Can you terminate your commercial agent?

The expansion of multinational companies is always either through incorporating a subsidiary or associating with a local distributor or a commercial agent in any jurisdiction. UAE is a standout amid the most preferable alternative where international companies can either sign an agreement for distribution or enters into an arrangement with the commercial agent for subsequent augmentation. 

Federal Law Number 18 of 1981 concerning UAE Agency Law, as amended (the Agency
Law) is the only legislation which governs the attributes pertaining to the Agency Agreement signed by
the parties. It is inevitable for foreign nationals to determine the advantages
and disadvantages prior to engaging in a commercial relationship. Thus, Corporate
Lawyers in Dubai have simplified for the readers to understand the Agency Law
of UAE prior to appointing or terminating
a Commercial Agent in UAE.

A registered agent typically relishes the exclusivity in their jurisdiction.
In addition, under the Agency Law, the
agent is entitled to earn a commission on
registering and selling the products thereof. Further, the Agent is also authorized to block the imports at the customs
authority, should there be a disagreement between the parties. The foregoing rights are devised in such a way to
safeguard the interest of the agent who might have devoted significant efforts
to build a profitable market for the principal. Henceforth, the agents in UAE
can utilize the Agency Law to prevent the
principal from registering a replacement agent unless the compensation is paid. Despite the stringent provisions, the
court, in certain cases, has overruled
the demands of commercial agents for termination of the contract on the grounds
of non-performance of the agency
contract. Following is the landmark judgment of the Court of Cassation declining the compensation for termination on the failure of agents to prove unjustified termination.

Facts

In the recent case of Federal
Supreme Court Case 811 of 2017 and Federal Supreme Court Case of 814 of 2017,
principal terminated the commercial contract due to substandard performance of
the agent; it was evident that he was in
clear breach of the agency contract.

Two principals in 1980 appointed
an agent in UAE, whereby they agreed to sell and provide services on three
brands of product, first two brands for principal 1 and the third brand for the
principal. However, post two decades, the
principals were facing the issue as the agency failed to perform his obligations under
the said contract. Despite continuous reminders and warnings, the agent
continued to be in default. Accordingly, the principals sent the letter for
termination of the contract, inclusive of
a final notice period to abide by the obligations pursuant to the contract, failing of which the agreement will be terminated completely.
The agent failed
to resolve the issue amicably.

In accordance
with the Agency Law, the Ministry of Economy (MOE) is empowered to terminate
an agreement based on justified reasons for termination. Thus, the MOE
cancelled the agreement relying on three letters
of termination for each brand, and subsequently, the invoice for the outstanding guarantee was issued.

Accordingly, three cases were
registered before the civil court against both the principals to set aside the
ministerial decision for termination and reinstatement of the agent, placing
its reliance on Article 14 of the Agency Law. The foregoing provision states that a meeting should be convened within
60 days from the date of termination to address the rationale behind termination and to offer an opportunity for
agent’s defence. Thus, failure to meet
the pre-requisite of convening the meeting authorizes
the court to strike down the ministerial decision of termination. However, to
the utter shock of the agent, the court of the first
instance rejected the claim and opined that MOE had
fulfilled their duty basis the communication between the parties. Accordingly,
the appeal was filed which ruled out the
decision of Court of First Instance stating that although the meeting is a mere
formality, it still exists to protect the
agent. Principals filed an appeal to the Supreme
Court, which upheld the decision of the Appeal Court.

Post the decision of the MOE, the
principals appointed new agents and subsequently the agency was registered.

Judgments and Appeals

A.     
Court
of First Instance Judgment: Agent’s request to cancel the registration of a new agent

The Agent’s
request to rescind the registration of new agent’s registration was rejected by
the First Instance court, and accordingly, the Agent filed an appeal. Appeal
court overruled the First Court’s judgment and declared the decision of the MOE
null and void. However, the deregistration of the new agents was not approved
by the Appeal Court as the same issue was not entertained by the First Court
at the time of the judgment. Thus, the
right to appeal is not granted.

The Agent approached the Supreme
Court, and the matter was accordingly
referred to the three experts, wherein, it was
concluded by the experts that the Agent was in breach of the contract
and thus, not entitled to the compensation. Even though the Agent won the
judgment, the new agents were not deregistered.
Accordingly, the request of the Agent to reinstate them in the register before
the Execution court basis the invalidity of the MOE decision was rejected.

B.     
Compensation
Claim (Part 1)

Upon finishing the foregoing case, the Agent filed three new cases against the principals for compensation of AED 600 million. The matter was referred to the expert who concluded the faulty actions of the agent which has caused
significant losses to the principals. Thus, the Agents is not authorized to seek compensation. In accordance with the experts’ report, the case was rejected in all the three
courts.

C.     
Compensation
Claim (Part 2)

A decade post receiving the unfavourable judgment on the compensation
claim, the Agent filed three new lawsuits, against the principals, the Ministry
and the New Agents. Defences like res
judicata, statutory limitation, and no standing to sue the new agents were
raised by the principals. First Instance Court accepted principals’ defense and rejected the case against the
ministry and the new agent. Subsequently, the case
was rejected by the Court of Appeal and
the Court of Cassation on the same grounds.

Epilogue

As evident from the case history,
the matter was referred to the panel of experts to determine the entitlement of
compensation, however, which was rejected
in all the cases. Accordingly, the Supreme Court opined that:

·        
The agent failed to provide evidence supporting their claim for
compensation or the damages suffered due to termination of the contract;

·        
The agents have breached the
contract by failing to adhere with the contractual obligations such as timely
payments, declining sales which caused loses;

The aftermath of the foregoing case sets a precedent for further
Principal-Agent relationship. The court confirmed that the agents would not be entitled to seek compensation for
termination, should there be a non-performance of the contractual obligations
by the agent, notwithstanding the protections granted to agents under the
Agency Law. Foreign companies must before terminating their contract with
Commercial Agents approach Lawyers in Dubai to analyse
the consequences for the same.