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Agents runs amok.

Pick your local agent with care. Such advice to foreign companies seeking markets in the Gulf has been repeated continuously since the heady days of the 1970s.

COMMERCIAL AGENCY snatching is on the increase in GCC states and local chamber of commerce officials and businessmen are calling for stricter regulations and monitoring. Similarly, Western firms can still fall foul of the legal minefields when setting up joint ventures in the region.

There is also a groundswell of growing concern over proposed British amendments to its Law of Domicile, which Gulf businessmen who own property in Britain say will adversely affect them. And with the competition for contracts in the Gulf (one of the few economic growth areas in the world along with southeast Asia) becoming more intense as domestic opportunities for recession-hit Western and Japanese firms shrink, it is increasingly imperative for foreign firms to do their homework thoroughly before venturing into the region.

In Saudi Arabia, where disputes over commercial agencies have intensified in recent months, most seem to be centred on the multi-billion dollar automobile sector. The most celebrated recent case of agency changing is Al Husseini versus Al Naghi over the dealership for Germany's BMW. Another involves a similar dispute about the distribution rights for Korea's Hyundai. The situation has got so out of hand that the phenomenon has spread to other products ranging from the agency for the distribution of Panadol painkillers to baby products and soft drinks such as Coca Cola.

Many Saudi private sector businessmen and officials admit that the agency snatching has reached ludicrous proportions. The free market has become a playground for pirates. "Some middle ground has to be reached," says Abdullah Dabbagh, secretary-general of the Council of Saudi Chambers of Commerce and Industry. On the other hand, Abdullah Sadiq Dahlan, secretary-general of the Jeddah Chamber of Commerce and Industry, warns against exaggerating the issue which, he says, affects a miniscule number of firms when measured against the thousands of local agencies distributing foreign products in the kingdom.

The Ministry of Commerce in Riyadh, however, has set up a committee to investigate buccaneering competition and act as a pre-arbitration adviser seeking to resolve disputes. This would avoid otherwise inevitable recourse to expensive and time-consuming litigation.

Most Arab states have specific laws relating to the appointment and establishment of commercial agencies. But according to Christopher Dixon of the international law firm, Fox and Gibbons, these must be read in conjunction with the civil and commercial codes, especially relating to mandatory provisions of civil law jurisdictions such as registration, termination and compensation, and contractual freedom in common law jurisdictions.

Sometimes there can even be differences in the agency laws and the ways they are applied. In most Middle East countries ministries or government organisations do have power to adjudicate on the mandatory provisions of commercial agency codes.

In reality, as Dabbagh points out, the situation is much more complex. Loopholes in local agency laws and poor business judgement on the part of some foreign firms have confused matters. In the oil boom years of the 1970s and early 1980s, many foreign firms scrambling for business in the Gulf chose local commercial agents who had no experience in dealerships or distribution, let alone in handling the product. Not surprisingly, foreign firms, unhappy at the performance of the agent, sought to change their distributors and usually opted for one of the established trading families with a wide network of business interests and experience.

Some firms appointed agencies which are not even registered with the Ministry of Commerce, a condition vital in the case of compensation or termination due to poor performance. Similarly, a local agent cannot seek recourse from the Ministry of Commerce Committee if it has failed to register as an agent.

Under most Gulf agency codes, the obligations of the agent are set out clearly - minimum sales target, the servicing and maintenance of products and the provision of reports to the principal. At the same time, there are statutory requirements on both parties - the duty of the agent to comply with lawful instructions and to supply spare parts, and the duty of the principal to renumerate the agent. The remedies for nonperformance, however, are not always clear, especially when they concern aspects such as the bases on which compensation is awarded.

In Saudi Arabia's case, Dabbagh concedes that the existing agency law may be over-protective of the local agent. The major problem is how to balance the rights of a company, whose agent is allegedly not performing to satisfaction, with those of the agent to sue the principal for a possible breach of contract. The Commerce Ministry now insists that a local agency marketing foreign products in the kingdom must be officially registered with the Ministry. The latter has also introduced standard agency contracts which claim to contain basic provisions protecting the agent and securing the interests of the principal foreign company.

Apart from agency law, there are persistent problems in other areas such as bonds - bid bonds, advance payment bonds and performance bonds relating to default or on-demand payment and which were commonplace in the Gulf for big construction projects during the boom years. The major problem, according to Peter Michelmore of the international law firm, Richards Butler, is that of "unfair calling" of bonds where payment is demanded when a supplier or contractor is not in breach of contract or when the contractor's default has been caused by an act or omission of the employer himself. Last year the International Chamber of Commerce (ICC) published new Uniform Rules for Demand Guarantees (URDG) intended primarily to combat this problem of unfair calling and to promote a fair balance between the interests of the parties to such Guarantees. Another problem relates to the expiry of performance dates.

There are still major structural and organisational problems concerning joint venture legislation. But in their eagerness to attract direct foreign investment GCC states are liberalising their investment regimes. Bahrain, for example, now allows wholly foreign-owned entities under certain conditions.
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Title Annotation:disputes over commercial agents in Gulf states
Author:Parker, Mushtak
Publication:The Middle East
Date:May 1, 1993
Previous Article:Bigger share of a smaller market.
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