Introduction
The United Arab Emirates, and particularly Dubai, has become a regional hub for regional and international distributors. Undoubtedly, the UAE Commercial Agency Law No 18 of 1981 and its amendments ("Commercial Agency Law") provides significant protection to exclusive distributors and its provisions have been interpreted on many occasions in favour of those distributors. Nonetheless, their interests are frequently threatened by competitors who manage to illegally import protected products into the country in violation of the Commercial Agency Law. Since they are not subject to any restrictions in terms of marketing and promotion efforts, the competing distributors can offer their products at cheaper rates than the exclusive distributor, while benefiting from the investments made by the latter.
Legal Overview
Exclusive distribution agreements usually include a principal and a distributor, also referred to as an "agent". For such agreements to effectively protect the interests of exclusive distributors, they must be registered with the Ministry of Economy; otherwise, the only recourse available to an exclusive distributor against a competitor importing protected products would be to sue the principal for breach of the exclusive distribution agreement. To be successful in such claim, the exclusive distributor must be able to prove that the principal effectively violated the terms of the agreement by selling protected products to a competitor.
However, in our evermore globalised markets, there is a wide array of strategies that can be used to hide the provenance of products. The principal would usually have no presence in the UAE, thus making the enforcement of a judgment inefficient.
The Facts
"They are bleeding us dry", said a client of ours, when he first walked into our conference room and started telling us about the problem he was seeking legal advice for.
Our client is an important distributor of consumer electronics and technology devices in the GCC countries. By virtue of an exclusive distribution agreement (hereinafter referred to as "the Agreement"), our client has been granted a territorial exclusivity to import and sell a specific range of products (hereinafter referred to as the "Protected Products") from an international technology manufacturer.
It is central to know that exclusive distribution agreements give far-reaching protective rights to the parties. However, to be protected to the fullest extent permitted by law the said agreement must be registered with the Ministry of Economy. For example, pursuant to the registration, the UAE customs authorities will not clear the entry of the Protected Products imported by a third party. It also allows an exclusive distributor to ask for the confiscation of any violating products, pursuant to which the perpetrator will be subject to criminal penalties.
Our client, being an experienced distributor, had taken all the appropriate measures to ensure the protection of the exclusivity. Nevertheless, the market had been recently flooded with Protected Products imported by a third party.
As previously mentioned, our client is the exclusive distributor for a specific range of products from the manufacturer. It appears that a competitor was able to import the Protected Products in shipments along with other products, for which our client did not have exclusivity, from the same manufacturer.
In general, exclusive distribution agreements will impose certain conditions on the distributor in exchange for the said exclusivity. Such conditions typically include the development of new geographical markets, sales objectives, and minimum marketing and promotion expenditures. Therefore, when a third party bypasses an exclusivity agreement it is, in fact, leveraging the investments made by the exclusive distributor to cut prices and unlawfully compete with the latter.
The Remedy
To remedy the situation, we drafted and filed a complaint with the Ministry of Economy supported by the necessary evidence, obtained by our client, proving the presence of the violating products in the UAE. After verifying that our client had indeed registered the Agreement and that the complaint appeared credible on a prima facie basis, the Ministry issued a certificate allowing us to proceed with the complaint to the Dubai Department of Economic Development (hereinafter referred to as "DED").
DED is vested with investigative powers and should the complaint be well founded, it can order that the Protected Products cease to be illegally imported and sold in the Emirate of Dubai in collaboration with inspectors of the Ministry of Economy. The time of the raid was set in collaboration with our client and it resulted in the confiscation of the violating products in the shops and stores of the competing distributor. Needless to say, our client was relieved to see the Protected Products he did not import taken out of the market.
Conclusion
We note that in its digitalisation effort, DED has recently changed its complaint-filling procedure. In a situation of breach of exclusivity, time is of the essence. Thus, it is important to make sure, when choosing a legal representative, that the latter already has access to the facilities that will permit a rapid resolution.
As can be seen, the registration of an exclusive distribution agreement is a crucial step to ensuring the protection of a distributor's rights. In fact, it allows a more efficient remedy in terms of cost and time and it guarantees a result for the injured distributor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
