Following the issuance of the Saudi Franchise Regulations by Royal Decree M/22 of 9/2/1441H. on 25 October 2019, the Saudi government is preparing a new law on commercial distribution and agency contracts; a draft of the law, which will, for the first time, contain provisions on the contractual relationship between the parties, was recently published for public consultation.
The draft law comprises of ten Chapters (general provisions, conclusion of the contract, general rights and obligations, expiry and termination, commission, competition, exclusivity, disputes, violations and penalties, concluding provisions) and 36 Articles. The most important provisions may be summarised as follows:
- The provisions of the law apply to all commercial distribution and commercial agency agreements performed in Saudi Arabia and entered into or renewed after the entry into force of the law; in relation to existing agreements for an unlimited term, the law will apply after three years following its entry into force.
- Distributors and agents must be registered in the Commercial Register and fulfil the license requirements for their activities; agreements must be registered with the Ministry of Commerce and, in that context, be translated into Arabic.
- Agents and distributors are liable to third party consumers for the fulfilment of consumer protection rights (maintenance, supply of spare parts, technical support), for the duration of the agreement and for one year thereafter, or until a new agent or distributor is appointed; they are responsible for compliance of imported goods with Saudi standards and health and safety requirements.
- If the principal terminates an agreement for a limited term before the expiry of its term, unless for specific reasons (such as material breach by the agent or distributor), the agent or distributor is entitled to equitable compensation; the parties may agree on compensation in an amount of the average commission or profits for one year, calculated on the basis of the three years preceding the termination.
- Agreements for an unlimited term may be terminated by either party by giving notice of at least one month for each year of the duration of the agreement.
- If the agreement expires or is terminated lawfully, and the principal has a considerable commercial benefit from the agreement, the distributor or agent may, unless agreed otherwise, claim appropriate compensation; unless the parties agree otherwise, the principal must buy back unsold but sellable goods at the market price or landed cost, whichever is lower, and tangible assets purchased by the distributor or agent from the principal, or on the principal’s request.
- Any agreement may contain non-compete obligations for the principal, and a distribution agreement may contain non-compete obligations for the distributor. In addition, a distribution agreement may contain post-contractual non-compete obligations; unless agreed otherwise, the non-compete obligation is limited to the contractual products and the territory, and is for a period of two (2) years; it is not enforceable if the principal terminates the agreement unlawfully.
- If an exclusive agreement results in a shortage of products or services that are necessary for consumers (such as foodstuff, pharmaceuticals, medical devices, health services), the Ministry of Commerce may continuously or temporarily suspend enforcement of the exclusivity; the distributor or agent cannot claim compensation from the principal unless the shortage of products or services was caused by the principal.
- The parties may agree on arbitration, mediation or conciliation for dispute resolution; the Ministry will establish a dedicated conciliation institution for that purpose.
- The law will replace the existing Commercial Agencies Regulations (issued by Royal Decree M/11 of 20/2/1382H. in 1962) and enter force into force 180 after the date of publication; executive regulations will be issued within 180 days following the issuance of the Law.
In view of those provisions, the following seems to be noteworthy:
- Apparently, the existing nationality requirements will be abolished; it needs to be seen how this will be reflected in the corresponding provisions of foreign investment law.
- To a very large extent, the provisions are subject to agreement and not mandatory; in particular, there is still no mandatory goodwill indemnity or compensation in the case of expiry or lawful termination.
- It is not entirely clear whether an arbitration clause would be upheld if it is combined with a choice of foreign law, but probably this should be the case; enforceability of a choice of foreign law in case of legal action in Saudi Arabia is still uncertain.
- It is remarkable that non-compete obligations seem to be entirely exempted from the restrictions under the Competition Law.
- The enforceability of exclusivity clauses against third parties is not really clear.
- The results of the public consultation have not been published, and it is unclear whether and to what extent changes will be made to the draft law; in any event, the executive regulations will probably provide further guidance and clarification.
Stephan Jäger, IDI Country Expert for agency & distribution in Saudi Arabia