Dubai Court Ruling on Non-Registered Distribution Agreement:
- No automatic renewal of a limited-term Distribution Agreement by the continuation of Trade
- No compensation for non-renewal/termination of a Distribution Agreement
Azhari Legal Consultancy successfully defended its client, a German manufacturer (the “Client”), in a lawsuit against a UAE authorized distributor (the “Distributor”) seeking compensation for the termination of an authorized distributor agreement before the Dubai Courts.
The Client appointed a UAE-based trading company as its exclusive distributor for the UAE and other GCC countries. Since the distributor agreement was not registered with the Ministry of Economy, the provisions of the UAE Agency Law did not apply.
The Client and the Distributor entered into a distributor agreement (the “Distributor Agreement”), in 2011, which had a fixed term of 3 years and contained a provision that the Distributor Agreement can be renewed if agreed so by the parties in writing. After the expiry of the Distributor Agreement, the parties negotiated the terms of a new distributor agreement. However, the parties failed to agree on all terms of the new agreement, and consequently, they never signed a new agreement. The Client did not appoint a new authorized distributor in the UAE. Instead, the Client only delivered to the Distributor whenever a purchase order was received from the Distributor.
Later on, as the Distributor failed to pay the purchase price, the Client initiated legal proceedings with the aim to get a judgment regarding its outstanding purchase price amounting to EUR 300,000.
During the legal proceedings the Distributor raised counter-claims requesting an amount of approximately AED 2 million as a compensation for the ‘termination’ of the Distributor Agreement. The counter-claims sought to recover expenses of marketing, costs of training of employees and renting of warehouses as well as a compensation for loss of business and income because of the termination.
The legal question in this case was – inter alia – whether the existence of the trading relationship between the Client and the Distributor after the expiry of the Distributor Agreement constituted an implied extension of the expired Distributor Agreement.
In its final judgment, the Dubai Court opined that (1) the continuation of the trading relationship between the parties did not constitute an implied extension of the expired Distributor Agreement as this Agreement provided that any extension requires to be in written form and (2) the non-renewal of the Distributor Agreement does not give rise to a compensation claim against the Client. Moreover, the Dubai Court regarded the Client as merely a supplier and the Distributor as an independent merchant and compelled the Distributor to pay the claimed amount.
Registered vs Non-registered Commercial Agency
The case decided by a final judgment of the Dubai Courts refers to a non-registered commercial agency.
If the commercial agency agreement would have been registered with the Ministry of Economy, the outcome might have been different in a drastic way for the Client.
The UAE Commercial Agency Law (Federal Law 18 of 1981) has strict requirements that govern the relation between the commercial agent and the principal. For instance, the commercial agent must be a UAE national (or a legal entity 100% owned by a UAE national(s)) and the agreement between the agent and the principal must be attested (notarized) and registered with the Ministry of Economy.
Termination or non-renewal of an agency agreement (or the distribution agreement), once registered with the Ministry of Economy, requires legal ground. Without a justifiable legal ground, which is defined very narrowly by the courts, or mutual agreement, it can be extremely difficult to terminate the agency agreement. Moreover, depending on the circumstances of the termination, the courts may give the agents substantial compensation for the damages suffered as a result of the termination.
In practice, even though the idea of entering the market through a local agent has its perks, such as the agent’s knowledge of the market, it could be more attractive for the principal to enter into an agreement which is not subject to the UAE Commercial Agency Law, as a registered agreement would be extremely difficult to terminate (even if there are fixed terms), would give exclusivity to the agent and ultimately substantial control for the agent over the subject matter of the agreement.
Therefore, it is very crucial to carefully draft an agency agreement, whether subject to the UAE Commercial Agency Law or not, in order to avoid adverse legal consequences.