01 Jul 2019

De-registration of an agency agreement

Authored by: Hadef & Partners, Sector Groups

In brief:

  • The registration at the Ministry of Economy of a range of reseller, distribution, agency and franchise agreements with local agents, is commonplace in the UAE.
  • It can be very difficult for an agency agreement to be de-registered in the UAE.
  • In this article, we discuss a case in which we successfully argued on behalf of our client that an agency agreement should be de-registered.

Agency agreements in the UAE

The registration of an agency agreement at the UAE Ministry of Economy (MOE) extends various statutory rights to local agents, which go beyond those contained in the contract, most notably, exclusivity and the right to compensation on termination. It can also be very difficult for a registered agency agreement to be de-registered by a principal. See our previous article in relation to agency agreements in the UAE here.

A word of warning on relevant products

Products that form the subject of the agreement are specifically identified and catalogued in the MOE agency register with reference to the particular registered agreement. However, it is often the case that registered agreements lack the required specificity in their description of products. It follows that broad, generic words are then used in the MOE agency register to describe the products, which can lead to confusion over the scope of the registered agency. This ambiguity, and in many cases the resulting all-encompassing scope of the registered agreement, is often not what the parties intended when they contracted together. It can also cause serious problems for principals looking to introduce new product lines into the market. Customs can seize products deemed to fall within the scope of registered arrangements which are being imported by parties other than the registered agent. Disputes between principals and agents can ensue which, regardless of the outcome, invariably damage the business in the territory.

Background to the recent case

In this case, our client (the Principal) had, following MOE registration, entered into numerous subsequent agency agreements with its Agent, in an effort to further specify the parties’ respective rights and obligations, and to clearly define the applicable product range.

The relationship deteriorated and the Principal initiated proceedings after it found the Agent to have breached multiple provisions of the latest agency agreement, including the failure to meet several performance benchmarks and the Agent dealing in competing products.

The result was bifurcated proceedings on termination and damages. These proceedings were further complicated and divided due to the numerous separate agency agreements in place between the parties.

Jurisdiction and the MOE

The MOE has jurisdiction over all registered agency matters. In the first instance, any dispute with an agent should be heard by a committee of the MOE. However, a decision by the MOE committee can be appealed to the Court of First Instance.

Over the course of 5 years, the separate proceedings reached various levels of appeal, with the main termination case reaching the Court of Cassation, twice.

The Case(s) and “material reason”

Under article 8 of Federal Law No. 18 of 1981 (the Commercial Agency Law), a registered agency cannot be terminated and a non-renewal provision will not be enforced (meaning that a registered agency will be automatically renewed, irrespective of a clause stating otherwise) unless there is a breach of a provision of the Commercial Agency Law.  In practice, this broad rule requires a valid and material reason that falls into one of the following limited categories:

  • non-performance (e.g. failure to meet pre-agreed sales targets or minimum purchase requirements);
  • the agent undertaking competing commercial activities (i.e. selling competing products and/or services); or
  • the agent failing to prevent, or acting in a manner that harms, the reputation of the principal.

In our case, the Abu Dhabi Supreme Court issued final judgment confirming a favorable Court of Appeal decision to de-register the agency. It was successfully argued that the Agent had breached the agency agreement when it actively pursued orders for products outside the contractual territory, and sold products which the parties had clearly defined as competitive. This position was confirmed by the expert’s report and the circumstances were subsequently considered by the Supreme Court to be in fundamental violation of the agency agreement’s terms. The activities of the Agent were found to have amounted to a breach of the Agency Law, and consequently the agency contract was terminable under Article 8 of the Commercial Agency Law.

This final ruling by the Supreme Court is a clear statement of the UAE court’s position on the bounds of a registered agent’s permissible activities, and is a significant result for our client. The case provides a rare example of the court’s exercise of its ability to de-register an agency agreement, which can often be challenging for principals to achieve and subsequently implement.

Conclusion

Our recent case shows that termination of a registered agency agreement is possible. However, it requires a strong set of facts and evidence in support of significant breaches of the agency agreement. It is worth noting that the behaviour of an agent in bad faith can also be crucial in establishing the justification for termination of a registered agency under the Commercial Agency Law.

Notwithstanding our successful court result, there are significant commercial considerations to take into account before engaging in litigious action against an agent. Taking legal recourse against any UAE agent can result in years of business interruption, often with customer orders and servicing going unfulfilled causing significant damage to goodwill. It is always prudent therefore to seek expert legal advice before taking any formal action.

For more information, please contact us on sectors@hadefpartners.com.