Our Commercial Lawyers usually asked to review distribution agreements from our international clients as well as distributing companies in UAE. Thus, through this article, Corporate Lawyers in UAE will highlight five important points to remember prior to entering into a distribution agreement pursuant to UAE Laws.

Federal Law Number 18 of 1991 regarding Commercial Agencies as further amended by Federal Law Number 14 of 1988, Federal Law Number 13 of 2006 and Federal Law Number 2 of 2010 hereinafter referred to as the Agency Law, governs the distribution agreement if signed with a UAE National or a company fully owned by local or if an exclusive distributor is appointed.

Following are the five essential clauses to review prior to signing any distribution agreement in UAE.

1. Distributor’s License

For any corporation undertaking distribution activities within UAE must secure a license from Department of Economic Development (DED) in the relevant Emirate. Thus, if the entity is not possessing the permit acquired from DED, it must not be allowed to distribute the products onshore. However, if the entity is registered in any of UAE free zone and possessing the license from the relevant free zone authorities, it will be able to distribute products within the territories of the free zone. Thus, the first and the foremost step for all the international companies willing to sell their products in UAE via distributors must scrutinise the licenses obtained by the company.

Further, international companies appointing distributors to cover wide territory including GCC must carefully examine the licensing requirements of other countries or must seek assistance from Commercial Lawyers of Dubai. Generally, foreign entities cannot directly distribute products in these countries and thus, appoint licensed distributors to conduct such activities. Therefore, companies must carefully review the provisions pertaining to licensing requirements of distributors in a distribution agreement, even in cases where the distributor will appoint sub-distributors to cover wide network. It is advised to restrict the distributor to seek the principal’s approval prior to appointing a sub-distributor in any specific region.

2. Termination

Things never work out as planned. Thus, to prepare ourselves from the worst case scenario, clauses like termination are undoubtedly important in any agreement. Except upon an agreement or a court order, it is nearly impossible under a civil law jurisdiction to rescind a contract. Ergo, a foreign entity desiring to terminate the distribution agreement without a specific termination clause in the agreement is left with only recourse of approaching the court, which involves strong evidence establishing the validity of termination. Generally speaking, not every agreement will be terminated just on the basis of termination clause present in the agreement. In such circumstances, the agent can raise the objection that the contractual obligation still exists. Although the court will not restrict the parties to abide by the contractual relationship in the absence of any specific agreement, the distributor might refuse to terminate the contract, until ordered by the competent court.

Whereas in the case if the agreement is authorized by the under Agency Law, there are numerous prerequisites to be considered before terminating the distributor. On the other hand, in an unregistered agreement, a specific clause allowing the principal to terminate the agreement and ruling out the possibility of obtaining a court’s order can suffice the requirement. It is further possible that the distributor might resist terminating the agreement and might not comply with the consequences which will lead us to the last recourse of obtaining a court’s order.

3. Dispute Resolution

Dispute resolution clause in any contract holds vital importance which assists the parties in the event of a dispute. Generally, a principal would be comfortable in opting its home country laws to govern the agreement. However, parties in UAE cannot agree on foreign courts having jurisdiction over matters where UAE courts have original jurisdiction. Even in cases where UAE courts are awarded authority, the courts would apply UAE law irrespective of a contradiction in the agreement signed by the parties.

In spite of the foregoing, the foreign law can be recognized to govern the agreement, if the agreement allows the parties to resolve the matter through arbitration. UAE is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Award; wherein, local courts can refuse to try cases where parties have mutually agreed on arbitration. Except in cases, where the distribution agreement is registered under the Agency Law, the UAE Courts will automatically hold the jurisdiction.

4. Compensation

“Mala fide intentions”, “Abusing rights” are the two concepts upon which the local distributor can seek compensation from the principal in the event of termination or case of non-renewal of the agreement, even in cases where termination was in accordance with the contract.

The preceding clause act as one of the main reason why foreign entities try to avoid UAE law to govern the distribution agreement. There are no specific grounds which can be laid down under which the distributor can seek compensation for wrongful termination as it is completely case to case basis and will be decided by the court considering the merits of the case. Importantly, the exclusivity of the agreement plays a vital role in determining the amount of compensation payable to the distributor, if any. Whereas, if the agreement is registered in accordance with the Agency Laws, the Commercial Agency Committee will have the initial jurisdiction to try the matter followed by an appeal in the UAE Civil Courts. The courts, as mentioned above, will hold the original jurisdiction, regardless of a contradictory arrangement between the parties outlined in the agreement.

5. Implementation

The last stage is implementation or execution of the agreement, whereby, if the foreign entity wishes to apply foreign law to govern the agreement, it must ensure that the distributor signing the agreement is authorized under the UAE Law. Also, if any agent is signing on behalf of the distributor, the entity must be assured that the authorized will bind the entity to refer the matter before arbitration.

As opposed to the foregoing, if the signatory is not authorized under the Agency Law or through the relevant governmental authority, the arbitration clause will stand null and void, as a result of which the UAE courts will automatically inherit the jurisdiction in the said matter. Thus, foreign entities must look for documents like Memorandum of Association of the distributor, power of attorneys, trade licenses or other relevant documents. Also, international companies can appoint Lawyers of Dubai to perform careful due diligence on the distributor and draft the agreement to prevent any future casualties. Apart from the foregoing, it is not necessary to translate the distribution agreement into Arabic.

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