With its oil wealth and strong demand for all manner of industrial and consumer goods, the United Arab Emirates (UAE) is an attractive market for many manufacturers. There are, however, potential pitfalls in doing business in the UAE, particularly when it comes to appointing local agents to distribute products in the country.
In the UAE, Federal Law No. 18 of 1981 (the Commercial Agencies Law) provides significant statutory protections to local agents who have been granted exclusive rights to distribute products within the country. This can often come as an unpleasant surprise to manufacturers seeking to re-organise their distribution arrangements.
In this article, we look at the key provisions in the Commercial Agencies Law and highlight some issues manufacturers should be aware of when entering into or terminating a distribution agreement.
[A distribution agreement, if it is subject to the Commercial Agencies Law, will be deemed to be a “commercial agency agreement”. For the purposes of this article, we will refer to commercial agency agreements and distribution agreements interchangeably as distribution agreements and local agents as “distributors”.]
Key Provisions of the Commercial Agencies Law
In the UAE, local distributors (being either Emirati nationals or companies wholly owned by Emirati nationals) who have been granted exclusive distribution rights to a specific product have the right to register their agreement with the UAE commercial agencies registry maintained by the Ministry of Economy. Upon registration, the local distributor will be granted the following rights and protections:
• Referral of disputes to the local courts and application of local law: the UAE courts will have exclusive jurisdiction over any dispute arising under the agreement, and the courts will apply the provisions of local law irrespective of the agreement’s provisions.
• Right to commission on products: the distributor will be entitled to receive commission not only on the products it sells itself, but also on the products sold by any other distributor in the designated territory;
• Restriction on the manufacturer’s right to terminate: the distribution agreement can only be terminated by mutual consent or by order of the court. This will be the case even if the term of the agreement has expired. Further, the manufacturer will not be able to terminate the agreement by giving simple notice, even if this is provided for in the agreement.
• Right to seek a block on the import of products: where a manufacturer has sought to terminate the distribution agreement and appoints a new distributor, the registered distributor may apply to block the import of products through the new distributor. This can effectively prevent the manufacturer from supplying the market through anyone other than the registered distributor.
• Right to compensation: if the manufacturer seeks to terminate the agreement through the courts, the distributor will be entitled to seek compensation. As a general rule, the courts will award damages for direct costs, capital investment in the business and, in many cases, loss of profit. In assessing a claim for loss of profit, the courts will usually look at net profit generated by the distributor over previous years and use this as a basis to calculate the net profit that would have been earned had the agreement not been terminated. Often, compensation will be awarded even if the distributor has breached the terms of the agreement, such as by failing to reach sales targets or failing to adequately promote the products.
Key issues for manufacturers
As the effect of the Commercial Agencies Law can be quite draconian, manufacturers should proceed with caution when negotiating a distribution agreement. Manufacturers can avoid the possible application of the Commercial Agencies Law by using careful drafting so that the agreement is not in a form that can be registered. Where an agreement has been registered, it will usually be difficult to terminate it unless the distributor agrees. While the manufacturer may seek a court order terminating the agreement, court proceedings can be lengthy and expensive and the manufacturer may be ordered to pay compensation at the end of the case. Moreover, the distributor may be blocked from accessing the market while the court proceedings are ongoing. It is therefore important to approach the termination of a registered distribution agreement carefully and, where possible, try and negotiate a settlement.
In light of the legal risks involved, manufacturers selling products in the UAE are well advised to seek advice before entering into, or terminating a distribution agreement.
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