Tuesday, March 3, 2009

Agency and Distribution

Omani law governing agency relationships contains provisions which are favourable to local agents and which may lead to unexpected results for uninformed foreign companies. The Commercial Agency Law was last amended by Royal Decree in 1995. Although these amendments reduced the previous “choke hold” that Omani agents had on overseas principals, the amended law retained the right of agents to claim for compensatory damages upon termination and non-extension in certain circumstances. It is therefore advisable to only appoint an agent after extensive due diligence has been conducted on the proposed agent’s business activities and reputation, and a detailed agency agreement negotiated and put in place. The big issues to consider in any agency agreement in Oman are exclusivity, registration, termination and dispute settlement.explicit sales targets in the territory, specifying cut off dates for achieving them;

Legal framework
Three separate laws govern the relationship between a foreign principal and a commercial agent in Oman:

  1. the Law of Commerce (Royal Decree 55/90);
  2. the Commercial Agency Law (Royal Decree 26/77, as amended by Royal Decree 82/84, 73/96 and 66/05); and
  3. the Commercial Register Law (Royal Decree 3/74, as amended by Royal Decree 88/86).
The Commercial Agency Law defines a “commercial agency” as:“Any agreement through which a merchant or a commercial company in the Sultanate is assigned to promote or distribute the products or services of a foreign person or entity in consideration for profit or commission.”

The law does not draw a distinction between a commercial agent, representative, distributor or any other type of intermediary. An agent may be a natural or legal person. If a natural person, the agent must be an Omani citizen who is 18 years or older and who is registered with the Oman Chamber of Commerce. If a legal entity, the company must be established in accordance the laws of Oman and with a minimum of 51 per cent Omani shareholding. However, Omani companies with up to 70 per cent foreign shareholding have been permitted to be agents following Oman’s accession to the World Trade Organization in October 2000.

A foreign principal cannot sell products directly to a customer in Oman without the participation of an agent, except in respect of products destined for the ministry of defence. A duly appointed and registered agent is entitled to commission, notwithstanding direct sales of the products or services by the principal to the customer in Oman.

Commercial agencies need not be exclusive. This means that a principal is free to appoint more than one agent in Oman. The September 1995 amendments to the Commercial Agency Law eliminated the requirement of “exclusivity” in agency agreements. This significant change made it easier for foreign principals to terminate non-performing agents for cause and to do business in Oman with a new agent. It also allowed foreign principals to appoint other agents simultaneously for different projects or services. Moreover, the amendment rendered the existing agent unable to prevent the registration of new agents by the same foreign principal. Most agency agreements in Oman are non-exclusive, but this is a point of negotiation
between the parties.

To be enforceable, all agency agreements must be in writing and registered with the ministry of commerce and industry. Without registration, the agent may not be able to enforce any of the rights contained in the agreement and may not be provided the various protections available to him arising under the Commercial Agency Law. This is reaffirmed by the Commercial Agency
Law, which states that a claim may not be heard regarding any agency that is not duly registered.

The agreement must be duly certified and authenticated by an Omani embassy if it is signed abroad. If the agreement is not in Arabic, a duly certified and authenticated translation must be provided and registered with the ministry of commerce and industry. The registration must be renewed every three years.

Omani law and practice provides significant protection to agents, especially in the context of termination. If an agency agreement is for an unlimited term and the principal cancels the agreement without cause, the principal must compensate the agent. With regards to fixed-term agency agreements the principal may cancel the agreement upon the expiration of its term. In
such instances, the agent will normally seek compensation where the agent feels that the principal has unjustly terminated the agreement or failed to renew it. Unilateral termination of an agency in Oman will almost always result in a compensation claim by the agent. Termination of a fixed-term agency before its expiration and without the agent’s mutual consent will undoubtedly require the payment of compensation to the agent.

Omani courts and the Dispute Resolution Authority have the sole discretion to decide compensation. They will take into account the totality of the circumstances when considering compensation claims. Each case is treated on its own facts and merits, but a court often makes its calculation by taking into account past sales (often for the last three years) or an average of the past annual commission or profit received by the agent.

Termination of a fixed-term agency can be justifiable in many circumstances. Therefore, it is advisable for the agency agreement to contain clear and unequivocal provisions setting out standards to justify termination in the event such standards or performance targets are not met by the agent during the term of the agreement. Such provisions could include:

  • Employee hiring targets or quotas for sales, or other management personnel;
  • Monthly or regular reporting on market opportunities or upcoming projects;
  • Provision of regular information on all enquiries, orders and prospective customers;
  • Prohibition on dealing with competitor products or a competitor in any way;
  • Prohibition on circumvention of the agreement in any tangible way;
  • Non-disclosure of confidential information to third parties; and
  • Anti-bribery language (ie. Foreign Corrupt Practices Act clauses for American principals).
Dispute resolution
The governing law in agency agreements must be Omani to be registered and enforceable. However, the parties are free to decide on the dispute resolution forum. Omani courts are bound to accept foreign arbitration awards because Oman is a member of the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards. In practice, this means that the
parties may choose arbitration as a means of settling disputes arising under the agency agreement outside of Oman, and subject to recognized rules of arbitration and conciliation, such as the International Chamber of Commerce in Paris, the London Court of International Arbitration in London, etc. Having a dispute decided by one or more arbitrators chosen by the parties would certainly be more beneficial to the foreign principal and devoid of the delays and politics of “home court” advantages for Omani agents. Under the New York Convention, any such award would be enforceable in Oman.

This article was first published on GMB Research. GMB Research commissions material from a large and growing network of leading local experts and international professional firms. Now covering 30+ countries from South East Europe, CIS and the Middle East as well as parts of North Africa and Asia, GMB Research is a rapidly evolving global resource.