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Aspects
of Relevance to the Kuwait Legal System
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Introduction
This is a brief on the court system in Kuwait and other issues
of legal significance. However, the points raised hereunder
serve only as a general guidance to the legal system and should
not be perceived as a thorough detailed research. The author,
firm and other related entities do not assume any liability
to the contents and implications therefrom. Considering the
generality of this brief along-with the continuous updating
process of local laws and regulations, the reader is strongly
advised to seek professional, updated and detailed legal advice
prior to effecting any decision or conducting any activity
in Kuwait.
Preamble
Ever since its independence in 1961, Kuwait had endeavored
to provide for and develop an integrated modern legal system.
Evolution from the Sharia'a based codified Islamic rules,
i.e., "Majalla-tul Ahkam El-Adliya", into the current codified
laws which were derived from the Civil Code of France, was
considered both a necessity and an acceptable enhancement
or rather a distant "off-spring" of the "Majalla", considering
that the Maliki Islamic school of thought, which existed in
the North of Africa, was a basic pillar for the Napoleonic
Civil Code. Such an advancement in the legal system, introduced
to Kuwait in the early eighties, was compatible with the growing
needs of the society. The oil industry, on the one hand, along-with
all its begotten wealth, enabled the government to apply its
expansion and modernization projects, and on the other hand,
attracted many immigrants from neighboring and foreign countries,
who in-turn, contributed to the society by introducing new
and diversified cultural as well as legal customs and perceptions.
However, it is important to closely heed a significant and
an undeclared aspect relating to the heritage and customs
of Kuwait when trying to address its legal system and monitor
the application of its rules. Although it may seem ironic
or rather a paradox for some, concepts emanating from the
tribal mentality and Sharia'a still prevail and even govern,
to an extent, many behaviors, actions and interpretations.
Nevertheless, the very awareness of the noted concepts would
assist in resolving many ambiguities, understanding and even
appreciating the way things are done in this Middle Eastern
country.
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First: The Court system of Kuwait:
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1-1 Kuwait
follows a three-fold litigation system. However, the courts
of the first two litigation stages, i.e., Court of First Instance
and the High Court of Appeal, are considered to be courts
of substantial nature, i.e., litigant parties may present
defenses of formal as well as substantial nature, hence merits
of the dispute, facts and evidence may be presented, argued
and discussed by the litigant parties before the noted courts.
The Court of Cassation, which acts and is considered as a
Supreme Court, is the third and final stage of litigation.
However, this court acts as a supervisory body. It reviews
the judgements of the lower courts and determines whether
they had applied the law(s) in a proper and sound legal manner.
It is not permissible to present new evidence, discuss or
argue the merits and substance of the litigated dispute. However,
discussion of the merits and evidence may be presented to
the Cassation court, where applicable, by way of including
them indirectly through "engulfed" formal legal defenses.
1-2 There is a one main General Court in Kuwait city and another
three Courts in the providences of Kuwait. The "main" court
reviews disputes of all types and claimed amounts. However,
the other three noted courts do not review disputes which
claimed value exceeds KD. 5000/-. The main General Court consists
of many chambers, i.e., internal court panels, each of which
preside for a specific legal field, e.g., civil, commercial,
lease, criminal, administrative, labour, family matters etc.
1-3 A judgement issued pertaining to a dispute which claimed
amount does not exceed KD. 1000/-, is final and un-appealable.
Where the claimed amount ranges between KD.1001/- and KD.
5000/-, a judgement issued by the court is appealable at the
partial appeal Court instead of the High Court of Appeal.
If the claimed value exceeds KD. 5000/-, i.e., 5001/- and
above, a judgement issued in its regard may be appealable
at the High Court of Appeal and thereafter at the Court of
Cassation. However, in principle, a judgement issued by the
court of First Instance becomes enforceable if the court decides
so or becomes fully enforceable if it is not appealed within
30 days after the date of its issuance. If appealed within
the noted period and confirmed by the Court of Appeal, it
will also be enforceable. Subsequently, it should be noted
that resorting to Cassation, as such, does not render the
appeal judgement un-enforceable unless the noted supreme court
approves of an urgent application to that effect coupled with
the Statement of Cassation (S.O.Cas.). In this case, the Judgements
of the lower courts, i.e. court of 1st Instance and Appeal,
shall be un-enforceable temporarily up to the Cassation's
final decision in respect of the dispute. However, a procedural
case initiated at the court of Urgent Matters would also have
the same temporary effect of the noted Cassation-application.
1-4 The Civil and Commercial Pleadings Law No. 38 of 1980
(CCPL) and its amendments govern, inter-alia, the method and
conditions of initiating legal proceedings. However, a court
case is considered to exist upon depositing a Statement of
Claim at the Clerks' Dept. of the court and paying the relevant
fees. The format of the S.O.C., and equally the S.O.A. & the
S.O.Cas, should be in the same manner specified, inter-alia,
by articles 8 & 45 of the (CCPL), e.g., it should contain
all the necessary merits and details of the subject dispute,
particulars of plaintiff and the defendant, their whereabouts
along-with details about the summoning process, place of notification,
name and signature of the court-summoner and the recipient.
An official stamp will appear on a duly processed S.O.C. clarifying
the date of the first hearing, title and Number of the chamber
along-with the date of its deposit.
1-5 The Court fees were regulated and governed by the Law
No. 17 of 1973. In brief, the fees are structured in rather
a simple manner, i.e., an amount equivalent to 2.5% is payable
for any amount claimed less than KD. 10000/-. An additional
fee equivalent to 1% of any claimed amount exceeding the noted
level of KD. 10000/- shall also be payable on depositing the
S.O.C. Claims of undetermined value shall be charged a fee
of KD. 5/- for each of the requests stated in the S.O.C. Other
official fees may become payable during the legal procession,
i.e., official engineers or accounting experts' fee as determined,
forensic fee etc.
1-6 There is no specific obligatory system scale of Advocate
fees. This is determined by the client and his attorney on
the basis of Consensus facit Legem. Despite some technicalities
and different interpretations as to the form of fees payable
to an Advocate, Law No. 42 of 1964 and its regulations and
amendments ending with Law No. 62 of 1996 govern aspects of
relevance to the Lawyers, their duties and rights. However,
a fixed amount equivalent to a percentage around 10% to 20%
of the amount claimed is perceived as a reasonable basis for
such remunerations as per the common prevailing understanding
among the law firms in Kuwait. In addition, it is common practice
to have half of the fees payable in advance, while the other
remaining balance to become due on full or partial favorable
finalization of the dispute amicably or through litigation.
The hourly based fees system may also be applicable upon agreement
between the advocate and the client. There is no legal stipulation
as to obliging either litigant party to pay its counter part's
advocate fees. However, subject to satisfying certain conditions
of intricate nature, and to the discretionary power of the
court, a litigant party's request to recover such fees may
be approved in part or in whole.
1-7 The Courts of First Instance commence their official work
at 8:30 a.m., while the High courts of Appeal and Cassation
commence at 9:30 a.m. The working hours end at 2:00 p.m. There
is a summer legal recess which starts on the 1st of July each
year and ends on the 31st of August thereafter. However, some
chambers continue to operate during the noted recess, e.g.,
Chambers of Urgent Matters. Additionally, work also continues
in both the Executional Department and the Experts' Department
of thecourt during the summer recess. The clerks Department
of the court cooperating also and accepts depositing of the
S.O.C., the S.O.A. and the S.O.Cas.
1-8 As per Article 102 of the Commercial Law No. 68 of 1980,
a basic "legal interest" is 7% of the amount ruled by the
court in favor of the plaintiff. However, if the Plaintiff
does not include a specific request for the 7% in his S.O.C.,
the court will not rule for the same. It was reported - unofficially
- that some judges refuse to approve the grant of the legal
interest and in some instances demand the plaintiff's lawyer
"politely", off-the-record, to delete such a request from
his claim. This refusal is attributed to the Shari'a beliefs
of some judges at the court. However, if the court obliges
the defendant to pay the legal interest, it will also determine
the date from which such an interest should be paid. If so,
the accumulated amount of interest will be calculated up-to
the full payment of the debt. However, as stipulated in Article
110 of the Commercial Law No. 68 of 1980, a legal interest
of 7% would be payable only for amounts claimed of a specified
nature which payment was delayed by the debtor.
1-9 The courts depend extensively on the Experts Dept., which
is an ancillary body of the court. The noted "Experts" are
employees of the Ministry of Justice and are either engineers
or accountants. Their role is to look in to the issues of
technical and accounting merits of a dispute, hence report
their findings and explanations to the court. However, their
role evolved into a close assistant of the court and actually
exceeded the same and carry-out their duties as investigators
who verify many aspects pertaining to evidence, facts and
merits of the dispute.
1-10 Nearly half of the Judges, two thirds of the General
Prosecutors and Experts are Kuwaiti citizens, while the others
are expatriates from neighboring Arabic countries mainly Egypt.
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Second:
Insurance and other codified laws in Kuwait:
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Kuwait
adopted the codified law system. As such, separate laws were
promulgated to govern various activities and transactions.
Articles of law which govern insurance transactions and activities
have been stipulated in several codified laws. The main insurance
rules and articles of law were stipulated in the Insurance
Chapter of the Civil Code No. 67 of 1980. It is important
to note that the noted Civil Code serves as the "Mother/Principal
Law" which should be adopted and applied in instances where
other laws, in general, do not provide for a rule to govern
an action or an issue of dispute. Other articles of law governing
marine insurance were stipulated in the Marine Mercantile
Law No. 28 of 1980. Insurance relating to Traffic Matters,
e.g., Third Party Liability policies, were stipulated in the
annexed regulation of the Traffic Law No. 81 of 1976. Articles
of law governing aviation are included in the Commercial Law
No. 68 of 1980. However, Kuwait is a member of several international
conventions governing marine and Aviation activities.
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Third:
Brief on the procedure involved for arrest of ships and "Attachment
Orders":
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3-1 A
ship or a vessel, as defined in Article 1 of the Marine Mercantile
Law No. 28 of 1980, may be arrested as per the rules stipulated
in the 5th Chapter of the noted Law.
3-2 To arrest a vessel, a plaintiff may submit an application
requesting the grant of a provisional attachment order to
the Judge presiding at the Chamber of Urgent Matters in the
General Court. In principle, Articles 222 to 260 of the Civil
and Commercial Proceedings Law No. 38 of 1980 govern the issues
pertaining to a Provisional Attachment, Articles 73 to 78
of the Marine Mercantile Law No. 28 of 1980 govern the marine
provisional attachment. As per Article 73 of the M.M.L., a
ship may not be arrested by way of processing a provisional
attachment unless the basis of such a request emanates from
a marine debt claim. Article 73/2 specified the definition
of marine debt sources.
3-3 If the rules and conditions as stipulated in articles
23 and 24 of the Civil and Commercial Proceedings Law No.
38 0f 1980, were met, Kuwaiti courts shall be competent to
review the merits of a dispute and pass a judgment in any
court case processed before them.
3-4 The Urgent Matters Judge does not look into the substantial
core of a dispute, as per Article 31 of the CCPL. Instead,
he concerns himself mainly with the Urgency aspects of the
dispute. As such, obtaining an arrest order against a vessel
is relatively a simple procedure. Where a plaintiff processes
a provisional attachment application coupled with a docket
(portfolio of documents) containing evidence that the debt
is of a marine nature, as noted earlier, his request would
be approved and an arrest order would be granted accordingly.
3-5 Upon issuing an arrest order, the plaintiff should process
its notification to the defendant and the port authorities
within eight days. The minutes of the arrest order summoned
to the concerned parties contains also information as to the
hearing date for a court case which should be held within
15 days after effecting the arrest procedures. The aim of
this court case is to obtain a judgment confirming the validity
and soundness of the arrest order. In this claim, the defendant
may submit his counter arguments and seek the nullification
of the arrest. In a parallel manner, the defendant may also,
in turn, file another procedural court case and request the
invalidation of the arrest order. Both court cases may be
referred tot he Experts' Dept. and may last there for a period
around three to six months. Another counter measure may be
processed by the defendant in order to release the arrested
vessel. Subject to Article 76 of the MML, the Urgent Matters
Chamber may grant a release order if a guarantee or any other
security was presented to the noted chamber. The value of
such a guarantee or security, e.g. bank guarantee, should
be equal to the debt amount claimed.
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Fourth:
Arbitration in Kuwait:
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The general rules governing
arbitration were stipulated in the 12th Chapter of the Civil
and Commercial Proceedings Law No. 38 0f 1980. Another recent
development was enacted in the early nineties, i.e., Law
No. 11 of 1995 and other Ministerial Resolutions, through
which a separate body for arbitration was established and
new arbitration articles were passed regulating the procedures
and methods to be followed when parties of a dispute invoke
arbitration.
However, Arbitration system exists also under the arbitration
system of the Chamber of Commerce and Industry in Kuwait,
along with other professional Societies.
All Arbitration awards should always be presented to the
court which was originally competent to rule on the merits
of the dispute, within ten days as of its date of issuance
in order to effect its enforceability.
Additional Note:
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Legal precedents have a binding nature. Judgements issued
by the Court of Cassation are published in two official
law journals and serve as precedents.
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The reader's attention is kindly drawn to the fact that
State of Kuwait had duly joined the treaty with respect
to the convention on the recognition and reinforcement
of foreign judgment in Civil & Commercial matter by
virtue of Law 6 of 2002 Kuwait had approved the noted
treaty .
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Fifth:
Brief on Agency issues:
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1) Commercial
Agencies in Kuwait are divided into three types, viz.;
a] Agency of Contracts,
b] Distributorship Agency,
c] Commission Agency.
2) In a general legal sense, Commercial Agencies are governed
by:
1: Articles 260 - 296 of the Commercial Code.
2: The Agency Law No. 36 of 1964,
3: Articles 698 - 719 of the Civil Code.
3) The Kuwaiti promulgator considered that Agency of Contracts
and Distributorship Agency are of significant commercial importance
to the local economy, hence he tailored articles 271 - 286
in a manner to serve the interests of local agents when their
agencies are terminated. We draw the reader's kind attention
in this regard specifically to articles 281 and 282 of the
Commercial Code. Subject to certain conditions, both articles
entitle the agent of contracts and the exclusieve distributor
to claim for Termination Damages. Article 281 applies where
the agreement is of an un-specified period. Article 282 govern
agreements of a specified term(s). It should also be noted
that a distributor has to be appointed on an exclusive/sole
basis in order to benefit from such articles of law.
4) As may be guided by various legal precedents, calculating
the agent's annual average profits derived from the subject
agency and thereafter multiplied by 3 or by 6 usually from
the assessment basis of Termination Damages. Assessment of
Termination Damages (which include unpaid expenses, due commissions
and Material and Moral Compensations), in general, is subject
to the discretionary power of the court. While doing so, a
Court takes into its consideration several factors, e.g. annual
profits, expenses incurred by the agent for carrying-out its
duties including promotional campaigns, product sales, term
of the agreement, possible faulty actions committed by the
agent, etc. Furthermore, as per article 284 of the Commercial
Code of Kuwait, the "Old" Agent may adjoin the new agent in
the termination damages claim which he may addresses to the
principal. However, success of the claim addressed to the
new agent is subjected to the ability of the claimant to prove
collusion between the new agent and the principal to illicitly
terminate his agency agreement and be replaced by him.
5) Articles 271 and 286 of the Commercial Code are of significance,
for they contain the definitions of both an Agency of Contracts
and a Distributorship Agency, respectively. An agent under
an Agency of Contracts receives payments by the Principal
(in the form of e.g. a certain agreed commission or a lump
sum) and do not "own" the products which title (Property)
remains vested in the Principal. Such an agent "solicits"
deals and transactions for the Principal and may conclude
them only in the name and for the account of the Principal
and not in his own name and benefit. You may note that an
agent may acquire both capacities, i.e. an agent of an Agency
of Contracts and a Distributor.
6) The only reference to the distributorship agency agreement
under the Commercial Code was only made under article 286.
A distributor was simply defined as being "a merchant who
undertakes to promote and distribute products of an industrial
or commercial entity in a certain area". Such a distributorship
agreement is considered as being a Contract of Agencies and
is governed by articles 275, 281, 282, 283, 284 and 285 of
the Commercial Code provided that he is appointed as a sole/exclusive
distributor of such entities". Payment issues pertaining to
a distributor and his right to sell and promote the products
in his own name or in the name of his principal were not explicitly
dealt with under the noted article. However, considering that
such an agreement, i.e., an exclusive distributorship, is
regarded generally as a type of the Contract of Agencies,
and falls under its scope, then it would be a reasonable and
sound legal argument to say that the latter's rules apply
and govern all aspects of such a distribution agreement. This
is especially true when the distributor is obliged to establish
buildings, showrooms, maintenance sites and workshops as per
article 275 of the Commercial Code. Article 261 of the Commercial
Code and a scholar's statement had clarified the payment and
title issues pertaining to a Distributorship. Article 261
assumes that all Commercial Agencies are carried out in return
of a certain payment to be made by the Principal to the Distributor,
unless agreed otherwise. In page No. 319 Para. 2 of Dr. Yacoub
Sarkhouh's Commercial Contracts, a Kuwaiti professor of law,
published in 1986, it is stated that: "One can note that in
such types of a contract (i.e. a Distributorship) whereby
an agent is appointed as a sole agent for promoting the products
of his Principal, the latter will not be bound to pay a commission
to the Distributor if sales are made directly by him, (i.e.
the Principal),..".
7) Termination Damages rules pertaining to Commercial Agencies
are rightly considered by Principals to be a burden of relative
financial implications. This may be evaded if a distribution
agreement is not characterized as such. In other words, where
an agreement falls out side the scope of an Agency of Contracts
and an exclusive Distributorship Agreement, articles 281 and
282 shall not be applicable and thus the local party will
not be entitled to claim for Termination Damages under their
rules. This does not prevent the agent from basing his claim
for recovery of expenses, possible dues and partial compensation
on other applicable legal rules stipulated, inter-alia, in
the Civil Law.
However, even if the "old" Agent, who suffered termination
of his contract, files his claim within the specified period,
his entitlement to receive termination damages is subjected
to, as per the above noted Article 282:
a) That he neither breached his contractual obligations nor
was in default while executing the Agency Agreement. And
b) That his activities had led to apparent success in promoting
the products or increasing the number of customers.
Where a new Agent is appointed for specified products, the
old agent has no right to dispute the former's appointment
for the distribution of products other than those mentioned
specifically.
8) It is interesting to note that in some instances, the subject-terminated
agreement does not fall under either agency types. It may
be called or titled as "Agency" or "Distributorship" agreement,
but in fact it falls in the category of a sale and purchase
agreement by which the old agent was appointed as a sole importer
only! This may be true in cases where the old agent does not
get paid a commission for whatever he sells in the local market,
but instead, where he (the old agent) purchases the products
from the principal and pays the latter all of the sale value
and subsequently sells them directly by himself or through
his dealers. Accordingly, and on the light of the forgoing,
if a dispute arises under the above pretexts and evolve into
litigation, the old agent's arguments on the basis of articles
281 and 282 would, generally, stand a minimal chance of success.
9) Finally, sometimes it is advisable to simply evade responding
to the counterpart's correspondence. If one party feels it
crucial to reply, for certain commercial reputation reasoning
or other factors, then its response should contain; a] reasoning
and causation, e.g., a basis of termination,, breach of major
obligations, unsatisfying the sales targets, supporting the
principle's competitors, carrying-out an administrative or
a corporate restructuring which was perceived as a contractual
breach, etc. b] A statement to pave the way for invoking a
subsequent legal defense at the court on the basis that, say,
the subject agreement does not fall under a certain "characterization".
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Aspects
pertaining to "Attachment/Lien":
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An Agent
may import the products, provided it is licensed to import
and carry-out merchandising/trading in Kuwait by the Ministry
of Commerce and Industry, a task which can be performed by
any local Import/Export Gen. Tradg. Est. or company. Contrary
to - for example - the laws of the U.A.E., the Kuwaiti laws
do not restrict the import of goods by their local agent.
However, a local agent may file a damages claim and apply
for a provisional attachment order where another party imports
counterfeited goods bearing an imitative Trade-Mark (or Trade-Name)
of the former's "agency goods", or bearing forged Trade-Marks.
Furthermore, a local agent whether holding a valid agency
agreement or a terminated one, may file a termination damages
claim and a provisional attachment against his principal and
the new agent. As noted earlier, success of a claim addressed
to the new agent is subjected to the ability of the claimant
to prove collusion between the new agent and the principal
to illicitly terminate his agency agreement and be replaced
by him.
The only legal remedy which would enable the old agent to
object to the import /clearance of the newly imported goods
is by applying for a provisional attachment. A procedure which
implies that a law suite in regard to the validity of the
attachment procedures should be filed within 8 days from the
date it was effected. It is most likely that the old agent's
application for an attachment against the imported goods would
be rejected. However, where it is approved and granted, the
same could subsequently be disputed, hence the attachment
will - most likely - be canceled. It would suffice to mention
in this regard that it is permissible to file an attachment
application against the General Manager of the Customs Administration
without including the principal or the new agent. This -uncommonly
known- measure will act as a temporary obstacle in the face
of the new agent and will prevent him from importing and clearing
his goods for a considerable period of time. However, it may
subsequently be canceled through processing a counter order.
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Seventh:
Legal structure and measures necessitated for establishing
a new company:
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1- A
foreign entity, e.g., a non-Kuwaiti company, establishment,
person, may carry-out commercial activities in Kuwait through
an agent or through becoming a partner in a local company.
However, any foreign company which carries-out business in
Kuwait becomes subject for Taxation as per the Tax Law of
1955.
2- Among other legal and financial benefits, a W.L.L. (With
Limited Liability) type of companies may be established within
a short period. The partners may subsequently decide to alter
its legal entity type into a joint stock company as deemed
agreeable among the partners (certain measures involves the
Ministry of Commerce & Industry).
3- The subject process shall commence by establishing the
company among, at least, two individuals (a spouse is excluded),
acquiring the proper license and including the necessary objectives
in the Articles of Association. Having established the company,
an official "Employment File" shall exist in the company's
name at the Ministry of Labour & Social Affairs". A need may
arise for a "Foreign" partner to appoint an agent/attorney
to represent him/her. Therefore, a Power Of Attorney should
be provided. Such a P.O.A. should be duly issued by the foreign
"Entity" at a Notary Public office abroad and attested up-to
the Kuwaiti Embassy. In addition, where the entity is a company,
a duly authenticated copy of the foreign entity's license
and commercial registration should be attested by the Kuwaiti
embassy abroad.
4- Each non-Kuwaiti individual representative, except for
citizens of the G.C.C. countries, should hold valid Work Permits
and Residence in Kuwait through the company after its establishment.
To meet this requirement, each individual should arrive to
Kuwait on a "Work Permit Visa", stay for a short period (around
a week or two) and finalize the Health as well as the Police
Record Clearance processes, i.e., fingerprints etc. When the
official Work Stamp appears on the passport of each representative
and upon the issuance of a Civil I.D., the Ministry of Commerce
and Industry may accept their application for admission as
new share-holders in the established company.
5- G.C.C. citizens are exempted from the "Work Permit and
Residence Passport Stamp" procedure. However, they are required
to hold Kuwaiti Civil I.D. cards in order to appear as residents
in Kuwait. To satisfy this requirement, such an individual
should enter Kuwait, stay for around a week, rent an apartment,
pay at least a one-month rent value and obtain a Police Record
Clearance/(fingerprints). Twelve colored passport size pictures
are required in advance for each representative.
6- On finalization of the above, the company's Articles of
Association shall be duly redrafted and/or amended at the
Ministries of Justice and Commerce, hence contain the shareholders'
names and number of shares as agreed in the first place between
all of us accordingly.
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Eighth:
Brief on Taxation in Kuwait :
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1- A foreign
entity, e.g., a non-Kuwaiti company, establishment or person,
may carry-out commercial activities in Kuwait directly through
becoming a partner in a local company or indirectly through
an agent or through normal sale and export to a Kuwaiti party(s).
2- As per the Tax Law of 1955 and other relevant regulations,
the criteria applied by the Ministry of Finance for subjecting
any foreign entity to taxation is whether such an entity carries-out
business "in Kuwait" or "with Kuwait". The "in Kuwait" business
rout subjects a foreign entity to taxation. A foreign entity
is deemed to be conducting business "in Kuwait" if; inter-alia;
a) it establishes a branch/office in Kuwait, b) it has some
resident or local employees on its payroll, c) it uses its
letter-heads in local dealings, e.g. contracts, receipts etc..,
instead of appearing as a distant Principle, d) it directly
receives payments from third parties other than through its
own agent or through foreign banking transactions, e.g., wire-transfers
L/Cs.
Second: Advice on documents:
If the Foreign entity wants to ensure that local taxation
is evaded and be inapplicable to its commercial activities
and yields derived therefrom, the following measures should
be noted. Although vaguely stipulated, the lash of the "in
Kuwait" business conduct concept, is the criteria of subjecting
a foreign entity to taxation or not.
a- There should be no reference to indicate that the foreign
entity had contracted directly with the, e.g.; end-user, client,
customer, sub-licensee or any local third party.
b- It is preferable, in some instances, to have the contents
of any documents embodied in a form of a unilateral undertaking
to be signed by the end-user, client, customer, sub-licensee
or any local third party.
c- It is advised also to state that the local party(s), e.g.,
end-user, client, customer, sub-licensee or any local third
party, in general, is unilaterally liable for any local taxation,
if any, should it become or be considered due in respect of
the subject agreement, policy, license and/or the subject
product/service. An example on the suggested draft text to
be included in order to reflect the noted perspective is:
"It is hereby declared that the unit/product/policy's total
price does not include any amount which is payable or may
become payable to the local authorities e.g., official fees,
taxation, additional custom charges, ..etc. The (customer)
hereby undertakes to bear such amount(s) on unilateral basis
where and when they are or become due, if any, and render
the (foreign entity) and its local agent, licensee or any
nominated party, free from their payment".
d- In general, it should be endeavored by foreign entities
to evade any deed or action which may be interpreted by the
Ministry of Finance as an evidence of its direct existence
or direct involvement in the Kuwaiti market (other than through
a Kuwaiti agent, local representative or licensee,.. etc),
e.g., direct contracting, direct receipt of payments, ..etc.
The concept of the foreign entity's rather passive involvement
in any transaction or deed carried-out in Kuwait may be emphasized
by inserting the following paragraph in the agreement with
the local party/agent; "Considering that (the principal) does
not have any office or direct business existence or involvement
in Kuwait, its rights are hereby reserved to instruct its
local agent, licensee or any nominated party to act on its
behalf in order to maintain the protection of (the principal's)
interests, including but not limited to, the Intellectual
and Industrial rights, e.g., trade-marks, designs, patents,
copy rights trade-names, ..etc".
Points of significance to Taxation:
The general rule is that individuals (Kuwaiti and foreign
nationals) and Kuwaiti companies are not subject to taxes
on income. However, a foreign corporate body engaged in commercial
activities in Kuwait is subject to income tax. The tax rates
range from 5% to 55%. These rates are applied progressively
to income brackets.
Contribution to the Kuwait Foundation for Advancement of Science
(KFAS)
KFAS was for the purposes of providing aid and assistance
to science students and researches for their education and
training and for scientific research and development in general.
Under Article 6 of the Memorandum of Association of KFAS,
it is provided that a source of KFAS's financing shall be
from the payment by all Kuwait Shareholding Companies (a "KSC")
of a five percent of such companies' net profits to KFAS.
While, as a legal matter, a KSC is not, strictly speaking,
obligated to pay five percent of its net profits to KFAS (under
Article 48 of the Kuwait Constitution, taxes may levied only
by a duly promulgated law), it has become the general and
accepted practice in Kuwait for KSC's to make such payments.
Public Sector Procurement
Procurement by the Kuwaiti Government and its agencies is
governed generally by Law No. 37 of 1964 (modified by Law
Nos. 13 and 31 of 1970 and 1977, respectively) concerning
Public Tenders (the "Tenders Law"). The Tenders Law provides
that any procurement made by the Kuwait Government with a
value in excess of KD 5000 (approximately $16500) must be
conducted through the Central Tenders Committee procedures
in order to ensure competitive pricing.
Article 5 of the Tenders Law provides that a tenderer for
government contracts must:
"(1) be a Kuwaiti merchant, individual or company, registered
in the Register of Commerce in the Chamber of Commerce and
Industry of Kuwait; The tenderer may be a foreigner if he
has a Kuwaiti merchant acting as a partner or agent pursuant
to a deed duly executed by a notary, provided the Central
Trading Committee shall set down a specific regulation for
the participation of the foreign company in the tenders of
large works.
(2) be registered in the Classification List of Contractors
and Suppliers in conformity with the following Articles."
As a result, a foreign entity may act as a government contractor
only through (or with) a Kuwaiti entity in which it has an
ownership interest or by acting directly but with the assistance
and support of a Kuwaiti agent or commercial representative.
Two important exceptions to the application of the Tenders
Law should be noted:
1. Ministry of Defense Procurement. The Tenders Law does not
apply to the procurement of military items for the Ministry
of Defense and Security Forces. "Military materials" is broadly
defined by Kuwait law to include land, sea and air weapons,
spare parts, military communications, detection equipment
and related systems ("strategic military procurement").
There are no comprehensive laws or regulations that govern
Ministry of Defense ("MOD") strategic military procurement.
Instead, the MOD has developed internal policies and procedures
for such procurements, and such policies and procedures are
not available to the public. In general, such policies are
more flexible than the Tenders Law in an effort to accommodate
MOD's specialized needs with respect to strategic military
procurement.
2. Other Specialized Procurement. Kuwait government agencies
may request permission of the Central Tenders Committee to
conduct particular tenders outside the Tenders Law. However,
such tenders are relatively rare.
Offset Program
The Counter-Trade Offset Program (Offset Program), established
by Decision No. 694/1994, requires all foreign contractors
who meet certain criteria to participate in the Offset Program.
The guidelines issued by the Ministry of Finance for the Counter-Trade
Offset Program define, in Article 4, the terms "Offset Obligation"
and "Foreign Contractor." Offset obligation is incurred when
the single cumulative value of supply contract(s) awarded
to a foreign contractor is equal to or greater than KD 1 million.
The offset obligation is effective as of the signature date
of the supply contract and is equal to 30% of the monetary
value of the said supply contract. 50% of the offset obligation
must be completed in the first four years and 100% in eight
years.
"Foreign contractors" are defined as any business entity having
all of the following characteristics, namely:
1. It does not exist or operate under Kuwait Laws as per Ministry
of Commerce and Industry, Department of Corporations.
2. It has been awarded, either as prime contractor or sub-contractor,
a supply contract by the government or any of its public sector
institutions.
3. The goods and/or services to be provided under the supply
contract are defined as foreign produced under Kuwaiti Laws.
Kuwaiti business entities acting on behalf of foreign businesses
which are formed for the purpose of circumventing the Offset
Program will be deemed to be foreign contractors.
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In August
1996, the Kuwaiti Government passed Law 25 of 1996 regarding
the disclosure of commissions in connection with government
contracts. This law effectively requires full transparency
and accountability in all government contracts in excess of
one hundred thousand dinars (approximately $300,00) in value.
The law, which applies to all transactions entered into by
the Kuwaiti Government or its agencies or instrumentalities,
requires a stipulation by the contracting party as to whether
it has paid or will pay a commission of any kind to a disclosed
or concealed intermediary. Additionally, the law imposes an
obligation on both the payer and the payee to disclose in
a separate declaration, the amount of the commission, the
type of currency, the place and manner of the commission.
The sanctions for non-disclosure or misinformation range from
civil and criminal penalties equal to the value of the payment
to imprisonment. However, it is important to remember that
full compliance does not necessarily exonerate the parties
in the event that the payment in question constitutes a violation
of any other Kuwaiti law.
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Ninth:
Legal Aspects of Relevance to Conducting Local Business
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Articles
23 and 24 of the Kuwaiti Commercial Code state the basic premise
for doing business in Kuwait. Article 23 provides that non-Kuwaitis
cannot engage in commerce in Kuwait without having a Kuwaiti
partner whose equity holding is at least 51 percent. Article
24 provides that a foreign company cannot establish a branch
in Kuwait (on-shore) and it may not engage in commercial activities
in Kuwait except through a Kuwaiti agent. However, and as
an exception from the same, Law No. 8 of 2001 had been promulgated
to enhance the involvement and direct investment of foreign
entities in local trade and industrial activities provided
that the conditions stated under the noted law are satisfied
by the foreign entity.
Entering the Kuwaiti Market
A foreign person or entity may enter the Kuwaiti market and
carry out business in various ways. These are:
- enter into a joint venture agreement;
- establish an incorporated entity;
- appoint a local commercial agent;
- appoint a commercial representative; or
- Establish a "Fully-Owned" local company
Joint Ventures
Joint ventures are simple contracts that require no formal
establishment procedures.
The Kuwaiti Companies Law refers to joint ventures as joint
venture companies. A joint venture company does not have a
legal personality and may not transact business in its own
name. It may transact business with third parties only through
one venturer, who would be personally liable for the transactions
he enters into with third parties. The transacting venturer's
liability to third parties is unlimited. The liability of
a nontransacting venturer is limited to his share in the joint
venture. If the transacting venturer is a non-Kuwaiti, then
the Kuwaiti venturer in the company must guarantee him in
that transaction. If the joint venture were to deal with third
parties in its own name, the effect would be to expose all
of the joint venturers to unlimited joint and several liability
whether or not they were personally involved in the transaction.
WLLs and Closed Joint Stock Companies
Another form of doing business in Kuwait is to form a legal
entity with independent personality and limited liability.
Under Kuwaiti law, there are two such company forms that are
open to non-Kuwaitis. The first is the limited liability company
(WLL).
Both Foreign individuals and corporate bodies may use this
type of entity. However, Article 191 of the Companies Law
provides that a Kuwaiti must own at least 51% of WLL shareholding.
A WLL is quite easily formed and takes approximately two months
for its incorporation. The WLL provides the limited liability
shield and, prior to the recent judicial amendment, was nontaxable,
since Kuwait has no individual income tax and its corporate
tax applies to non-Kuwaiti corporate bodies. A closed Kuwaiti
joint stock company (KSC Closed) is the other type of company
open to non-Kuwaiti entities. Articles 68 and 94 of the Companies
Law provide for this type of company as an exceptional kind
of joint stock company. The general rule is that the shareholders
of joint stock companies must be Kuwaiti nationals. As an
exception, foreigners may own 49% of the share capital of
a KSC Closed after obtaining the approval of the concerned
authorities. The company's objects cannot be banking or insurance.
The incorporation of a KSC Closed may take up to six months.
The limitation in using this form of business is that, over
and above the tax levied on the profits made by the foreign
company as a share holder in KSC Closed Company, the KSC Closed
Company is itself subject to the 5% contribution to the Kuwait
Foundation for the Advancement of Science.
Commercial Agents
Commercial agencies are regulated by Law No. 36 of 1964 on
the Regulation of Commercial Agencies, and the Kuwaiti Commercial
Code, Chapter 5, Articles 260-296.
Article 1 of Law 36 provides that non-Kuwaitis may not act
as commercial agents in Kuwait, and Article 10 provides that
those who violate the rule are subject to three months imprisonment
and/or a fine.
The relationship between the Kuwaiti agent and the foreign
principal must be direct. The Code's provisions set out the
general rules governing commercial agencies and the types
of commercial agencies.
Commercial Representatives
The scope of authority of a commercial representative is usually
more limited than the authority granted an agent. A commercial
representative may be paid a set fee on a regular basis or
a commission or percentage of profits. The duties and obligations
commercial representatives are governed by Articles 297 -
305 of the Commercial Code.
In executing documents on behalf of his principal, the commercial
representative must sign his name as well as the name of the
principal and indicate that he is a commercial representative.
A principal is liable for all of the commercial representative's
actions and liabilities, so long as they are conducted or
incurred within the scope of representation.
Unlike an agency agreement, a commercial representation agreement
cannot be registered with the Ministry of Commerce and Industry.
A "Fully-Owned" local company - Direct involvement
Compared to the trade "Taboo", as rightly described by many,
under articles 23 and 24 of the Kuwaiti Commercial Code, which
prohibited non-Kuwaiti entities from directly assuming fully
owned trade activities in Kuwait, the recently passed Law
No. 8 of 2001 was a significant legislative development in
this respect. Despite many conditions stipulated therein and
that it is not yet fully "Tested" in courts, the legislator
had tailored the noted law in a manner to favor foreign investors
with the best possible assurances and securities to operate
in Kuwait.
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Tenth:
Local Trade-Marks (TM) Protection measures:
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1) Where
a Trade Mark infringement occurs, several types of counter
defensive measures may be initiated. Such measures may commence
at the Ministry of Commerce & Industry or at a later stage
in the courts. To advice on the best possible course of action,
a local law-firm needs to be provided with details about the
infringements and the merits of the subject Trade Marks.
2) For instance, an "Objection" may be processed officially
at the Ministry of Commerce & Industry/TradeMarks Dept. in
an attempt to stop the registration of an imitated TradeMark.
Such a process may last for a period of around five months
and involves preparation of additional counter replies and
verbal pleadings at the noted Dept.
3) Where an imitated TradeMark is already published in the
Official Kuwait Gazette and registered in a manner beyond
the ability to "Object" to it at the Noted Ministry, a court
case may be initiated in an attempt to delete the Administrative
Order which granted the permission to issue a registered TradeMark
Certificate. Time factor is of essence in such an action.
This is due to the fact that some court cases have to be initiated
within; ten days, or thirty days or five years, otherwise
the court case would, likely, be rejected on formal/procedural
grounds. This court case may also include a claim for damages,
whether a fixed amount or a temporary damages amount of KD.
5001/-.
4) In addition to the civil case above, you may note that
in order to effect a measure to stop goods bearing imitated
TMs from entering the country or from being distributed therein,
the above court case may be preceded with an "Attachment Application"
which may be processed at the Court of Urgent Matters in order
to obtain a "Freeze" on the goods. Such an order may be initiated
against the opponent himself and also (another separate one)
against the Head of the Customs Dept. Upon the grant of such
orders, each has to be followed by a court case to confirm
the validity and soundness of the attachments made.
5) Protective measures may also be initiated at the Consumer
Protection Dept. of the Ministry of Commerce and Industry
through depositing a complaint. Such a measure has to be preceded
with and complemented by a complaint to be processed at the
General Prosecutor Office, which is regarded and considered
subsequently to be a Criminal Case.
Documents Requested for TM Protection Measures:
a- Original duplicate of the original trademarks certificate(s)
(and any industrial designs, if any) duly authenticated by
all local authorities up to the Kuwaiti Embassy where their
registrations took place (abroad).
b- Any existing agency agreement concluded between the client
and his agent in Kuwait. The same applies to the local partner-ship
arrangements.
c- Copies of the agent's commercial license(s).
d- Samples of the original and imitated products.
e- Colored Photographs of both original and imitated TradeMarks
(as and if registered).
f- POA, duly authenticated up to the Kuwaiti Embassy abroad.
g- A letter or an affidavit issued by the foreign entity and
addressed to its local attorney containing a brief in respect
of the background on the subject TradeMarks, the relevant
merits, and the requests
h- Copies of any judgments issued in favor of the foreign
entity in respect of the subject TM against other opponents,
if any.
i- The addresses of the opponents, location(s) of their warehouses,
stores and any useful information in their regard.
Common Fees & Legal remuneration involved in the TM protection:
The official fees involved in the TM protection measures processing
are relatively minimal. However, the legal remunerations of
a local firm may vary from one office to another, subject
to the "conditions" of each TM and to the agreement with the
client.
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The following
is a brief on the main areas of interest pertaining to the
Time-Limits or the Time-Bar. Again, the reader's kind attention
is drawn to the fact that the information contained herein
serve only as a general guidance and should not be perceived
as a thorough detailed research.
Debts: Statutory-Time-Limitations (STL) or Time-Bars:
It is generally perceived that an explicit or implied acknowledgment
of debt renews its STL for a further similar period. If a
right to process a claim is time-barred and a debtor thereafter
pays part of his indebtedness, the applicable STL will be
renewed for a similar period because this would amount as
an implied acknowledgment of the "expired debt" as per article
449 of the Kuwaiti Civil Code.
You may note that STL is a very delicate legal issue. Every
case has its own merits, thus it should be studied and reviewed
separately. It would be advisable to know the merits and facts
of a dispute/claim in order to subject it to a legal identification
processing usually referred to as "Characterization", hence
its STL could be determined accordingly.
Any party who intends to conduct business in Kuwait should
observe, inter-alia, the following "General" time-limitation
periods: a) Marine Insurance 2 years, b) Insurance 3 years,
c) Tortious liability 3 years, d) Commercial business transactions
between merchants 10 years, e) Commercial Business transactions
between merchants and non-merchants 1 year, f) Felonies 10
years, g) Misdemeanors 5 years, h) Marine 1 year. I) Taxation
5 years. Such periods may be subject to a
Marine: Statutory Time Limit (STL):
In marine cargo claims it should be noted that as per Article
201/1 of the Kuwaiti MML, any court case emanating from a
marine B/L would be time-barred if not processed at the courts
within a one year period as of the date of delivery or commencing
the date on which the goods were supposed to be delivered.
However, a duly served claim letter through the registered
mail or settlement negations between the concerned parties
stops the calculation of the time bar period, as per Article
201/3 of the noted law. Therefore, if the time-bar period
of one year, as per the above article of law, lapses without
addressing the carrier with any law-suite, the court may accept
the formal defense to be raised on behalf of the carrier and
reject such proceedings accordingly.
Whereas for the claims arising out of Air-Fright shipments,
the STL period is two years, subject to the merits of Article
220 of the Commercial Code.
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Twelfth:
CopyRights & Patents:
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Kuwait
is a signatory of the WIPO treaty as per the local law passed
in this respect No. 2 of 1998. However, the direct CopyRights
protection is embodied in the Law No. 64 of 1999 pertaining
to the Intellectual Properties in general. The scope of protection
is wide and include the protections of, inter-alia; Computer
software, data transmission and broadcasting in addition to
many kinds and types of IP works. Furthermore, Law No. 16
of 1986 was passed to declare Kuwait's active participation
in the "Arabic Treaty for Protection Of Authors Rights". Additionally,
IP works may find protection under article 37 of the Constitution,
the Penal Code, the Civil Law No 67 of 1980 and the Printing
& Publications Law No. 3 of 1961. The Patent, Drawings and
Industrial Designs are protected under Law No. 4 of 1962.
Although no authority grants "Registration" for such noted
IP works and Patents, but instead a "Depository-System" exists,
it was noted by many that the competent ministries and authorities
apply a stringent attitude against infringes of such rights.
In general terms; Software, books, songs and movies may be
deposited at several local authorities and enjoy a "good"
degree of legal protection. However, other artistic rights;
e.g. pictures, musical notes, paintings, have no direct "Depository"
system until now at any of the local ministries and authorities.
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