The State of Kuwait recently enacted Law No. 13 of 2016 (the Agency Law) on the regulation of commercial agencies in Kuwait, explicitly overturning the former agency law. The Agency Law introduces material changes to the principal/agent relationship. In general franchises are not considered agencies, but Kuwaiti law does not differentiate between an agent and a franchisee and in practice treats them both as the same.
While many of its core tenets remain unchanged, we highlight three important changes below that franchisors ought to be aware of:
- Article 4 of the Agency Law mandates that a local agent can no longer be an exclusive distributor or provider of commodities or goods in Kuwait. This may have a material impact on the franchisor/franchisee relationship and we will need to see over time whether this will be strictly implemented by the officials and whether this point will be further clarified in the executive regulations to the Agency Law. The Agency Law sets out that those executive regulations must be issued within six months.
- A franchise agreement can only be registered with the Agency Department at the Ministry of Commerce and Industry. Once registered, it is then legally treated as an agency and provides certain protections for the local party. In order for an agency relationship to exist as a matter of law, Article 6 requires this agency relationship be registered in the commercial register at the Ministry of Commerce and Industry. Under the previous regime, although registration was required, local courts would still grant the local agent compensation rights even if the arrangement was not registered. This registration obligation is crucial because, in theory, courts will now dismiss any claim related to an agency relationship if such relationship is not registered.
- Lastly, the Agency Law imposes affirmative obligations on the agent, which may continue for a period of six months post termination or expiration of the agency relationship if another agent is not properly appointed in that time period. Importantly, failing to perform the obligations (including registration) set out in the Agency Law imposes financial penalties on the party in breach. Care should be taken in drafting all new agency/distributorship agreements and the like to limit potential liability.