulting from it is imposed on him.
Therefore, the provisions of the Offset Program compulsorily establish this legal relationship between the foreign contractor (the supplier) and the National Offset Company which is in charge and coordinates with bodies offering the tenders starting from the so-called Phase of the Primary Concept Paper in which the concept can be proposed by the contractor to the National Offset Company and can be discussed with it in a consultative, not a contractual manner.

It should be taken into consideration that the Phase of signing the Memorandum of Agreement is prior to concluding the supply contract so that the Offset Obligation shall be imposed or commence only from the effective date of the supply contract, not from the date of signing the Memorandum of Agreement.
The Memorandum of Agreement constitutes the general framework which includes the principles of the Offset Obligation, the manner of its application, and the official form of the foreign contractor’s obligation toward the Offset Program. Upon signing the Memorandum of Agreement, the legal relationship shall be established. Such is the relationship which the contractor had with the body offering the tender under the supply contract but did not have with the National Offset Company in its capacity as the manager and supervisor of the obligations emerging from the Offset Program.
So, the Offset Obligation originates and emerges from the supply contract as a contractual basis, but its legal system is determined by virtue of the Memorandum of Agreement which defines all the principles and features and the manner of performing the Offset Obligation according to the Offset Program’s provisions and consequently the provisions of the Tenders Law, not the supply contract’s provisions.
Therefore, the Offset Obligation emerges from the supply contract and is applied and performed as per the provisions of the Offset resolutions. In other words, the Offset Obligation can be regarded as an obligation with a mixed and special legal nature as it is based on the provisions of administrative contracts and is implemented as per the legal system originated by the provisions organizing the Offset Program.

Studying the penalty of breaching the fulfillment confirms the rule that the Offset Creditor has the right to claim the debtor or even to oblige the same to fulfill such obligation if possible. The penalty of breaching the Offset Obligation is annulling the contract and reinstating the circumstances to the condition before concluding the contract.
Thus, the foreign contractor becomes an Offset obligor under the Memorandum of Agreement it signed and is required to perform the Offset Obligation by a body that it had no relationship with from the beginning. Rather, the Offset Obligor was made to conclude a contract with such body in order to implement all the provisions that organize the Offset Program.
Upon imposing the Offset Obligation on any foreign contractor, the foreign contractor shall move to the Phase of Fulfillment of the Offset Obligation. Such a phase is of importance as the existence of a legal obligation is meaningless without the efficient and successful fulfillment of the same. However, according to the mentioned specific nature of the legal nature of the Offset Obligation, the Offset Obligation becomes subject to a specific system for fulfillment of the same under some relevant provisions and decisions.

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