DISTRIBUTION AGREEMENTS IN THE MENA REGION: NAVIGATING KEY LEGAL CHALLENGES

16 December 2024

Bini Saroj

Distribution agreements in the MENA region are crucial for businesses looking to expand their market presence. These agreements typically involve appointing local agents or distributors who understand the regional market dynamics, navigate bureaucratic challenges, and leverage their contacts to facilitate business operations. However, the legal landscape varies across countries, with specific regulations governing exclusivity, compensation, and termination of agreements. Companies must carefully negotiate these contracts to mitigate risks and ensure compliance with local laws

Dubai: This article provides an overview of the complexities of distribution contracts in Morocco, Algeria, Egypt, and Saudi Arabia. It highlights the risks foreign companies face when entering into commercial agency and distributor agreements in the MENA region and offers guidance on mitigating these risks.

Key Difference between Commercial Agents and Distributors

Commercial Agents: These individuals conclude commercial transactions in the name and on behalf of another company for a commission, thereby establishing a customer base for that company.

Distributors: Unlike commercial agents, distributors purchase goods from a company at discounted prices and resell them in their own name, earning through the profit margin. Different regulations apply to commercial agents and distributors, as the former are generally more in need of protection.

Key Considerations for Distribution Contracts in the MENA Region

1. Exclusivity

• Algeria: Exclusivity in distributor contracts is prohibited under competition law.
• Morocco: Exclusivity is permissible, but commercial agents are entitled to commissions on exclusive contracts even if they do not directly conclude sales.
• Egypt: Exclusivity applies to commercial agency contracts unless explicitly waived.
• Saudi Arabia: Exclusivity is not mandatory but is enforced if agreed upon. Certain products may require exclusive agreements. However, the Ministry of Commerce may rescind exclusivity if it restricts competition or causes inefficient distribution.
  
  

2. Nationality Restrictions

• Egypt and Saudi Arabia: Commercial agents must be Egyptian or Saudi nationals. In Saudi Arabia, the draft law may allow foreigners to act as agents or distributors if licensed by the Ministry of Investment and Commerce.
  
  

3. Termination Challenges

Termination of commercial agency or distributor agreements is often difficult, even in cases of contractual breaches. To avoid prolonged disputes:

• Include clear termination clauses outlining material breaches.
• Limit exclusivity to specific products or regions to prevent potential blockages upon termination.
  
  

4. Registration Requirements

• Saudi Arabia: Commercial agents and distributors must register with the Ministry of Commerce. Foreign agents may also need to register with the Ministry of Investment under the draft law.
• Egypt: Only commercial agents require registration. Non-registration is subject to fines but does not invalidate the contract.
  
  

5. Notice Periods

• Morocco: Notice periods increase with the contract duration, starting at one month in the first year and increasing to three months from the third year onward.
• Egypt: Notice periods should be explicitly defined in the contract, as there are no default legal provisions.

6. Claims for Compensation

High compensation claims are common upon contract termination, especially in Egypt, where the law protects agents for damages caused by non-renewal or termination.

7. Parallel Imports and Enforcement Issues

Despite exclusivity agreements, parallel imports are not always preventable. Companies should register intellectual property rights locally and consider legal action to enforce compliance.

Dispute Resolution and Jurisdictional Challenges

Dispute resolution in the MENA region can be complex, as local courts may disregard choice of law clauses.

• Morocco: Does not allow choice of law clauses in distribution contracts.
• Egypt: Commercial agency agreements are mandatorily subject to Egyptian law and jurisdiction.
• Saudi Arabia: Courts often apply Saudi law to disputes, even if foreign law is specified in the contract.

Arbitration is often a more reliable alternative, as arbitral awards are generally easier to enforce in the MENA region than foreign court judgments.

Conclusion

Distribution agreements in the MENA region present unique opportunities and challenges for businesses seeking to expand their market presence. By understanding the legal framework, key considerations, and country-specific insights, companies can effectively navigate the complexities of these agreements and establish successful partnerships with local distributors. Careful drafting and negotiation of the agreement are crucial to mitigating risks and ensuring compliance with local laws, ultimately contributing to the long-term success and growth of the business.

ALKETBI TOUCH

Engaging our knowledgeable team of lawyers when drafting and negotiating the distribution agreements in the MENA region, will be a crucial factor of success. ALKETBI tailored drafting and review of agreements and customized advice regarding compliance with local regulations, ensuring that the agreement is legally sound and enforceable. We will offer strategic guidance on negotiating terms with local partners and mitigating potential risks, setting you up for success.