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.

Dr. Hassan Elhais is a legal consultant in Dubai, specializing in the drafting of all statements of claim, memos and consultation on litigation of all manner.