The underlying statutory framework concerning commercial agencies, distributorships and franchises in Saudi Arabia is set out in the Commercial Agency Regulation, Royal Decree No. 11 of 20th Safar 1382 Hejra corresponding to 22nd July 1962 Gregorian, and the Rules for the Implementation of the Commercial Agency Regulations of 1981. The application of these two statutes to franchises arises from Ministerial Order No. 1012 of 1992 of the Minister of Commerce. For ease of reference, we shall refer below to commercial agencies, distributorships and franchises collectively as agencies, unless the context requires otherwise.
Article 6 of the Implementing Rules provides that no entity may act as an agent without being registered in the commercial agents’ register of the Ministry of Commerce and Industry, and requires agency agreements to be registered with the Ministry of Commerce and Industry within three months from the agreement coming into effect, the ostensible reason being consumer protection, namely that after-sales service and the provision of spare parts is guaranteed.
The Service Agency Regulation of 1978 required that foreign parties who are not already licensed to conduct business in Saudi Arabia cannot perform contracts for the Saudi Arabian government or government agencies without having a registered service agent in the country, but that Regulation was repealed by Royal Decree No. M/22 of 16th Jumada Awal 1422 Hejra corresponding to 6th August 2001 Gregorian. Historically, registration of agency agreements was not crucial where only private sector sales were contemplated, because there are no Saudi Arabian laws which provide that a foreign party selling foreign goods to a Saudi Arabian private sector entity must have an agent or distributor in Saudi Arabia. In particular, until very recently there was no requirement that only a registered distributor may import specific brand goods into Saudi Arabia. However, in line with a tightening-up of trademark protection following Saudi Arabia’s accession to the World Trade Organisation on 11th December 2005, in recent months the Ministry of Commerce and Industry has made the import of high profile brand goods conditional upon the importer being the registered distributor, to prevent the import of pirated goods. To date, the application of this rule appears to be flexible, and determined by whether or not the concerned Ministry of Commerce and Industry officials are familiar with a given brand.
Articles 10 and 11 of the Implementing Rules provide that agency agreements must satisfy certain minimum requirements by setting out, inter alia:
the rights and obligations of each of the parties;
the obligations of both parties vis-a-vis consumers as regards the provision of maintenance and spare parts;
the capacity and nationality of each of the parties;
the subject of the agency;
the area covered by the agreement;
the services, works and goods covered by the agreement;
the duration and method of renewal of the agency; and
the mode of termination or lapse of the agency.
In 1982 the Ministry of Commerce and Industry first issued a recommended form of agency agreement, commonly referred to as the “model agency agreement”, which was recommended to be used in agency and distributorship relations with foreign principals. The terms of this model agreement have been amended from time to time. Similarly, together with Ministerial Order No. 1012 was issued a model franchise agreement “for the guidance of franchise contractors”. The use of any of these model agreements has never been mandatory, provided that the minimum requirements laid down by Articles 10 and 11 of the Implementing Rules are met. Apart from these formal requirements, the validity, effect and interpretation of agency agreements is governed by Islamic Law, which grants considerable freedom of contract to the parties to a contract. In general, the Saudi Arabian courts will give effect to the parties’ common intention set out in the agreement.
It is the agent’s duty to register the agreement. The principal has no actual involvement in the process. Registration of an agency does not afford an agent particular protection vis-a-vis the principal. The Saudi Arabian courts are not concerned with the registration of contracts and will, ordinarily, give effect to the common intention of the parties expressed in their written agreements, whether registered or not. The only context where registration of an agency agreement gives the agent some advantage in Saudi Arabia is that, until a dispute between a terminated agent and the principal is finalized, in principle no new agent can be registered, thus depriving the principal of the opportunity to effect government sales in Saudi Arabia. However, a newly appointed agent can still effect private sector sales in the meantime, and, in appropriate circumstances, a newly appointed agent can apply to the Ministry of Commerce and Industry for a temporary registration of the agency, particularly if he can demonstrate that sale of the principal’s products or services is in the public interest.
A new commercial agencies regulation has been under discussion since 1995, and has gone through numerous drafts in the meantime. Government sources have indicated that a final draft may now be ready. While earlier drafts were more restrictive on the principal’s and agent’s freedom of contract than under the current regime, current indications are that the parties to agency agreements may enjoy even greater freedom of contract under the new legislation.
*This Saudi Arabian Law Overview is not intended to be legal advice, and cannot be relied on as a substitute for legal advice. We make no representation that the contents of this Saudi Arabian Law Overview are or will remain accurate or current.
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