Commercial Agency Law Saudi Arabia: Termination Rights

An agent for a home appliance brand in Jeddah has worked with the brand for nine years. It opened two showrooms, trained a maintenance team and holds about SAR 2 million of spare parts. Then an email arrives from the parent company: "Thank you for the partnership. The contract will not be renewed after the end of this year. We have appointed a new distributor." The email does not erase this history. But it also does not automatically give the agent compensation for everything it spent.

The short answer: if the contract ends at its agreed date and the notice clause was respected, the general rule is that no compensation is due. If the ending is a termination for a breach that was not proven, or a paid agency was revoked at an unsuitable time or without an acceptable reason, compensation is due to the extent of the damage the agent proves. Stock is not bought back automatically unless the contract says so or the parties agree.

Which law governs ending a commercial agency in Saudi Arabia?

The Commercial Agencies Law applies to anyone who contracts with the producer, or whoever acts for it, to carry out commercial business, whether as an agent or as a distributor in any form. It requires the agent to be registered in the dedicated register at the Ministry of Commerce (Article 3). But it has no detailed rules on ending the relationship or on compensation. For that, you go to the contract and then to the Civil Transactions Law, which states that it does not affect special legal provisions (Article 1).

The label "commercial agency" is used for different relationships: a distributor who buys products and resells them on its own account; an intermediary who sells in the principal's name for a commission; or a franchisee who runs a business under the principal's brand and business model for fees. The last one falls under the Commercial Franchise Law (Article 1). So start with the contract and its annexes: products, territory, term, renewal, exclusivity, minimum purchases and after-sales service.

Some duties stay with the agent after the end. Under the second article added to the law in 1400H, the agent and distributor must provide maintenance and guarantee manufacturing quality during the agency and for one year after it ends or after a new agent is appointed, whichever comes first, and must provide spare parts. So do not close the whole file on the day the contract ends.

Non-renewal, termination for breach, or ending by agreement?

These are three different routes, and each has its own effect:

• Expiry without renewal: if the principal followed the notice clause, the contract normally ends at its date. A valid contract cannot be cancelled or changed except by agreement or a legal provision (Article 94).
• Ending by mutual agreement (iqala): both parties may end all or part of the contract by consent (Article 105). This is a chance to write down every effect of the ending.
• Termination for breach: this needs a formal notice (i'dhar), then a demand for performance or termination with compensation where justified. The court may refuse termination if the breach is minor (Article 107).

If the contract has a clause allowing termination without a court judgment, it does not remove the need for formal notice unless it expressly says so (Article 108). Also note that continuing to deal after the end date, with new orders and invoices, may lead to a dispute about implied renewal. Put your position in writing.

Where was the breach, and how do you prove it?

"The other side harmed me" needs detail. Did the principal stop filling confirmed orders? Did it sell inside a territory it gave the agent exclusively? Was the agent late paying invoices that were due, or did it have objections about quantities or defects? The contract must be performed in good faith and includes what follows from it by custom and by its nature (Article 95), so the way the parties dealt with each other over the years carries weight.

In practice, build a table that links each claim to its document: the obligation in the contract, the date of the breach, the message sent about it and the financial effect. Keep the full correspondence, not only the messages that support you. The rest of the conversation may show consent, an amendment or an important objection.

As a rule, compensation is due only after a formal notice to the debtor (Article 175). The notice can be given by the agreed method or by any official means of notification, including filing a lawsuit (Article 177). Notice is not needed in some cases, for example when the other party states in writing that it will not perform (Article 176).

Is the agent entitled to compensation when the agency is ended?

Not automatically. If the relationship is an agency in the civil-law sense, meaning the agent acts in the principal's name and on its account, the principal may revoke the agency whenever it wants, after informing the agent (Article 503). But Article 504 provides that if the agency is paid and the principal revokes it "at an unsuitable time or without an acceptable reason", the principal must compensate the agent for the damage. The reverse also applies: a paid agent who withdraws at an unsuitable time or without an acceptable reason must compensate the principal (Article 505).

If the relationship is a distribution in which the agent buys the goods and sells them on its own account, the question is decided under the general contract rules: was there a breach, and what is the damage? If the contract does not set the compensation, the court assesses it. A debtor who did not commit fraud or gross fault is liable only for the damage that could normally be foreseen at the time of contracting (Article 180).

Advertising and showroom costs do not all become a debt on the principal just because the contract ended. The court looks at what was agreed, when the money was spent and whether the business benefited from it in previous years. Sales forecasts are not guaranteed profit. On the other hand, no compensation is awarded if the debtor proves that non-performance was due to a cause beyond its control (Article 170). If the creditor's own fault contributed to or increased the damage, this affects the compensation (Article 172).

A principal ended a paid agency two weeks before the sales season, after asking the agent to prepare a marketing campaign and pay for it, and without any earlier complaint about the agent's performance. This comes close to "an unsuitable time" and "without an acceptable reason". The answer would be different if the non-renewal notice was sent before the date agreed in the contract and after documented warnings about low sales.

What about stock and unpaid commission?

Prepare a separate statement for each item: stock the agent bought on its own account, goods delivered to it on trust (consignment), money it collected for the principal, and disputed commission. For stock, separate quantity, condition, expiry date and purchase date. Mixing these items in one claim weakens your position.

Stock is a good basis for settlement. The parties may agree that the principal buys back specific items, or gives the agent time to sell the rest, or that open orders move to the new agent in return for a settlement. A distributor who bought goods years ago on its own initiative is in a different position from one who bought on a recent order approved by the principal. Also agree who handles warranty, maintenance and customer complaints during the transition.

Be careful with releases. If you agree to settle certain invoices, write in the settlement record that it does not cover earlier commission or other stock. Signing a "final and full release" for a specific payment may be read more widely than you intended. A contract that ran for years is usually a time-based (continuing) contract, so termination does not cancel the past retroactively (Article 111). The dispute resolution and confidentiality clauses survive termination unless agreed otherwise (Article 113).

Does deleting the agency registration settle the account between the parties?

No. Registration in the agencies register is an administrative step at the Ministry of Commerce. Debts, commission and compensation are a contractual dispute for the competent court, or for an arbitral tribunal if there is an arbitration clause. Check the dispute resolution clause first. Breaching the Commercial Agencies Law or its regulations is punished by a fine of SAR 5,000 to SAR 50,000, with publication of the penalty at the violator's cost, without affecting the injured party's right to compensation (amended Article 4). Check the registration status and procedure directly with the Ministry of Commerce, and do not rely on old news about deadlines or fees.

If the dispute is about the numbers before it is about the principle, the parties may agree on an accountant or expert to settle the disputed account, then negotiate the remaining claims.

This is general information based on the official Arabic texts of Saudi laws, which prevail over any translation. It is not legal advice for your specific case.

Practical solutions for both sides

If you are the agent:

• Ask in writing for the reason for the ending and the status of open orders. Asking for clarification does not mean you accept the termination.
• Prepare a detailed statement of account: stock, commission, money collected, and expenses you were asked to incur before the termination.
• Keep proof of any instruction from the principal to invest or expand shortly before the termination. This supports the "unsuitable time" argument.
• If the reason given is weak sales, collect evidence of supply shortages or delays caused by the principal.
• Do not sign a full release in return for a partial payment. Write down the limits of each settlement.
• Remember your duty to provide maintenance and spare parts for one year after the end or until a new agent is appointed.

If you are the principal or manufacturer:

• Follow the notice period and written method in the contract, and send the notice from an authorised person to the agreed address.
• If you are terminating for breach, document the earlier warnings and the breach itself before termination.
• Before terminating, consider a written plan to improve performance or to adjust the territory and products. It may save you a long dispute.
• Choose timing that does not harm the agent without reason, for example after the stock is sold or at the end of the season.
• Offer an orderly exit: buy back stock at an agreed price or allow time to sell it, and arrange a clear handover of customer service.

If you received a termination letter, or you are preparing to end an existing agency, send us the contract and correspondence on WhatsApp so we can go through your rights and obligations before you reply.