Unwritten Distribution Agreements in the UAE
Authored by: Clare Raven
In a recent case the Abu Dhabi Court of Cassation declined to award compensation to a distributor even though the Court found that a distribution arrangement had been in place for 5 years and that the principal had terminated the arrangement without providing the agent with any notice.
Unwritten distribution arrangements are not as uncommon in the UAE as one might expect. Many such relationships date back several years and sometimes decades. They seem to be a consequence of how trading has evolved in the UAE particularly where a business relationship has worked well and so there may not have been cause to formalise the arrangement.
There is a general expectation on the part of distributors and agents in the UAE that the termination of the agency or distribution relationship means that compensation will be payable to the agent or distributor. This expectation is heightened where the arrangement is exclusive. The thinking being that the agent or distributor has introduced a product to the market and built up market share and goodwill. Therefore the agent or distributor is entitled to be compensated for future loss of profits that it would have earned from its efforts in building up such market share and goodwill. It used to be the thinking that whether compensation is payable depends upon how the relationship is classified i.e. is the relationship a commercial agency, a distribution arrangement or simply a series of sale and purchase transactions between trading counterparties. However, whether there are clear terms setting out the parties rights and obligations may be the determining factor. If there is no written distribution agreement, then compensation may not be awarded even if a commercial relationship involving distribution has been in place for several years.
In the case of a registered commercial agency, substantial compensation is awarded upon termination irrespective of whether the agency contract entitles the principal to terminate and the contractual notice is given. To be registered with the Ministry of Economy, the agreement must (among other things) be in writing, excusive and with a UAE national agent.
If an arrangement is deemed to be a sale of goods arrangement, whereby the parties are merely trading counterparties conducting a series of unrelated purchase transactions then (subject to any contractual terms to the contrary), the seller would be free to decide in the future at any time whether or not to continue to sell to the purchaser. If the seller decides not to fulfill an order it is unlikely that compensation will be payable to the purchaser.
The uncertainty arises in respect of unregistered distribution/agency arrangements which have received different treatment by the UAE Courts.
The validity of unregistered agency/distribution agreements
Following the introduction of the Federal Commercial Agency Law there was doubt as to whether a non-national could enforce rights under an unregistered distribution/agency arrangement. Article 3 of the Agency Law provides that any trade agency not registered with the Ministry of Economy shall not be considered valid and legal cases shall not be heard. The early thinking being that the intention of the Commercial Agency Law was to prevent non-nationals from acting as agents or distributors of products in the UAE making this area of business the exclusive preserve of UAE nationals. However, the Federal Commercial Code clearly contains references to agency and distribution arrangements and the position under the law is uncertain. Under the Commercial Code a party can be a contracts proxy, a proxy by commission and a commercial representative. Distribution arrangements are also contemplated.
“A distribution contract whereby a trader undertakes to promote and distribute the products of an industrial or commercial establishment in a specific area on an exclusive distributorship basis, shall be considered as a contracts proxy...”
Quite understandably conflicting judgments have been handed down by the UAE Courts on this issue. There are cases where the Courts have declined to hear a claim on the basis that the agency agreement was not and could not be registered and is therefore deemed void pursuant to the Agency Law. This leaves the complainant with no recourse to justice. There are also judgments where the UAE Courts have accepted that an unregistered agency is valid under the Commercial Code.
Are damages payable upon termination of distribution arrangements? If so, what is the criteria?
As the UAE Courts have recognised unregistered agency/distribution agreements as valid under the Commercial Code, the next question is whether any compensation is payable upon termination of such a distribution arrangement.
Guidance on liability for termination of a “commercial agency/distributorship” relationship (i.e. a contracts proxy) is provided by the Commercial Code:
“either party to the commercial agency contract may terminate it at any time, and no compensation is due except if the termination occurs without prior notice or at an inconvenient time. Where the contract has a fixed term, it may only be terminated for a serious and acceptable reason, otherwise compensation will be required.”
However, the Commercial Code does not provide further guidance as to when termination is deemed to have occurred at an inappropriate time. An example of an inappropriate time at which to seek to terminate could be termination immediately following the distributor undertaking significant expenditure on new premises solely for the business or undertaking significant and costly promotional work.
Provided the contractual provisions are observed at the time of termination, in theory, compensation claims brought by unregistered agents and distributors ought to be easily defended. However, there can be a tendency on the part of the UAE Courts to generally award some compensation upon termination. This may be as a consequence of article 225 of the Commercial Code which provides:
“In the event where the principal replaces the contracts agent by a new agent, the latter shall be jointly responsible with the principal for the payment of the indemnities decided by the court to the previous agent whenever it is established that the dismissal of the previous agent was a result of collusion between the principal and the new agent”.
It may be that “collusion” is found by the UAE Courts simply because the principal has appointed a new agent/distributor.
In practice, many unregistered distributors pursue damages upon termination as if they are a registered agent. Significantly, some of the reasoning in the judgments of the UAE Courts when considering and assessing compensation upon termination of the unregistered agency/distribution agreement may lead one to question whether the Courts are indeed considering similar criteria to that applied to the compensation payable upon termination of a registered agency.
In one case in 2009 arising out of an unregistered agency/distribution arrangement the claimant claimed the termination caused him to suffer substantial loss and claimed loss of profits and other expenses. The Court of Cassation awarded damages in the region of AED7 million.
What happens when the distribution arrangement is unwritten?
In a recent case heard by the Abu Dhabi Courts, Hadef & Partners successfully defended a claim for compensation brought by a distributor where the foreign principal terminated the relationship without providing any notice. The key facts of the case are as follows:
- There was no written distribution agreement between the parties but the distributor claimed that an agency existed based upon a letter that made reference to a commercial relationship. The distributor claimed it was appointed agent several years earlier and there was a fair amount of evidence that the relationship was a distribution arrangement.
- The distributor claimed loss of profit from the date of termination without notice until the date of final judgment and also claimed for moral and other damages.
- On behalf of the principal we argued that: (i) the relationship was not exclusive as there were relationships with other importers and re-sellers in the UAE and the principal sold the product direct to end users; (ii) the product had been sold in the territory since the 1990s; (iii) the majority of promotional spend was funded by the principal; (iv) there were defaults on the part of the distributor including: (a) delay in payment; (b) poor stock management leading to the unavailability of product for customers; (c) poor storage leading to damage to product and complaints by purchasers.
- The Court appointed expert found the distributor’s claims that it had made a substantial investment for the distribution of the product unreliable in the absence of a written distribution agreement between the parties.
- The expert could not find that there was an exclusive distribution agreement in light of the lack of written contract. Therefore, he concluded that he could not estimate the damage done to the distributor as a consequence of the termination of the arrangement without notice because of the absence of a written distribution agreement.
- The Court of First Instance adopted the expert’s findings and held that there was no commercial agency and further that it was impossible to calculate the damage sustained in the absence of a written distribution agreement which sets out the reciprocal rights and obligations of the parties.
- The Court of Appeal found from the parties’ performance and intent that there was a distribution agreement in place. However, as there were no specific terms defining the nature or duration of the relationship, either party could terminate the relationship at will. Further, that the distributor had not proven the losses and damage it alleged it had sustained.
- The Court of Cassation upheld the Court of Appeal’s judgment.
The following conclusions may be taken from the Abu Dhabi Courts’ reasoning in this case.
- It is possible to have a distribution relationship without a detailed distribution agreement.
- If the Courts find that there was an agency/distribution arrangement then there is a reasonable chance that compensation on termination will be awarded by the Courts if actual losses are shown.
- The Courts indicated that had there been a written distribution agreement containing the term of the agreement then an award for loss of profits could have been assessed. However, in the absence of a written distribution agreement the assessment could not be undertaken and therefore no compensation was awarded.
- There is a difference in the Court’s approach with regard to registered commercial agencies and Commercial Code distribution agreements. In this case, notwithstanding the fact that the distribution arrangement had been in place for at least 5 years and that it was terminated without notice, no compensation was awarded. Where a registered agency agreement expires because it has reached the end of its term, the length of duration of the parties’ relationship is taken into account by the Courts when assessing the compensation to be awarded.
It is sensible for both parties to commercial arrangements to set out their rights and obligations in writing.
 UAE Federal Law no. (18) of 1981 concerning Organizing Trade Agencies (Commercial Agency Law).
This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.