April 4th, 2023 Legal Updates

Contract Drafting in the State of Kuwait

Contractual disputes result from contracting parties deliberately or inadvertently departing from the perceived terms of an agreement.  One of the most significant values of a properly drafted written agreement is that it mitigates against circumstances where the contracting parties may have opposing interests in a particular contracting relationship.  In most Civil Law jurisdictions, proper form and execution of an agreement are crucial to mitigating uncertainties down the road; this is especially true when the law, for example, Kuwait Law No. 67 of 1980 (the Civil Code), is unclear as to the rights and obligations of a party or parties in a particular scenario.  Coupled with the discretion afforded to tribunals in Kuwait and the challenge of translating documents from non-Arabic to Arabic, it is common to feel uncertain about how a tribunal might interpret a particular provision.  Thus, contracts in Civil Law jurisdictions, such as Kuwait, sometimes need to be more amenable to globally standard contracting provisions.  This article provides insight into some of the drafting principles from a Kuwait law perspective.

Fortunately, the Kuwait Civil Code gives much deference to the terms agreed between or amongst contracting parties, and Kuwaiti law generally permits parties to agree to resolve disputes by way of arbitration or otherwise.  However, as discussed in this article, a party must ensure that they, or their counsel, can draft provisions appropriately and understand applicable Kuwaiti law and practice.

Several principles of law give us a fundamental understanding of the core concept of an agreement and its means of interpretation, which in turn, assist in preparing a formal, enforceable agreement.

First, a contract is the agreed set of laws that govern the contracting parties’ relationship, subject to express provisions of the law (e.g., the Kuwait Civil Code), which govern certain rights and obligations (e.g., rights of sub-contractors, contractors, and employers of construction contracts).  In other words, so long as a contractual provision is not expressly prohibited by law, it is presumed to be enforceable.

Second, a contract’s wording should be simple and fathomable by its parties to avoid unintentional ambiguity.  In such a context, if the wording of a contract is clear, the plain terms of the contract govern the interpretation thereof.  In other words, a court (or other tribunal applying Kuwait law) cannot look for other clues to understand what the contracting parties agreed — this is similar to the parol evidence rule applied in Common Law jurisdictions, which, in short, tells us that, when interpreting a contract, you cannot look to evidence outside the four corners of the agreement to determine the contractual intent of the parties.

Where there is room for interpretation of the contract, a Kuwaiti tribunal will look at the totality of the parties’ relationship to determine the intention or will of the parties at the time of contract formation.  If a tribunal finds clearing an ambiguous provision impossible, it will apply the interpretation that protects the harmed party.  Whether a contractual provision is clear is often at the heart of any contractual dispute.  Thus, it becomes essential that a drafter prepare a provision with an understanding of various factors, including how such a provision will be interpreted, under the applicable governing law, in case of a dispute.

Third, in a Civil Law jurisdiction, such as Kuwait, a contract likely causes parties to be governed by other principles and rules not formalized in their written agreement.  In short, they are the unwritten rules that govern all contractual relationships.  For example, any contract inherently contains the custom prevailing in its domain and rules of equity.  This principle often assists parties in understanding that, while it is impossible to account for every single possible scenario, the law essentially requires contracting parties to act professionally and in good faith, coupled with an assurance that other rules would fill the gaps that the parties would not address in their contract.  But for this rule, the simplest of agreements may easily result in volumes of terms stipulating the result of any potential scenario that may arise.

Some contracts, such as pledge agreements, lease agreements, or loan agreements, require certain key provisions or forms to be appropriate under Kuwaiti law.  Case in point, should a dispute arise regarding the enforceability of specific contract provisions, Kuwait courts (or any other tribunals applying Kuwait law) will first examine whether the contract includes such provisions.  This test will determine the nature of the type of contract and will also conclude on the validity of the agreement from a formal standpoint in some cases.  Should the matter of form be covered when drafting a contract, the parties should observe the contract’s substance.

Other principles may apply depending on the contract itself, the capacity and relationship between its parties, or the circumstances that develop following the execution thereof.  For example, the law accounts for the possibility of an unforeseen event that renders performance unduly burdensome or impossible.

In short, while Kuwait law provides some fundamental principles to guide the interpretation of a contract, it is vitally important that a Kuwaiti contract is prepared correctly with an understanding of Kuwait law and practice.

It is common for parties engaging in a highly technical or high-value contract to opt to refer disputes to other means of dispute resolution, such as arbitration.  Kuwait regularly enforces contracting parties’ election to defer adjudication of disputes to a foreign arbitration, so long as the tribunal is recognized by Kuwait (common examples include DIFC-LCIA and the ICC).  Parties may also elect a foreign jurisdiction, such as those party to the New York Convention, to resolve disputes, so long as we have reciprocity (i.e., Kuwait recognizes the foreign jurisdiction’s judgments, and the foreign jurisdiction recognizes Kuwaiti judgments).

One key issue, mainly when contracting with Kuwaiti entities, is the enforceability of an alternative dispute provision, such as one that defers all disputes to an arbitration tribunal.  A party may enforce an agreement to arbitrate or defer disputes to a foreign jurisdiction if done properly.  Kuwait law is strict regarding who is authorized to oblige another to certain things, here arbitration.  Often, general managers of companies with limited liability (WLL) or chief executive officers of shareholding companies (KSC) are not inherently authorized to bind their companies to such provisions, unlike other Civil Law jurisdictions such as Egypt, which, by default, recognizes the authority and capacity of legal entity’s legal representative to elect arbitration as the mean of dispute resolution.  Thus, their signature is usually insufficient to satisfy a counterparty that such a stipulation will be enforceable.  As a result, more is often needed to provide adequate comfort that a contract will be fully enforceable against a counterparty, such as, for example, express approval by the owners of the contracting entity.  Kuwait Law No. 1 of 2016, as amended most recently in 2019 (the Companies Law), guides as to what is needed to ensure that an agreement to arbitrate disputes binds the Kuwaiti contracting entity; however, a review of that entity’s corporate documents (i.e., the Memorandum of Association, and Articles of Association (if applicable)) is often needed to confirm the extent of the signatory’s authority to bind the entity s/he represents.

In summary, contract interpretation in Kuwait is heavily dependent on the quality of the agreement prepared.  While Kuwait guides contract interpretation, much is left to the drafter to ensure the parties’ intentions are reflected correctly in writing.  A party to an agreement should be mindful of rights and obligations that may be inherently present, such as those resulting from rules of custom and fairness, and ensure that the entire agreement is enforceable as intended.

Authors: Ahmad Saleh, Senior Associate and Khaled Al-Khashab, Associate

For further information, please contact Alex Saleh (alex.saleh@glaco.com) and Ahmad Saleh (ahmad.saleh@glaco.com).

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