Articles 23 of Law No. 68 of 1980 regarding the Commercial Law (“Commercial Code”) states that non-Kuwaiti citizens may not pursue any commercial activities in Kuwait, unless they have a Kuwaiti partner. The share of the Kuwaiti partner shall be no less than 51%. Article 24 of the Commercial Code further sets out that no foreign company may establish a branch in Kuwait nor pursue its commercial activities in Kuwait unless it has a Kuwaiti agent.
The above basic principal prevails unless explicitly stated otherwise in any other laws. In recent years, certain exceptions have been made in respect of the mandatory participation of Kuwaiti partners. This is the case in regard to companies licensed by the Kuwait Direct Investment Promotion Authority and in regard to Kuwaiti companies listed on the Kuwait Stock Exchange.
The most widespread manner in which foreign entities operate in Kuwait is through agents or distributors.
Under Kuwaiti law all agency agreements must be registered with the Agency Department at the Ministry of Commerce and Industry in order to be valid. However, in practice not all agency agreements are registered. The local courts have taken the position that even if an agency agreement is not registered, the local agent can still enjoy the protection and benefits of such arrangement. Certain government authorities will require proof of the registered agency and such agency will also need to be registered with such government authority. The registration of such agreements are typically for the benefit of the local agent as it provides a record of the agency and more importantly restricts other agents from dealing with the foreign principal for the same services as set out in the arrangement without their prior consent. In order to change local agents, the foreign principal needs to first de-register the current agent and then register the new agent. Such deregistration requires the approval of the current agent.
Article 281 of the Commercial Code states that if a principal terminates an agency agreement without cause, then the principal shall pay the agent compensation for any resulting damages. Any agreement to the contrary is deemed null and void.
In the event that the principal terminates the agency agreement and the agent is not in breach of its obligations, the principal is obligated to compensate the agent for any damages the latter incurs as a result of the termination. In the event the principal chooses not to renew the agency agreement, the agent is entitled to “fair compensation” if the agent has not failed or committed any errors and its activities have resulted in considerable success of the business.
Kuwaiti law does not define the measure of “damages” or “fair compensation” which may be owed by the foreign principal to the local agent. Damages and compensation are determined on a case-by-case basis under the Kuwaiti court’s broad discretion. The courts will consider all the circumstances it believes are relevant, including the duration of the agreement, the number of employees, the number of stores, outlets or workshops, the past volume of sales and estimated lost profits, as well as costs incurred by the agent.
The agent is liable for all liabilities of the principal arising from the principal’s activities carried out in the country and as set out in the agency arrangement. In addition, if the principal replaces the agent with a new agent, the new agent shall be held jointly liable along with principal for the settlement of any compensation determined under a judgement passed in favour of the former agent.