Background
In earlier days Saudi commercial agency and distribution agreements carried high risks for offshore suppliers, particularly when registered at the Ministry of Commerce (“MoC”) Commercial Agency Registry (“Registry”); these often became “Catholic marriages,” difficult to terminate without losing the market.
The old Commercial Agency Law was designed to protect local agents, limiting eligibility to register in the Commercial Agents Registry to Saudis only.
New Draft Commercial Agency Law
Not only may foreign principals now register new agreements without the original agent’s approval; a new Commercial Agency Law replacing the earlier law will if implemented, among other positive provisions, open agency to foreign entities, as follows.
- As before, agents/distributors (not principals) must register agreements in the Commercial Agency Registry, in addition to satisfying applicable licensing requirements.
- Foreign-owned agents/distributors are treated equally with locals, subject to foreign investment licensing by the Ministry of Investment.
- The MoC’s model agreements remain optional, not mandatory.
- If silent on term or extended beyond what has been agreed, agreements become indefinite.
- Unless otherwise agreed agents/distributors may use principals’ trademarks, without registration or formal licensing.
- Obligations to respect the counter party’s reputation and trade secrets continue post-termination.
- Agents must ensure consumer rights, including maintenance, spare parts and technical support, throughout the term and for a year thereafter, or until a new agent is appointed.
- Agreements terminate automatically upon either party’s death or insolvency.
- Agreements may be terminated for cause and without compensation for material contract or compliance breach, liquidation, 90+ days’ nonperformance, threats to public health or safety, loss of licensing, corruption, harm to commercial interests or infringement of intellectual property rights.
- Unless otherwise agreed (and excepting force majeure for which no notice is required), the notice period for terminating indefinite agreements is calculated based on one month for each year served; if actual notice falls short, compensation for the balance is based on average annual commissions or profits over the latest three years.
- Unless otherwise agreed, both parties are upon termination for other than cause entitled to compensation for contributions to the value of the principal’s brand, goodwill and sales.
- Unless otherwise agreed the principal must upon termination repurchase sound inventory and assets purchased from him at market value or amounts paid.
- Claims for wrongful termination expire after a year, and for breach after three years.
- After termination agents/distributors are unless otherwise agreed entitled to payment of commissions on sales attributable to their efforts, and on their transactions concluded within 90 days of termination.
- Disputes may be resolved before a MoC “conciliation commission,” or if the parties agree a commercial court or arbitral tribunal.
- Non-competition clauses may unless otherwise agreed extend through the term of agreement, and another two years after expiry.
- The MoC may amend the terms of an agreement to assure consumer access to food, medicine/medical equipment, healthcare or other “necessary goods or services.”
The new law is refreshing in its “light touch” regulatory approach, leaving rules on damages upon termination and the like freely negotiable between the parties. Given the wide latitude afforded to the parties to align their agreements with policies and circumstances, agreements should appropriately address issues otherwise subject to the new law’s default provisions.
The new law resolves an anomaly whereby companies registered in other Gulf Cooperation Council states were in theory assured national treatment under the Unified Economic Agreement, though in practice excluded from serving as local agents or distributors based on earlier restrictions of non-Saudis from registering in the Commercial Agents Registry.
The Ministry of Investment applies a high bar against foreign participation in “trading,” currently SR30 million capital plus substantial investment commitments over five years, to qualify for a 100% foreign-owned investment license; it remains to be seen whether it will relax these barriers to the ability of non-GCC investors to benefit from the new law’s more welcoming approach.
While other government agencies, including the Ministry of Human Resources and Zakat, Tax & Customs Authority, have been criticized for protectionism, the new agency law if implemented as drafted deserves praise for its fidelity to the World Trade Organization national treatment principle, and for the greater contractual freedom reserved for the parties.
