Exclusive Distribution Agreement in Saudi Arabia: Key Terms

A juice factory in Qassim signed a distributor three years ago as "exclusive for the Eastern Province". This year the factory opened an online store that ships directly to customers in Dammam and Khobar. It also signed a deal with a large supermarket chain that has branches in the Eastern Province. The distributor says its exclusivity was breached and claims commission on all those sales. The factory says online sales and key accounts were never part of the deal. And the contract? One line: "Exclusive for the Eastern Province."

The short answer: exclusivity covers only what the contract shows. If the contract is silent about sales channels or customers, the court looks for the common intention of both parties, trade custom and how the parties actually dealt with each other. The Commercial Agencies Law may also apply to the distributor, which means registration with the Ministry of Commerce. There is no general rule that forces the supplier to buy back the distributor's stock at the end. Anything not written down is likely to become a dispute.

What is the difference between a distributor and a commission agent?

Before you discuss exclusivity and commission, describe the business model as it really works. Does the distributor buy the goods and resell them on its own account, for its own profit? Or does it sell in the supplier's name for a commission? Who issues the invoice to the customer? Who owns the stock and carries the risk if it does not sell or gets damaged? These answers decide the rights more than the title of the contract.

Under Article 104 of the Civil Transactions Law, clear wording must not be given a different meaning. If the contract needs interpretation, the court looks for the common intention of the parties, guided by custom, the nature of the deal and the usual dealings between them, and reads the clauses together. A doubt is interpreted in favour of the party who carries the obligation. Once signed, the contract binds both parties and can only be changed by agreement or by a legal provision (Article 94). It must be performed in good faith, and it includes what naturally follows from it by custom and by its nature (Article 95).

If the arrangement lets you run a business under the supplier's trademark or name, with transfer of know-how and a set operating method, in return for fees that are separate from the price of the goods, it may be a franchise and not a distribution deal (Article 1 of the Commercial Franchise Law). Franchises have their own rules, including registration of the agreement and the disclosure document with the Ministry (Article 6).

Does the Commercial Agencies Law apply to distribution agreements?

It can. An article added to the Commercial Agencies Law in 1400H makes the law apply to anyone who contracts with the producer, or whoever acts for the producer in its country, to carry out commercial business, "whether as an agent or a distributor in any form of agency or distribution". The law requires the agent to be registered in the dedicated register at the Ministry of Commerce (Article 3).

The agent or distributor must also provide the spare parts that consumers normally ask for, and 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. Breaching the 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).

How do I write an exclusivity clause that does not lead to a dispute?

Define exactly what the exclusivity covers:

• Products: attach a product list. State whether new versions and products of the supplier's affiliates are included, and how a product is added or removed.
• Territory: name the cities or regions, and say how orders from customers outside the territory are handled.
• Channels: say whether it covers the supplier's own online store, marketplaces and government tenders.
• Customers: say whether the supplier's existing customers or large multi-branch accounts are excluded, and list them by name, not by a general description.
• What is restricted: is the supplier only barred from appointing another distributor, or also from selling directly?

You can make exclusivity depend on sales targets, if the targets are written, the calculation method is clear and the review dates are set. If you are the distributor, link the targets to product availability, delivery dates and the agreed marketing support, so you do not carry the result of a supply gap caused by the supplier. A verbal target that was never written down is not a valid reason to withdraw exclusivity.

Also watch the Competition Law. Article 5 prohibits agreements between businesses whose aim or effect is to harm competition, including fixing prices and terms of sale, and dividing markets by geographic area, distribution centres or type of customer. Article 6 prohibits a business in a dominant position from imposing resale prices or resale terms, or requiring a business to refuse to deal with another business. So clauses such as "you must not sell below price X", "you must not deal with our competitors", or splitting territories between competing distributors need review. The fine can reach 10% of the annual sales of the products involved in the violation (Article 19). This does not mean every exclusivity clause is banned. What matters is the purpose of the clause and its effect on the market.

Commission, supply and returns: what must the contract set out?

Do not confuse the framework distribution agreement, which runs for years, with individual purchase orders that may need acceptance each time. Do not assume the stated profit margin stays the same if the contract does not allocate shipping, marketing and warranty costs. And do not assume the supplier automatically buys all the distributor's stock at the end, or that the distributor bears every return whatever the cause.

What if the supplier breaches exclusivity or the distributor misses targets?

A distributor who sees its product sold in its territory should collect evidence: which product was sold, to whom, by whom and when. The product may come from a wholesaler outside the territory or from an excluded customer. Not every appearance of the product in the market is a sale in breach of the contract. The supplier, on its side, shows that the sale was outside the territory, fell within an agreed exception, or involved a product not covered by the exclusivity.

If the dispute is about sales targets, compare the orders sent, the quantities supplied, the delivery dates and the marketing support with what the contract says. Sometimes the better solution is to fix the supply shortfall, adjust the marketing plan, or convert part of the territory to non-exclusive distribution through a written addendum, instead of a sudden termination that leaves stock and open orders behind.

A distributor has exclusivity for a specific product in the Eastern Province. The contract excludes "key customers" without naming them. The distributor notices direct sales by the supplier to a customer in the region. Before valuing the claim, it reviews the correspondence, any customer annex and how the parties dealt with each other in past years. If the supplier has dealt with this customer directly since the start without objection, that affects how the exception is interpreted. The parties may agree on a named list of excluded customers and a commission for the disputed sale.

What happens when a distribution agreement is terminated or expires?

If one party breaches the contract, Article 107 of the Civil Transactions Law allows the other party, after a formal notice (i'dhar), to demand performance or termination, with compensation where justified. The court may refuse termination if the unperformed part is of little importance. A clause allowing termination without a court judgment does not remove the need for formal notice unless it says so expressly (Article 108). So missing a sales target does not automatically allow immediate termination.

A distribution agreement that runs for years is usually a time-based (continuing) contract. Termination does not cancel the past years retroactively, and the court may award compensation where justified (Article 111). The dispute resolution clause and the confidentiality clause survive termination unless agreed otherwise (Article 113). Customer data and the right to use the trademark do not pass to the distributor just because the relationship was long.

In practice, the usual solution is a final account that separates delivered goods, commission due, debts, stock and guarantees, followed by a written settlement or by taking the dispute to the competent court.

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 supplier or manufacturer:

• Write down clearly what is excluded from exclusivity: online sales, key accounts by name, and tenders.
• Link exclusivity to written targets with periodic reviews, and state the consequences of missing them.
• Review price clauses, territory splits and bans on dealing with competitors against the Competition Law before signing.
• Set out what happens at the end to stock, customer data, the trademark and open orders.
• Before terminating for missed targets, send a written formal notice and keep proof that you met your supply obligations.

If you are the distributor:

• Ask for exclusivity that covers the channels you actually invest in, or for commission on direct sales in your territory.
• Link your targets to the supplier's supply and support obligations, and keep a record of orders and delays.
• Make your commission due on invoice, not on collection, if collection is in the supplier's hands.
• Get a written commitment on stock buy-back and its price at termination.
• Check whether you must register the agency with the Ministry of Commerce if the law applies to your relationship.

If you are drafting a distribution agreement, or you have a dispute with your distributor or supplier about exclusivity or commission, send the contract and correspondence on WhatsApp and we can review them with you.