Prior to entering a Distribution Agreement with a local Distributor in the UAE, the foreign principal should put into consideration several aspects that can negatively affect the Principal in the long run. A lot of the times the termination & de-registration process is overlooked by Principals when signing a distribution agreement, specifically with a Distributor registered with the UAE Ministry of Economy. The protection of a registered local distributor may hinder the Principal's option of terminating and de-registering a distributor if and when required. Therefore, Principal's may end up unable to terminate the Agreement and de-register an exclusive distributor- or they may be required to pay significant compensation to the Distributor. Therefore, it is crucial for foreign Principals to understand how the termination & de-registration of Commercial Agencies are governed by the Ministry of Economy pursuant to UAE Laws and regulations.
I. Termination of Agreement
Contracts in the UAE are governed by the Federal Law No. 5 of 1985 On the Civil Transactions Law of the United Arab Emirates Article 267 pertains to the dissolution of contracts and prohibits unilateral termination of contracts. Article 267 stipulates: ''If the contract is valid and binding, it shall not be permissible for either of the contracting parties to resile from it, nor to vary or rescind it, save by mutual consent or an order of the court, or under a provision of the law."
Therefore, no valid contract can be terminated by any party unless it is terminated by mutual consent of both parties or by the order of the court if any unilateral party is pursuing such termination or under any other provision of the law. The only exception to this provision is Articles 272 that allows for termination in case of default and Article 271 which allows for parties to contract out of this requirement of the Law through expressly stating the same in their Agreement.
Article 272 and 271 provides:
- In contracts binding on both parties, if one of the parties does not do what he is obliged to do under the contract, the other party may, after giving notice to the obligor, require that the contract be performed or cancelled."
It shall be permissible to agree that a contract shall be regarded as being cancelled spontaneously (automatically) without the need for a judicial order failing performance of the obligations arising there out, and such agreement shall not dispense with notice unless the contracting parties have expressly agreed that should be dispensed with."
The above provisions entitle the parties to terminate by sending a notice to the other party in case of non-fulfilment of obligation in the agreement or contract out of the requirement of terminating an agreement through the conditions of Article 267 by expressly dispensing with such requirements in their agreement.
The relationship under distribution contracts is also governed by the Federal Law No. 18 of 1981 concerning the Organization of Trade Agencies (the "UAE Commercial Agency Law") which defines an agency as the "representation of the principal by an agent for the purpose of distribution, selling, display or rendering of a commodity or service in the United Arab Emirates against a commission or profit". The UAE Commercial Agency Law does not allow termination of the distribution agreement without a serious cause pursuant to Article 8 and provides for indemnification upon such termination pursuant to Article 9 of the Law. However, such agreements only get the protection of the UAE Commercial Agency Law if the Agreement is registered with the UAE Ministry of Economy (MOE).
Further, the Agency Law is silent as to what reasonable reason(s) may be or specifically equated to for the termination of the Agreement by the Principal. The same would also be subject to and dependent on the MOE Committee's discretion. Generally, however, the following may be considered justifiable reasons for termination:
- Non-performance and meeting of the sales target;
- Any breach of the agency law;
- Agent undertaking competing for activities and conflict of interest; and
- Agent acting in a manner that would negatively affect principals' image as a manufacturer.
Article 1 of the Cabinet Resolution No. (381) of 2006 on Cancellation of Registration of Commercial Agencies confirms that a commercial agency agreement can be removed from the registered if:
"1. A duly documented and a certified letter showing termination of the commercial agency agreement under a mutual consent of parties thereto is provided.
2. A final judicial judgement on cancellation of registration of the commercial agency is issued.
3. Registration of the commercial agency or renewal of such registration expires without the agreement of the parties thereto to extend such registration a year prior to such expiration.
4. A registration cancellation application form, prepared by the Ministry, signed by the commercial agent or their legal representative authorized to carry out cancellation is submitted.
5. A documented and duly certified letter is submitted by the principal that they do not wish to renew the commercial agency before the date specified in the agreement for such renewal.
In the normal proceedings of cancelling an agency agreement, the Agency Directorate notifies the local agent of the termination request and if the agent agrees and shows appearance before the Ministry as required within sixty (60) days, the de-registration takes place on a mutual consensual basis. However, if the de-registration is contested, the party seeking the de-registration will have a right to refer the dispute to the Commercial Agencies Committee of the Ministry for a decision. This procedure may take anywhere between five (5) to seven (7) months or even longer if the matter gets prolonged.
Last but not least, decisions by a Committee can be appealed by the Parties before the relevant Court in the UAE within thirty (30) days of being announced; in the absence of which the decision of the Committee shall be final and unappealable.
However, Parties cannot go to the court prior to submitting jurisdiction to the Committee at the Ministry. Reference is made to Article 28 of the UAE Commercial Agencies Law that provides as below:
The committee shall examine any disputes arising out of the commercial agencies registered in the Ministry. Parties to such disputes may not institute lawsuits before the court in this respect before being submitted to the commercial agencies committee."
In conclusion, foreign Principals should pay close attention to the Distribution Agreements they enter into- in an attempt to ensure their maximum protection in case they wish to terminate and de-register the Agreement, while also keeping in mind that UAE laws and regulations offer protection to registered distributors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.