International: Agency and Distribution in the Arab World: The Registration of Distribution Agreements

In order to break into a foreign market, the engagement of the services of an agent or distributor, as the case may be, is often the first and easiest step. This also applies in the Persian Gulf region, and in countries such as Saudi Arabia, Kuwait, Bahrain, Qatar and the United Arab Emirates ("UAE"). A number of peculiarities - such as the registration of distribution agreements - should, however, be duly heeded. Using the example of the UAE, a number of legally sensitive issues are outlined below.

Legal Framework

In the UAE, distribution agreements are subject to the so-called Commercial Agencies Law No. 18 of 1981 (the "CAL"). The name of this law is misleading, given that its scope does not only extend to commercial agents (as we would understand this term pursuant to §§ 84 et seq. of the German Commercial Code), but also to distributors and franchisees (hereinafter collectively referred to as "commercial agents"). The CAL is a mandatorily applicable law.

The subject matter of the CAL includes trade / commercial law matters such as the personal requirements to commercial agents, the registration of agreements, etc. It does, however, also include substantive provisions relating to the termination of agreements and claims for compensation. Significantly, the CAL makes provision exclusively for the protection of the commercial agent - and not the principal.

The Significance of the Registration of Distribution Agreements

The CAL places commercial agents into an extraordinarily strong position. Exclusivity - established by law - is worthy of specific mention. If this inherent exclusivity should be circumvented by way of parallel imports, commercial agents have the possibility of having a so-called import ban imposed on the principal by customs authorities. In consequence, the principal will have no access to the UAE market until the dispute with the commercial agent has been settled.

The provisions for the termination of distribution agreements are of no lesser significance. The termination of an agreement having been concluded for an indefinite period of time is invalid; notice of termination may only be served for important cause. This is the reason why distribution agreements are often only terminated in return for often disproportionate compensation payments.

Most important, however, is the fact that all of the aforesaid rights contained in the CAL can only be invoked by commercial agents who have been entered in the so-called Commercial Agency Registry of the UAE'S Federal Ministry of
Economy and Technology.

Although registration is required by law, non-registered agreements are nevertheless permissible. The latter are subject to the significantly less strict provisions of the Civil and Commercial Codes No. 5 of 1985 and No. 18 of 1993.

Practical Recommendations

In view of the drastic legal consequences attaching to a registered distribution agreement and the general permissibility of concluding non-registered distribution agreements, at least from the perspective of the principal, it should generally be sought to prevent a registration. In the end, this is a matter for negotiation, and whether or not an agreement is (to be) registered should be recorded in the relevant agreement. The principal should also neither have the agreement certified by a notary or the Chamber of Commerce, nor have it legalised by the UAE embassy, given that legalisation is a pre-requisite of registration.

A further cautionary note should be sounded with respect to the issuing of so-called representation letters, which confirm the existence of a distribution relationship. Such letters can serve as a basis for purposes of the legalisation of an agreement by the embassy of the UAE in preparation for the registration of a distribution agreement. The necessity of such letters of representation should therefore always be critically questioned.

Barbara Mayer