Ali Al Rashdi, Mujtaba Ali Kazmi

Introduction

Partnerships between foreign investors and local companies play an essential role in driving economic growth in Oman, facilitating the exchange of expertise and technological knowledge in sectors such as construction, energy, and mining. In many cases, foreign companies opt to collaborate with Omani counterparts to execute specific projects without establishing a new legal entity. This strategy allows flexibility, enabling foreign investors to leverage their expertise while securing profit shares without the burdens of establishing a company or working as subcontractors.

Despite these advantages, compliance with local laws remains a critical factor in ensuring the sustainability of such partnerships and protecting the rights of both parties.

What are the legal consequences of failing to register such partnerships, and how can businesses mitigate these risks?

Laws Governing Partnership Agreements in Oman

Partnerships between foreign and local companies in Oman are subject to several key laws designed to regulate relationships and protect the rights of all stakeholders:

  • The Foreign Capital Investment Law (Royal Decree No. 50/2019) Article 3 of this law prohibits foreigners from engaging in any investment activity in Oman without obtaining a license from the Ministry of Commerce, Industry, and Investment Promotion. It outlines permissible activities and defines the terms for cooperation between foreign investors and local partners.
  • The Commercial Companies Law (Royal Decree No. 18/2019) This law governs the formation and registration of companies, emphasizing that all partnership agreements must be registered in the Commercial Registry under the Ministry of Commerce, Industry, and Investment Promotion. Article 5 states that companies failing to adopt a recognized legal form are considered null and void, while Article 14 clarifies that legal personality is granted only upon registration.

Legal Risks of Unregistered Partnerships

  • Nullity of the Agreement: Unregistered partnership agreements are considered absolutely null and void, meaning they produce no legal effects. This leaves the parties unprotected in the event of a dispute, as the courts cannot recognize or enforce claims based on such agreements. However, courts may apply the principles of a de facto partnership to address prior dealings, as highlighted in the Supreme Court judgment discussed later in this article, while maintaining the nullity for future obligations.
  • Financial Penalties: Under Article 33 of the Foreign Investment Law, foreign investors who engage in unlicensed activities face fines ranging from OMR 20,000 to OMR 150,000. Local partners involved in such violations are subject to the same penalties, underscoring the mutual risk posed by unregistered agreements.
  •  Liability to Third Parties: If the partnership is not registered but is disclosed to third parties, the relationship may be interpreted as a "De Facto Partnership" under Article 85 of the Commercial Companies Law. Such partnerships lack legal registration but may impose joint and several liabilities on the partners for third-party obligations. In such cases, foreign companies could face unexpected financial and legal responsibilities.

How Omani Courts Addressed an Unregistered Partnership Between a Foreign Investor and a Local Partner

In the cassation No. 34/2004, the Supreme Court addressed a case where a foreign investor filed a claim claiming profits from a partnership with a local partner. The partnership agreement was neither documented nor registered as required by Omani laws. The court concluded that the agreement was null due to its non-compliance with the Foreign Capital Investment Law, which requires all partnership agreements to be both registered and licensed.

However, the court recognized the existence of a De Facto Partnership based on the evidence presented. It decided to settle the rights and obligations arising from the partnership for the period preceding the judgment, while denying any future rights or obligations. 

This case underscores the critical importance of registering partnerships to ensure legal recognition and avoid the complexities associated with unregistered agreements.

How to Protect Your Partnership Agreements

To protect your investments and ensure compliance with Omani laws, it is essential to take proactive measures, including:

  • Drafting clear and comprehensive partnership agreements that define the rights and obligations of all parties.
  • Registering the partnership in the Commercial Registry and obtaining the necessary licenses to secure legal recognition.
  • Engaging a specialized lawyer to ensure the partnership complies with local laws and to provide tailored legal advice when needed.

Conclusion

Partnerships between foreign and local companies create valuable opportunities for success in the Omani market. However, compliance with foreign investment regulations and the proper documentation of partnership agreements are essential to safeguard against legal risks. 

At Bait Al Qanoon, we have the expertise to assist you in drafting and registering legally compliant partnership agreements, ensuring the protection of your investments and the achievement of legal success