The Kingdom of Saudi Arabia (the KSA) is attracting increasing levels of interest from foreign investors in a broad range of sectors. The appointment of a KSA commercial agent is one way in which a foreign company can penetrate the market without establishing a direct presence in the KSA.
We are seeing a growing number of enquiries in this area; indeed in October of 2009 the Ministry of Commerce & Industry (the MoCI) Summary of Commercial Information reported a 30% increase in the number of registered agents in the KSA compared with the equivalent period in the previous year.
This article highlights some of the key legal issues which should be considered by foreign companies either wishing to enter the KSA market through a commercial agency or wishing to make amendments/variations to their existing KSA agency arrangements.
Are foreign companies required to appoint a KSA commercial agent or distributor (a "KSA Agent") in order to sell their products in KSA?
The appointment of a KSA Agent is only one of a number of options open to a foreign company wishing to sell goods and services to KSA customers. Another option is for foreign suppliers to organise the sale of the products from outside of the KSA and require that the purchasers inside the KSA arrange for the importation of the goods themselves. It is also possible for a foreign principal to establish a company in the KSA licensed to carry out the activity of franchising provided that it satisfies a number of conditions that include:
- a limit on foreign shareholding of 75%; and
- the requirement that the foreign applicant provides evidence that it is authorised in its own country to practice franchising.
Nevertheless, for certain foreign companies/industry sectors the appointment of a KSA Agent remains an attractive option because it can allow the foreign company to penetrate the KSA market in a fast and efficient manner (without having to establish a direct presence in the KSA). Provided due diligence is carried out, it should be possible to source a sophisticated and knowledgeable agent (or a network of non-exclusive agents) who can add real value in the KSA.
Key Features of the Agency Law
The Commercial Agencies Law as enacted by Royal Decree No. M/5 dated 11/06/1389H (corresponding to 25/08/1969) and its Implementing Regulations (the Agency Law) establishes a comprehensive framework that governs the relationship between the KSA Agent and foreign principal. Key features include:
- the KSA Agent should register with and obtain approval from the MoCI for each agency agreement into which it enters (although failure to register will not necessarily invalidate a contract or adversely affect the foreign principal). The time limit for the submission of the registration application in the register of commercial agencies is three months from the date on which the agency came into effect;
- the agency agreement must include certain basic terms (parties, subject matter, term, termination procedure, etc.). The MoCI has the authority to verify that the agency agreement conforms to KSA law and satisfies certain minimum requirements;
- the agency agreement must contain information with regard to product line and geographic scope but there is no requirement that the appointment of the KSA Agent be made on an exclusive basis. Thus, it is possible to register an agency agreement with the MoCI which states that the arrangement is non-exclusive;
- during the term of the agency agreement and until the first anniversary of its termination or until the appointment of a new agent (whichever is the earlier) the KSA Agent must provide consumers with necessary spare parts and maintenance at reasonable prices, available within 30 days of request;
- a model contract (originally issued in 1981 but revised in 1983) was recommended by the MoCI in relation to the appointment of a KSA Agent. However, it is not compulsory to use this agreement;
- the principal must guarantee the quality of the products and materials and ensure that they conform to the approved standard specifications in the importing country. The KSA Agent shall not be obliged to receive, or be responsible for distribution of, any quantities received from the principal that are contrary to such required standard specifications;
- severe penalties may be imposed for violating certain provisions of the Agency Law, including a fine of a sum not less than 5,000 Riyals and not more than 50,000 Riyals. Payment of a fine does not prevent an aggrieved party from initiating further legal action which could result in e.g. compensation being paid for damages caused, liquidation of the company, the deportation of foreign personnel and/or prohibition against future commercial activities in the KSA.
Is there any compensation that may be awarded to a KSA Agent upon termination of an agreement appointing a KSA Agent?
There is no fixed rule under the Agency Law in relation to the amount of compensation that may be awarded to a KSA Agent upon termination or non-renewal of a relevant agreement. Any award given by the Board of Grievances (which is the relevant forum for hearing disputes of this nature) generally covers only actual and direct damages incurred by the KSA Agent.
In the past, the Board of Grievances has not generally awarded punitive damages or taken into account loss of anticipated profits. In fact, there are a number of cases where the Board of Grievances has not awarded any compensation to the KSA Agent where the principal has not renewed or terminated the agreement in accordance with its terms and has not breached other provisions in the agreement.
Can a foreign company that has a KSA Agent establish a commercial presence in KSA?
A foreign-owned entity, that has products in the KSA and a registered KSA Agent, can establish a Scientific and Technical Office (the STO) in the KSA without any capital requirements or local equity participation. The purpose of the STO must be to support the relevant KSA Agent and to assist the end users of the products. The STO is prohibited from directly or indirectly engaging in commercial activities in KSA and should not therefore engage in any direct relationships with the KSA Agent's customers, should not conduct marketing campaigns and cannot operate as a profit centre.
The establishment of a STO is becoming more and more prevalent and is increasingly viewed as the "modern way" of overseeing the operations of an agency in the KSA. One of the advantages of a STO is that it allows the foreign principal to have full control over its in-country employees. The process for establishing an STO is relatively straight forward usually taking between 2 to 3 months to complete.
Conclusion
For the right type of business the appointment of a KSA Agent remains an attractive way of entering / operating in the largest market in the GCC. However, it should be stressed that due diligence should be carried out on prospective commercial agents and any agreement should be carefully drafted to ensure that it complies with and complements the provisions of the Agency Law.