Saudi Arabia continues to overhaul and modernise its legal system in (commercial) contract matters:
- Following the entry into force of the Commercial Franchise Regulations (Franchise Law) in 2019 (see IDI Newsletter November 2019), the Civil Transaction Regulations (Saudi Arabia’s first “Civil Code”) was enacted recently by Royal Decree M/191 of 29/11/1444H. (18 June 2023) and will enter into force in December 2023;
- At the same time with the draft Commercial Distribution and Agency Contracts Regulations (see IDI Newsletter October 2022), the Saudi Ministry of Commerce submitted draft Commercial Transactions Regulations for public consultation and, in the meantime, has published the results of that public consultation.
The Commercial Transactions Regulations will, once issued, be the first comprehensive codification of commercial law in Saudi Arabia, replacing the Commercial Courts Law of 1350H. (1931), the Commercial Papers Law of 1383H. (1964) and the Commercial Books Law of 1409H. (1989), and complementing the new Commercial Courts Regulations that were issued by Royal Decree M/93 of 15/08/1441H. (8 April 2020).
The draft law comprises of nine Chapters (preliminary provisions, commercial activities, the trader, the trading business (fonds de commerce), commercial obligations, accounting, commercial contracts, commercial papers, concluding provisions) and 321 Articles; Section 4 of the Chapter on commercial contracts deals with commercial agencies and includes subsections on contract agency, commission agency and commercial representatives.
These provisions are generally in line with those contained in other Commercial Codes in the MENA Region, in particular the Kuwaiti Commercial Code of 1980, the Egyptian Commercial Code of 1999 and the Qatari Commercial Code of 2006 and are ultimately based on the French notion of a mandataire in commercial matters; however, the following provisions are particularly worth mentioning:
- If the principal is not resident in Saudi Arabia, the commercial agent’s place of business will be considered to be the principal’s place of business for service of documents purposes; in the case of legal action related to a customer contract, the contract agent is considered to be the legal representative of the principal;
- a contract agency is defined as a contract under which an agent undertakes, for a definite or indefinite period of time, and in a specific territory, to promote, negotiate and conclude transactions in the name and for the account of the principal, and to carry out some or all of the obligations of the principal in relation to these transactions;
- unless agreed otherwise, the principal may enter into agreements with several contract agents within the same territory and for the same activity; in the case of exclusivity, the contract agent is, unless agreed otherwise, entitled to commission on all transactions concluded within the contractual territory;
- if the contract agent has an obligation to invest in showrooms, warehouses or service centres, the term of the agreement must not be less than five (5) years;
- if the agreement is for an unlimited term, the principal must compensate the contract agent for damages incurred and profits lost as a result of termination unless in case of breach of obligation or negligence by the contract agent; the same applies to either party in the case of termination of a limited term agreement prior to the expiry of the term;
- if the principal refuses to renew a fixed term agreement on expiry, the contract agent is entitled to goodwill indemnity to be determined by the Court, provided that (1) the contract agent is not in breach of any obligation or negligence, and (2) the contract agent’s activity has led to significant success in promoting the principal’s products and increasing demand for them; this claim for goodwill indemnity must be filed within 180 days following termination;
- in the case of collusion, the new contract agent is jointly liable for the above compensation and goodwill indemnity;
- a distribution agreement is considered to be an agreement under which the dealer undertakes to promote and distribute goods or merchandise purchased from a commercial or industrial business in order to distribute them on an exclusive basis in a specific area; the above provisions on contract agencies apply to such distribution agreements as well.
Of particular interest are the – apparently mandatory – provisions on compensation on termination of an unlimited term agreement for convenience and on goodwill indemnity in the case of principal’s refusal to renew a limited term agreement, not least since these provisions do not seem to be in line with the provisions of the draft Commercial Distribution and Agency Regulations. It needs to be seen how that situation will be resolved when the Regulations actually enter into force.
Stephan Jäger, IDI Country Expert for agency & distribution in Saudi Arabia