Factional leader, Abdinor Ahmed Darman, says the private security company, Asgaard German Security Group, has agreed to help train military and security personnel in Somalia and to help fight piracy.
Darman says, under the terms of the contract, former German soldiers deployed by Asgaard are also required to help defend him and his supporters against attack by troops loyal to Somalia's U.N.-backed Transitional Federal Government and 5,300 African Union peacekeeping troops protecting the government in Mogadishu.
The media in Germany have speculated that Darman is planning to use the German mercenaries in a coup against the Transitional Federal Government, a government Darman considers illegitimate.
Since reports of Darman's deal with Asgaard security group surfaced a few days ago, lawmakers and political analysts in Germany have criticized the deal, some calling it a possible violation of U.N. sanctions on Somalia.
On Wednesday, the office of Somali President Sharif Sheik Ahmed described Darman as a "con artist" and dismissed his deal with the German company as a "laughable" matter.
An analyst with the International Crisis Group, E.J. Hogendoorn, says the deal appears to be based more on wishful thinking than on reality.
"It is obviously an extremely bizarre story. My understanding is that, essentially, the contract would be fulfilled when this man, Darman, actually becomes the head of Somalia, which is highly unlikely to happen. So, my suspicion is that this is a publicity ploy by both the German company and also by this Somali warlord."
Darman claims he was elected president of Somalia in 2003 by a parallel government set up during the tumultuous transitional presidency of Abdikassim Salat.
Salat was elected in August 2000 by various clan leaders in Arta, Djibouti in an effort to establish the first functioning government in Somalia since the collapse of the Siad Barre regime in 1991. But violence fueled by factional leaders opposed to the Arta agreement doomed Salat's government.
Through the mediation of the East African regional body called the Intergovernmental Authority on Development, Somalia's internationally recognized Transitional Federal Government was formed in 2004. Many Somalis say Darman has lived abroad for many years and is considered a marginal figure in Somali politics.