METHODOLOGY OF BUSINESS OPERATIONS
There
are a variety of ways in which a business can be setup and conducted in
the Kingdom. The options range from
informal contractual relationships to direct investment in
the economy. Most
businesses require some from of license from
the Government, and
some require investment or employment of Saudi citizen. The factors that influence are varied including
type of business, nature
of transactions and duration of the involvement. This
is the most common form for entering into joint ventures with Saudi
partners. The minimum capital investment required to establish an LLC is
SR 500,000. An LLC must have between 2 and 50 shareholders and is
managed and
represented
by one or more managers. There is no Board of Directors, although
shareholders often provide for a Board and other management arrangements
in the Memorandum of Association. The LLC must also have an auditor and,
where it has more than twenty (20) partners, it must establish a Board
of Controllers.
The limited partnership is a separate business entity comprised of
several individuals or companies. The general partners are liable for
partnership debts to the full extent of their personal assets while the
limited partners are liable only to the extent of their
capital
contributions. Foreign companies may enter into a limited partnership.
Foreign
companies may register a wholly foreign-owned Saudi branch office,
provided that they obtain the requisite license. The branch office may
engage in any government contract or private sector work within the
scope of its license. Branch offices are subject to the requirements of
the Government Tenders Regulations, where applicable. Branch office
registration follows the same general procedure as for the registration
of an LLC.
The
Commercial Agencies Regulations and the related Implementing Rules,
governs the agencies and distributorships. The rules and regulations
reserve a monopoly for Saudi nationals and wholly owned Saudi entities
on 'trading' activities. Trading activities include the import and local
purchase of goods for resale. Therefore, foreign companies engaging in
such activities must use Saudi commercial agents and distributors, who
must register their Agency Agreements with the MOC Agency Register. The
agent must hold a valid Saudi commercial registration permitting him to
act as an agent or distributor and the directors and authorized
representatives of the agent must be Saudi nationals.
Franchising is becoming popular and growing day by
day.
It helps establish consumer-oriented businesses in Saudi Arabia.
Saudi Arabia completely
revised its regulations for foreign investment in 2000.
The new Foreign Investment Act created the Saudi Arabian General
Investment Authority (SAGIA). Under the law, the amount invested should not be less than SR
25 million for agricultural projects, SR 5 million ($1 million) on
industrial projects, and SR 2 million ($533000) on other projects. Government
Contracts:
There is no central tender
board and every government agency has contracting authority.
In 2001, the Saudi Council of Ministers repealed the 25-year old
law requiring foreign contractors to have a Saudi agent in order to bid
for contracts. However, a
company may improve its position by acting closely with Saudi interests
when bidding for a government contract.
Under the policy of
“Saudization” the Saudi Government strongly favours companies with
extensive Saudi participation or investment.
Some contracts will require a minimum amount of subcontracting
with Saudi companies. A
bidder on government contract also must provide bank guarantees.
At bidding stage, a company must guarantee one per percent of the
bid amount. If the
government awards the contract, the company must guarantee 5% of the
total contract amount.
KINGDOM
OF SAUDI ARABIA MINISTRY
OF COMMERCE INTERNAL
COMMERCE CONTROL _________________________________________________________________________________________
Direct
Exports is the simplest form of doing business in the Kingdom, subject
to the goods meeting health and safety standards.
Hiring a local agent, though not a requirement, are the preferred
and most commonly obtaining method of operation.
An
exporter or company first selects the commercial agent, which may be an
individual or a company. The
commercial agent also must have the appropriate license.
The company then enters into an agency agreement with the Saudi
agent. The Saudi Ministry
of Commerce must approve the agreement.
The Ministry then provides a model agency agreement (see below). A company can negotiate its own agreement, but the Ministry
is more likely to approve the one that resembles the model agreement.
Any termination or change of a commercial agent must be fair to
the old agent. Wrongfully
terminating an agent may expose a company to liability and may make it
more difficult to obtain government approval of a replacement agency
agreement.
Foreign
investors can establish an office and conduct business in Saudi Arabia
in one of the following forms:
Limited
Liability Company (LLC)
Partnerships
Branch
Offices
Commercial
Agencies
Both the arbitration and the Grievance Board apply Shari'a law.
Franchising
JOINT
VENTURES
TEXT
OF THE 1983 SAUDI ARABIAN MODEL CONTRACT
CONTRACT
OF AGENCY OR DISTRIBUTORSHIP
On
this day _________________/_________________/14______________(H)
(1)
_______________________whose place of business is in
_____________________ C.R.No.___________________dated_____________city
of___________________represented herein by
(Hereinafter
referred to as the First Party/principal :
2.
The Agent/Distributor_____________________________________whose
place of business is in _________________________ C.R. No.
________________________ dated______________________________ city of
____________________represented herein by
(Hereinafter
referred to as the “Second Party/Agent”):
______________________________________________________________________
RECITALS
WHEREAS,
both parties desire to enter into an agency or distributorship
arrangement to serve their mutual interests and to specify the rights
and obligations of each party in such arrangements; and
WHEREAS,
the Second Party (Saudi) desires that such relationship conforms to the
requirements of regulations with regard to foreign trade (import and
export), specifically the Commercial Agencies Regulations and amendments
thereto in the Kingdom of Saudi Arabia, which regulations require a
direct relationship between the business agent or distributor of
products and the originator company abroad.
Non-Saudis are prohibited form engaging in import and export
businesses and commercial agencies in the Kingdom of Saudi Arabia.
Both
parties hereby agree as follows:
______________________________________________________________________
GENERAL
ARTICLES
Article
(1) The above recitals
shall be considered an integral part of this contract.
Article (2) Both parties agree that the Second Party, as Agent or Distributor (“Agent”) for the First Party in the Kingdom of Saudi Arabia, shall negotiate and conclude any agreements concerning the products or services subject to this distributorship agreement
on behalf of ___________________and in the
name of ________________________
Article
(3) The scope of this
agency contract covers the products and services provided the First
Party as hereunder specified. The
products included in this agency contract are
______________________________________
Article
(4) The geographic area
covered by this contract shall be_____________
___________________(specify whether throughout the Kingdom or for a
certain region.)
Article
(5) The term of this contract shall be
___________________________ effective as from
_____________________renewable automatically for another period unless
wither party gives at least three months prior written notice of his
intention to terminate the contract.
______________________________________________________________________
RECIPROCAL OBLIGATIONS
Article
(6) Because the Second
Party is obligated under Saudi law to guarantee the quality of the
products and materials which form the subject of this contract and to
provide necessary maintenance and spare parts at reasonable prices when
required by consumers, the First Party shall also be obligated to the
Agent for the same obligations in accordance with the requirements of
the consumers and shall provide such maintenance on such dates and shall
provide such spare parts in such amount as may e specified by the Agent.
In addition, the First Party shall provide to the Second Party at
reasonable prices such spare parts and necessary maintenance through the
date one year following the expiry date of this contract or from the
time of appointing another agent.
Article
(7) The Second Party is
obligated under Saudi law to provide under this contract only products
and materials that are compatible with the approved standard
specifications in the Kingdom. The
First Party shall guarantee the quality of these products and materials
and insure that they conform to approved standard specifications in the
Kingdom; the Agent shall not be obligated to receive, or be responsible
for distribution of, any quantities received from the First Party that
are contrary to such required standard specifications.
Article
(8) Both parties
shall execute this contract in accordance with acknowledged business
practices and good faith. Such
obligation shall extend to include all activities rendered as part of
the contract requirements under generally accepted business practices.
________________________________________________________________________________________
SPECIAL
OBLIGATIONS
Article
(9) The Second Party shall
undertake to:
(a)
Provide the premises required for the Agent to run his business
in the Kingdom with his own staff, exercise all reasonable care and
diligence, and be entitled to make use of the services and technical
expertise of the First Party as and when required.
(b)
Perform all works necessary to execute contracts locally for
promoting and marketing the products, make available suitable storage
areas, open new distribution centers as may be necessary and provide
local services within the area covered by the contract.
The Second Party shall, in the performance of this contract, be
entitled to use the First Party’s trademark but without any additions
or modifications. He shall
also exert his best efforts to make such trademark known throughout the
area.
Article
(10) The first Party
(a)
Pay the Second Party a commission in the amount of
____________________________of the value of the items sold within
__________________________________________
(b)
Execute the contract with diligence whether as to observation of
good quality products and materials, which form the subject of the
contract, or insure safe and good delivery to the Second Party, or to
fulfill obligations regarding quantities and dates specified in the
Second Party’s orders.
(c)
Bear responsibility for the faults of himself and his employees,
when such fault results in damage to the Second Party.
_________________________________________________________________________________
EXPIRY, CANCELLATION AND COMPENSATION
Article
(11) This contract
shall be terminated if performance by either party is rendered
impossible, or, upon the death or the loss of competency,
Article
(12) The Agent shall be
entitled to compensation for damages which may arise out of the
Principal’s inability to meet his commitments, according to the
contract or to business customs.
Article
(13) If the Principal
refuses to renew or continue work under this contact, the terminated
Agent shall be entitled to reasonable compensation for his activities
that may have resulted in the apparent success in the business of the
terminated Agent. Specially, the terminated Agent shall be entitled to
compensation for his promotional activities and efforts at client
relation that result in
goodwill that may accrue to the new Agent.
Article
(14) The Principal may
claim compensation from the Agent for damages caused as a result of the
Agent’s abandoning this Agency prior to the expiry of this contract or
as a result or any breach of this contract by the Agent.
Article
(15) Should this contract
be improperly terminated or revoked, as a result or which wither party
sustains damages, the party improperly terminating the contract shall be
obliged to compensate the other party for the damages such party
sustained, taking into account the extent of efforts made and material
and nonmaterial capabilities provided to serve the Agency prior to such
improper termination.
_________________________________________________________________________________
CONCLUDING
ARTICLES
Article
(16) Dispute arising
between the parties hereto as a result of the performance or
nonperformance under this contract shall be settled amicably.
Should
this not be possible, the matter shall be referred to the Board of
Grievances (Diwan Al-Mazalem), Commercial Circuit in the Kingdom of
Saudi Arabia or to an arbitration committee, inside or outside Saudi
Arabia, in accordance with the regulations for arbitration.
In case of a dispute between the Principal and the Agent, a new
Agency contract may be granted to a new Agent within the Agency area for
the same products or services only after the authority considering the
dispute shall have made a final award or decision.
Article
(17) This contract has been
executed in three copies, with each party receiving one copy.
The Second Party shall present a certified copy to complete the
contract registration in the Commercial Agencies and Distributors
Register with the Ministry of Commerce of the Kingdom of Saudi Arabia.
FIRST
PARTY (PRINCIPAL)
SECOND PARTY (AGENT)
Name:
___________________________________
Name: __________________________________
Signature:
________________________________
Signature: _______________________________