Saudi Arabia is one of the largest importer of goods in the Middle East region and is, in fact, one of the largest per capita importers of goods in the world. Saudi Arabia imports virtually all consumer and industrial goods that it uses. It imports roughly triple the amount of goods that it exports. For example, according to the Kingdom’s Central Department of Statistics and Information (Link in Arabic), in 2012, total imports were approximately 584 Billion Saudi Riyals (US $156 Billion) compared to non-petroleum related exports of 190 Billion Saudi Riyals (US $50 Billion).
With the recently-announced record 2014 national budget, demand for imported goods is expected to exponentially rise. Most foreign companies seeking to establish a long-term presence in Saudi Arabia choose to do so via a commercial agency agreement with a local partner. Commercial agency agreements in the Kingdom are governed by the Commercial Agency Act and associated regulations (the “Act”). The law does not differentiate between a distributor or an agent and, therefore, the Act is applicable to both types of contractual relationships. These two terms are used interchangeably in this Article.
The Act defines a commercial agency relationship as a contractual relationship between a Saudi company or individual and a foreign producer or their representative for the purpose of undertaking trading and commercial activities in the Kingdom.
Who Can Act as Agent/Distributor in Saudi Arabia?
The Act requires that the local agent or distributor be either a Saudi national (or 100% Saudi-owned company) or a citizen of the Gulf Cooperation Council (GCC). The GCC’s members include the countries of: Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the United Arab Emirates. In addition, the entity or individual must register with the Ministry of Commerce and the chamber of commerce in the region where the majority of trading activities will be undertaken.
Legal Obligations of Agents & Distributors
The Act imposes stringent legal obligations that function as a “warranty” for any goods distributed by the local agent . Among the most significant are the requirements that an agent provide spare parts at ‘reasonable prices’ as well provide maintenance and repair services. This requirement is imposed for a period of one year even after the termination of the agency agreement with the producer or until the appointment of a new agent. The agent is also required to maintain extensive documentation disclosing all customs/duties information and the country of origin of the product.
The Commercial Agency Agreement
In order to impose uniform rights and obligations on all local agents and their foreign principals, the Ministry of Commerce has a standardized model contract which serves as a guide for both parties. Although the agent and principal are not required to use the model contract, the use of a contract with terms that substantially differ from the model will prevent that agency relationship from being registered with the Ministry of Commerce–essentially invalidating the contract.
The mandatory terms in a commercial agency agreement, as set out by the Ministry of Commerce, are the following:
- Parties to the Agreement;
- Territory covered by Agency;
- Exclusivity, if any;
- Duration of Agency;
- Conditions for termination and renewal;
- Rights and responsibilities of each party towards each other and the consumer–specifically who is responsible for the cost of maintenance and provision of spare parts;
- The products and services that are covered by the Agreement;
- Capacity of the local agent, i.e., whether the agent is a direct representative of the principal or is an independent distributor; and
- The terms of payment or formula for remuneration.
Saudi Arabia is a lucrative market for foreign companies and investors. At a time when the market in the United Arab Emirates is beginning to get stagnant and saturated, Saudi Arabia remains ripe with opportunities. However, the cultural, political, and legal landscape is complex and varies dramatically from that of countries such as the USA or in Europe. Unaccustomed foreign companies or investors should seek out advisory or legal firms who are proficient and have expertise in Saudi Arabia.
Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice. The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.
Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Committee as well as the Islamic Finance Committee of the American Bar Association’s International Law Section. Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years. Wassem currently focuses his practice on Business Immigration (EB-5 Regional Center and Investor Representation) and International Business Transactions. For more information, please visit the About Us page or http://www.dharlawllp.com.