Commercial laws witness fast growth Starting a business complex affair

COMMERCIAL laws are the driving force in the evolution of internationals laws, and in Kuwait too, this is one area of legislation that is witnessing the fastest growth. In this interview, leading commercial lawyer, Advocate Mohammed Basheer, gives us some perspective on the complexity and breadth of commercial laws in Kuwait. In a country where multitudes of foreign brands have entered into partnerships with local businesses, how are international contracts made? Which courts do disputing parties belonging to different countries go to? And other interesting machinations of jurisprudence are discussed below.

Question: Tell us about how exactly a lawyer fits into a business organization?
Answer: Legal departments are increasingly getting hard to dispense with in any business organization. Take for example a contracting company or a manufacturing company. There are several contracts they enter into, and every transaction has three dimensions to it, namely techno-legal-commercial.
For example, if it’s a cable manufacturing company, there’s a technical aspect to it. Then there is a commercial aspect, because it’s a business transaction between two parties. Finally, the legal side kicks in because any transaction is on the basis of a contract. Any transaction where there’s an offer and there’s an acceptance based on a certain set of laws, then it’s a contract. Marriage is also a contract.
So, a company gives quotations, and a buyer accepts it, leading to a purchase order. Now, you see how almost every business functions on contractual obligations, which makes the presence of a lawyer indispensable.
I am also part of the tender committee in my company. A lawyer will have to look into the legal aspects of the tender; especially important is the presence of a lawyer where the tenders are from outside Kuwait.


Q: Of course the legal terms in contracts would be extremely involved. But what are some of the most important legal terms that you look into while overseeing a tender?
A: Firstly, we have to look into the specifications of the product. The buyer will place conditions, and you will have to analyse if you will be able to fulfil those conditions. The delivery period, the mode of payment, whether it’s a letter of credit or some other means... all these matter. Moreover, a lawyer will also have to analyse the INCO terms, which means International Commercial terms. These terms will clarify a lot of transaction details such as if the supplier will deliver the product to the buyer or if the buyer will take the products from the supplier’s site and so on.
In short, there’s a legal interference at every stage of a business transaction. Without legality no business would be able to function. This is more the case in a global world, where buyers and sellers are no longer from the same locality or region, but transactions are increasingly happening across continents.


Q: Can you tell us something about the dynamics between international and local laws? When the transaction is between parties in two different countries will the laws of one of these countries govern the transaction or are we looking at a separate set of laws supervised by an international justice system?
A: That’s a good question. The good thing is that globally the jurisprudence of law is fundamentally the same, or I can say they are very similar. The idea is to ensure fairness, and as humans all of us irrespective of where we come from, agree on what amounts to fairness. However, every nation has its own jurisprudence, and also differs sharply in certain areas like the penal code, marriage and so on. For example, you can never compare the marital laws in India with those of that in Kuwait. The laws are influenced by a variety of factors such as the ethnic mixes, religious outlook etc of a place. These differences mainly pertain to civil laws.
However, the laws pertaining to commerce have a Latin origin, and it is quite uniform across the world. Here in Kuwait, there are influences of Egyptian legal system also. The legal system in Kuwait is of recent origin.
International law can be divided into public law and private law. Every country has its own boundaries, which includes not just land but also air and sea. That’s why we hear of terms like the Kuwait’s territorial waters, Kuwait’s air space and so on.


Now, if there’s an offence committed at a particular place, usually it is the law of that land that gets applied. Private laws are between people. If a supplier in Syria cheats a buyer in Kuwait, then the private international law kicks in. Public laws are applicable between countries or governments.
As humans advance and progress, the laws have to keep evolving. In the past, laws were meant to govern our interactions with people in our immediate surrounding. However, as technology made distant communications and travel possible, we had to create new laws. May be in future, we will have to look at inter-planetary laws, or inter-galactic laws. Who knows? Our grandchildren might be looking at such laws.
Nothing evolves faster than law in the sphere of human endeavour. Because any change or evolution in any aspect of human life is accompanied by corresponding evolution in law. Take your mobile phone for example; with every new feature that gets added to it, there’s a new law that has to be created to define the appropriate limits in its use.
If we get into the evolving laws in the cyber world, then I think this interview will never end. There is so much legal complexity in these areas, which are relatively very new.


Q: You are right. But now let’s focus on the legal complexities involved in starting a business in Kuwait. Take us through the basics of it.
A: Okay. To start a business in one’s native land is in itself a complex affair. So, the complexities are only going to increase, if we look at starting a business in a foreign country.
When you look at Kuwait, there are the usual commercial, banking, procedural and legal aspects to starting a business. These things can get very difficult to circumvent without the assistance of a legal luminary.
Now, let’s look at the basic requirements to start a business in Kuwait. The first condition is that you need to have a Kuwaiti partner who enjoys not less than a 51% share in the business. With regard to foreign ownership, an interesting amendment was made in 2003 allowing foreign companies to take part in certain activities, which are: all industrial activities except oil and gas exploration and production; construction, operation and management of infrastructure in the field of water, power, drainage and communication; banks, investments, foreign exchange companies, insurance companies; information technology and software development; hospitals and medicine manufacturing; land, sea and air transport; tourism, hotel and entertainment; culture, information, marketing except for the issuance of magazines and newspapers, integrated housing projects except for real estate speculations.
So basically, the exceptions are oil and gas and newspapers. But for these areas, a foreign enterprise is free to indulge in any commercial activities in Kuwait.


Q: Most countries in the world today are keen to attract foreign investors to boost their economies. Is there such an effort on the side of Kuwait? What incentives do FDI’s get in Kuwait?
A: Yes, the FDI law confers certain privileges on foreign investors. They are: exemption from payment of income tax or any other tax for a period of 10 years, as well as exempting every new investment in the same enterprise from such taxes for a period equivalent to that granted to the original investment when the enterprise was established; relief from double taxation; total or partial exemptions from customs duties on certain imports such as machinery, equipment and spare parts required for construction and development; allocation of land and real estate required for investment purposes in accordance with Kuwaiti law; recruitment of foreign manpower in accordance with Kuwait labor laws.


Q: You said exemption from income tax is a privilege for foreign investors. Is there income tax in Kuwait?
A: There is taxation, which is very minimal. It’s not like in some of the industrialized countries, where taxes eat away almost half your profits. When you compare with those countries, Kuwait is a tax-free haven.
Okay, now let’s move to the important laws that govern businesses in Kuwait. The important laws are: Commercial Company Law, Civil Code, Commercial Code, Foreign Direct Investment Law, Kuwait Tax Decree, Regulation of Commercial Agencies Law and Kuwait Labor Law.


The first thing you need to have before doing business is a license to do business. It’s the ministry of commerce and industry that issues these licenses. However, you will also need to get a license from the concerned ministry relevant to your business. For example, if you are starting a business that is somehow related to the ministry of water and electricity, then you need to procure a license from that ministry in addition to the commercial license from the ministry of commerce and industry.
These procedures are a little involved, and an entrepreneur will not be able to go through these processes without the assistance of a lawyer or someone who is well versed in these matters.
Of course, you can’t blame the law, because Kuwait is a land of many international businesses and there are lot of players. So, the laws have to be strict to ensure rule of law.
A common area of business in Kuwait is Commercial Agency. Kuwait is a microcosm of the world with people, products and brands from all the parts of world taking part in the economy. And as the law stands, any business needs to have a Kuwaiti partner. An agency for foreign business is the easiest way to establish a local partnership.


Once again a distributor is different from an agent. An agent can represent the company wholly and gets a commission on the items he sells. A distributor depends on the difference in cost price and selling price for his profit margins. And then there is Franchising, which is different again.
All these commercial relationships have different contractual agreements, and as it involves foreign partners, the contracts need careful scrutiny as the principal company may be located in the US or Europe, and will tend to reflect their laws. Secondly, the legal language will also differ. Yes, you can say that the contracts are written in English, but there is a difference between US English and European English. An English contract composed in Italy will sound different. These factors add to the complications, and there is the need for a shrewd lawyer to sift through these complications and hammer out an equitable contract.
A lawyer will also have to consider whether the agreement is enforceable by law. A contract has to have the following features: there should be an offer, there should be an acceptance, the duties of the principal company, the agent or distributor or franchisee have to be assigned. Each of these should be studied to ensure that they are enforceable by law, so that in the event of a conflict, it can be resolved legally.


Q: Who will be the arbitrator if there is a legal conflict between the parties in a foreign deal? Let’s say an Italian company and a Kuwaiti agent have dispute. Which court will they go to, Italian court or Kuwaiti court?
A: The principal companies usually have a higher say, and in the example you cited, the Kuwaiti agent will be required to go to Italy to fight the case. But Kuwaiti courts accept any case pertaining to contracts that are registered in Kuwait. So, there is a provision to resolve disputes in Kuwait.
Disputes can be resolved through the Court of First Instance, the Court of Appeal and the Court of Cassation, which is the highest court, in Kuwait. Disputes can also be resolved by way of arbitration. We can have one or more arbitrators in the Court of Appeal. In such instances, the case will be presided by three judges and two arbitrators chosen by the parties. Kuwaiti courts generally decline to hear any commercial case where the contract allows for arbitration. We can stipulate a clause in the agreement for parties to decide on the arbitrators.
Therefore, the parties can actually decide between themselves where they want to settle the dispute. Of course there are attendant issues of language etc. depending on where you fight the case.
Internationally there are rules for arbitration. Usually, the arbitrator is someone who speaks the languages of both the parties and is capable of appreciating the complexities of the case. Such an arbitrator may decide to conduct the case in either of the country, or at a neutral location.


Q: Who chooses this arbitrator?
A: That will have to be through an amicable understanding between the two parties. The disputing parties will choose the arbitrator.


Q: And can an arbitrator be anyone, or does it have to be a legal person?
A: A jurist of course. However, the point to note is that most such commercial cases will be settled at the earliest, because prolonging a case will not be in the best interest of either party. A delayed case will only entail losses. So, the nod is to agree to an amicable settlement. The underlying motive is to hammer out a win-win solution. If you are adamant, yes, you might win the case at the end of the day, but you will lose out in your business. It is not pragmatic to be stubborn in commercial disputes.
You have to understand that labor disputes, criminal cases and family disputes are not what shape the evolution of law in the world; it is commerce that is propelling the evolution of law. We all know how huge MNCs are actually running the world today. They are the agenda setters, they are the policy shapers. Corporate law is international law.


Q: Can you tell us something about the taxes in Kuwait?
A: Kuwaitis and expatriates are not subject to personal income taxes in Kuwait. Foreign companies are liable to pay income tax, even if they are shareholders in a Kuwaiti company. Also, companies owned by GCC citizens in Kuwait are not subject to the Company Income Tax.


Q: So, the share of the foreign companies in the partnership will be taxed. For example, if a US company has 49 % partnership in a Kuwaiti company, that 49 % will be taxed, is it?
A: Yes. Moreover, there is no property tax, Value Added Tax or sale tax in Kuwait.


Q: Do you know of any commercial dispute where the parties had to go for a foreign arbitrator or to a foreign country to resolve the dispute?
A: I know of many cases that are pending in the courts here in Kuwait. But as I said, a majority of cases are resolved through an arbitrator. Similarly, there are cases pending in foreign courts involving Kuwaiti businesses. But pending cases is not the norm. The norm is amicable settlement.


Q: How does Kuwait compare with Dubai when it comes to encouraging foreign businesses? It is said that it’s very easy for a foreign investor to start a business in Dubai.
A: Yes. Dubai is a very investor friendly country. There are reasons for it. Kuwait’s main economy is oil, and there is little need for it to depend on foreign investors to bolster its economy. Whereas Dubai subsists on tourism and foreign investments, and it can ill afford to alienate investors.


Q: But do you think the situation in Kuwait is improving?
A: Definitely. We have been seeing amendments in business laws, and the rules are getting relaxed nodding towards more investor friendliness. And one notable point is that there is a palpable shift in Kuwait’s business priorities. It’s warming up more towards East, eyeing China and India. Especially in the healthcare sector. There is a demand and supply economics at work here. Lifestyle diseases, like anywhere else in the world, are on the rise in Kuwait, and there is a sharp increase in demand for quality health services. Countries like India have emerged at the right time with world class health services, and the advantage is that they come at a third of the cost of similar services in the West. There is an appreciation of this fact in the Middle East, and more and more people are turning towards the East for medical treatments.


Q: But that would only promote health tourism. How do you see it bringing foreign businesses and investments into Kuwait?
A: Yes, not so much from that angle. However, this has stimulated business relations between Kuwait and India, as is evident from the visits of Indian ministers to Kuwait and their meetings with Kuwaiti authorities to probe ways of improving bilateral business ties. These are good signs for the future.

biography

Advocate Mohammed Basheer is a business lawyer working for a leading manufacturing company, Gulf Cable & Electrical Industries Company. He is the General Convenor of Indian Lawyers Forum, and brings vast experience with him in law practice from India. With close to a decade’s experience in Kuwait, Basheer is an expert in Kuwait commercial laws. The Indian Lawyers Forum is an association Indian Lawyers and law graduates in Kuwait with more than 80 members.

By Valiya S. Sajjad - Arab Times Staff


By: Mohammed Basheer

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