Protecting Foreign Principals in 'Three-Way' Local Distribution Arrangements

Distribution agreements and commercial agency relationships are a common legal structure for doing business in Oman. Distribution agreements are particularly useful for selling locally within Oman goods or commodities that are produced abroad by a foreign company.

A typical distribution agreement will have two parties:

• the foreign principal, who produces the goods and ships them to Oman; and 
• the local Omani distributor, who distributes and sells the goods within Oman. The distributor may also have other responsibilities, such as coordinating marketing efforts for the goods within Oman.

Under this standard scenario, the distribution agreement will set out the bilateral terms and conditions between the parties. Such terms could include, for example:

• whether or not the distributor has exclusive rights to distribute the principal’s goods or commodities within Oman (or within a region of Oman, as applicable);
• the framework setting out how the distributor shall order the goods from the principal, how the principal shall perform the order and ship the goods to the distributor, and how the distributor shall receive and pay for the goods in Oman;
• supporting services (such as marketing materials or showroom design) that the principal is obligated to provide to the distributor; and
• sales targets or minimum annual order thresholds that the distributor is obligated to meet during the term of the distribution agreement.

While most distribution relationships involve a straightforward two-party agreement as described above, some distribution relationships feature contractual arrangements among three parties: the foreign principal, the local distributor, and the local end customer.

One of the main reasons for using a three-party structure is in large, one-off transactions where the local distributor may not have the financial means to assume ownership of the goods and store the goods before selling the goods to the customer. In such transactions, the local distributor would play a role that is more akin to a broker than to a traditional distributor. The local distributor would locate the customer and agree the commercial terms of the sale with the customer. There could then be two separate, concurrent contracts in respect of the sale: a contract between the local distributor and the foreign principal to procure the goods, and a contract between the local distributor and the end customer (to which the foreign principal is sometimes an additional signatory) to purchase the goods.

This type of arrangement, while sometimes necessary based on the profile of the local distributor, can pose risks to the foreign principal, particularly in respect of the payment mechanism: often, the contracts will be structured so that the foreign principal gets paid by the local distributor only after the local distributor gets paid by the end customer.

However, there are several steps that the foreign principal can take to mitigate this risk. For example, the foreign principal can specify in its contract with the local distributor (and such provisions can be referenced as necessary in the contract between the local distributor and the end customer) that:

• the foreign principal shall retain legal title to the goods sold until the foreign principal receives payment for such goods;
• the local distributor shall, at its cost, obtain insurance coverage over the goods in relation to risks to the goods during shipping (such as loss, vandalism, or other damage), with the foreign principal as beneficiary of such insurance policy; and
• the amounts paid by the end customer to the local distributor shall be paid into a separate bank account in Oman, with the local distributor giving irrevocable instructions to the bank that the funds paid into that account shall be frozen until the local distributor has paid all amounts that it owes to the foreign principal.