In this article, we provide an overview of distribution contracts in Morocco, Algeria, Egypt and Saudi Arabia and their particularities.
Concluding commercial agency and distributor contracts (in English: “commercial agency & distributorship agreements”), the most common among distribution contracts, poses a number of risks in the Middle East and North Africa (MENA) region that foreign companies should be aware of in order to mitigate them. This article sheds light on some particularities in Morocco, Algeria, Egypt and Saudi Arabia.
Commercial Agents and Distributors: What is the difference?
Commercial agents are individuals who, for a commission, conclude commercial transactions in the name and on the account of another company, thereby establishing a customer base for that company. This distinguishes them from distributors, who usually purchase goods from a company at discounted prices and resell them in their own name, so that their earnings consist of the profit margin. As a rule, different regulations apply to commercial agents and distributors, as the former are more in need of protection.
What should companies look out for when negotiating distribution contracts in the MENA region?
Exclusivity: Algerian competition law prohibits exclusivity in distributor contracts. In Morocco, on the other hand, the parties are free to decide. However, the commercial agent is entitled to a commission in the case of an exclusive contract, even if he was not involved in concluding the contract. In Egypt, exclusivity applies to commercial agency contracts unless the parties agree otherwise. In Saudi Arabia, the Ministry of Commerce previously automatically considered every commercial agency contract to be an exclusive contract until it finally recognized non-exclusive contractual relationships in the more recent past. Exclusivity is mandatory for certain products in Saudi Arabia.
The current Saudi law and its implementing regulations do not require the commercial agent/distributor to be appointed on an exclusive basis for the products or territory concerned. However, if a commercial agent/distributor is appointed on an exclusive basis, the exclusivity will typically be enforced and protected by the competent authorities (Ministry of Commerce and competent courts in the event of disputes). The draft law (which is still in the consultation phase) generally allows exclusivity agreements between an entrepreneur and a commercial agent/distributor. The Ministry of Commerce may rescind such an exclusivity agreement if it could restrict competition in the market and/or lead to inefficient distribution of certain products in the market.
Nationality: Some countries like Egypt and Saudi Arabia still require commercial agents to have Egyptian or Saudi nationality, respectively. Although at least for Saudi Arabia the abolition of this requirement has been announced, it remains to be seen when and if this reform will actually be implemented. The Saudi draft law provides that foreigners (from outside the Gulf Cooperation Council) may act as commercial agents/distributors in the Kingdom if they obtain a license from the Ministry of Investment and Commerce.
Exclusivity Restrictions: In some Arab countries, commercial agents and distributors are granted significant rights and privileges. For example, under Saudi Arabian law, it is difficult for manufacturers to appoint a new commercial agent/distributor upon termination of the contract until all disputes are finally resolved. This can take years. Such a blockade can be avoided by not agreeing on exclusivity between the parties from the outset or at least limiting the exclusivity to certain regions or products. In Egypt, restrictions on the agency relationship to regions, sectors, projects, or customers can generally be agreed upon, so that several commercial agents may be used for the distribution of foreign products in Egypt. Nevertheless, to avoid disputes, it should be expressly stated in distributor contracts that the commercial agent is not granted exclusivity.
Registration requirement: In Saudi Arabia, there is a registration requirement for commercial agents/distributors with the Ministry of Commerce. According to the draft law, they would also have to register with the Ministry of Investment if they are foreigners. In Egypt, this obligation only exists for commercial agents. Circumvention of the registration requirement by applying foreign law is not possible. Non-registration is punishable by heavy fines in Saudi Arabia and Egypt, but does not render the contract invalid. It is advisable to include a detailed indemnification provision in the contract for the agent/distributor for not requesting the cancellation of the registration upon termination of the contract.
Difficulty of termination: In many countries, it can be very difficult to terminate the commercial agent/distributor even in case of clear breaches of contract. It is advisable to include clear termination clauses in the contracts that standardize and define material breaches of contract by the commercial agent/distributor.
Notice periods: In general, the notice periods depend on the duration of the existing contract. For commercial agency contracts in Morocco, for example, the notice period is one month in the first year of the contract, two months in the second year and three months in the following years from the third year onwards. Deviation from this is only possible to extend the notice period. In Egypt, it is generally advisable to specify exactly in the contract which notice periods must be observed, as these are not regulated by law.
Claims for compensation: High claims for compensation upon termination of the commercial agency contract or non-renewal of a fixed-term contract are not uncommon. Mandatory provisions of the Egyptian Commercial Agency Law, such as on claims for compensation, cannot be contracted out. The claim for compensation is based on the damage caused to the commercial agent as well as their influence and efforts to promote the goods and increase the customer base.
Parallel imports despite exclusivity agreements: Registered exclusive contracts do not always prevent parallel imports in practice. Companies should register their intellectual property rights locally and not shy away from suing their contractual partners to increase pressure to comply with the contracts. It should also be taken into account that in Saudi Arabia, the black market often competes unsustainably with the legitimate commercial agent/distribution partner.
Dispute Resolution: Morocco is one of the countries that does not allow choice of law clauses in distribution contracts. But even where choice of law clauses are legally possible in principle, it may happen that local courts, when called upon, ignore them and dispute resolution clauses, consider themselves competent both locally and internationally, and apply local law. In Egypt, too, commercial agency contracts are also mandatorily subject to Egyptian law and Egyptian jurisdiction. In Saudi Arabia, courts tend to apply Saudi law to disputes between a foreign principal and its Saudi commercial agent/distributor, even if the parties have chosen a foreign law. In lawsuits brought by a Saudi agent against its foreign principal, Saudi courts often declare themselves competent, even if the parties have agreed in their contract on the jurisdiction of a foreign court. The enforcement of arbitral awards in the MENA region is easier than the enforcement of German court judgments. When choosing the place of jurisdiction, it is advisable to consider the probability of bringing an action oneself or being sued.
If we can assist you in contract drafting or a dispute in distribution law, please feel free to write to us at info@mideastlaw.de.
