More and more international manufacturers are looking to the MENA region as a burgeoning growth market – and locally-based SMEs will often look to the region’s tried and tested export routes as a traditional way of taking their business to the next level. Yet the linkage between manufacturer and local distributor can be complex and weighted towards local interests. Richard Bell, Partner, Clyde & Co, and Rebecca Soquier, Associate, Clyde & Co, investigate.
With its oil wealth, population growth and strong demand for all manner of industrial and consumer goods, the Middle East and North Africa (MENA) region is an attractive market for many manufacturers. There are, however, potential pitfalls in doing business in the region, particularly when it comes to appointing local agents to distribute products in the region. Many states in the MENA region have enacted commercial agency laws which provide that products may only be distributed in that country by a local company or agent. In some states, the commercial agency laws grant local distributors significant statutory protections which override the express terms of a distribution or agency agreement. This can often come as an unpleasant surprise to manufacturers seeking to re organise their distribution arrangements. For the purposes of this update, we refer to commercial agency agreements and distribution contracts interchangeably as “distribution agreements” (although in some jurisdictions there are differences between the two terms) and local agents as “distributors”.
We will examine the types of commercial agency laws manufacturers typically encounter in the MENA region. For ease of reference, we have classified the different commercial agency regimes into three categories:
- Protectionist: this category includes states which have commercial agency laws that heavily favour the local distributor;
- Moderate: this category includes states which have commercial agency laws that grant the local distributor a certain degree of statutory protection while maintaining some flexibility for the manufacturer to terminate the distribution agreement and appoint other distributors;
- Free market: this category includes states which do not have commercial agency laws and where the courts will generally uphold the manufacturer’s contractual right to terminate the distribution agreement and appoint other distributors.
For each category, we consider the common traits in the laws, focusing in particular on the rules relating to termination of the agreement, the remedies available to the local distributor and the possibility to contract out of application of the laws. We also highlight some issues manufacturers should be aware of when entering into or terminating a distribution agreement.
In countries such as the UAE, Syria, Egypt and Yemen, local distributors who have been granted exclusive distribution rights to a specific product have the right to register their agreement with the state’s commercial agency registry. Upon registration, the local distributor will (with some minor variations) be granted the following rights and protections:
- Referral of disputes to the local courts: the local courts will have exclusive jurisdiction over any dispute arising under the distribution agreement. A clause providing that disputes will be referred to arbitration or to a court in a foreign jurisdiction will generally be unenforceable.
- Application of local law: the local courts will apply the provisions of the national law irrespective of the governing law provisions in the agreement. Governing law clauses providing for the application of a foreign law will be unenforceable.
- Restriction on the manufacturer’s right to terminate: the distribution agreement will generally only be able to be terminated by mutual consent or by order of the court.This will be the case even if the agreement has expired in accordance with its terms. Further the manufacturer will not be able to terminate the agreement by giving simple notice, even if this is provided for in the agreement itself and even if the local distributor is in breach.
- Right to seek a block on the import of products: where a manufacturer has sought to terminate the distribution agreement and appoint a new distributor, the “registered” local distributor may apply to block the import of products through the new distributor. This can effectively prevent the manufacturer from supplying the market through anyone other than the registered distributor.
- Right to compensation: if the manufacturer seeks to terminate the distribution agreement through the courts, the local distributor will be entitled to seek compensation. As a general rule, the courts will award damages to the distributor for direct costs incurred (such as hiring and training staff, advertising costs and finance costs on loan facilities), capital investment in the business (setting up showrooms, shops and service facilities) and, in many cases, loss of profit. In assessing a claim for loss of profit, the courts will usually look at net profit generated by the local distributor over previous years and use this as a basis to calculate the net profit that would have been earned had the agreement not been terminated. Often, compensation will be awarded even if the local distributor has breached the terms of the agreement, such as by failing to reach agreed sales targets or failing to adequately promote the products.
This category includes countries such as Saudi Arabia, Kuwait, Jordan, Iraq, Libya and Bahrain where the commercial agency laws provide certain statutory provisions favourable to local distributors but allow the manufacturer some flexibility to terminate an existing distribution agreement and/or appoint a new distributor.
The typical features of these moderate regimes are as follows:
- Foreign law and arbitration clauses are generally accepted: as a general rule, the courts will uphold and enforce clauses that provide for a foreign governing law and for disputes to be referred to the courts of a foreign jurisdiction or to arbitration.
- Possibility to de-register the agreement upon the expiration of the term: while the local distributor will be entitled to register the agreement, this does not necessarily prohibit the manufacturer from terminating the agreement. In Saudi Arabia for example, once the term of an agreement has expired, the courts will generally accept that the manufacturer may exercise its right to not renew the agreement without having to provide further justification.
- Unlikely for the products to be blocked at customs: there are no legal provisions or mechanisms which allow a local distributor to request a block of the import of products into the state. There may, however, be informal mechanisms that allow the distributor to disrupt the relationship with customers or interfere with market access.
- Limited rights for compensation: The local distributor will generally have a right to compensation on the termination or expiry of the distribution agreement but this will usually be limited to damages to actual costs incurred rather than speculative loss of profits or punitive damages.
Free market states
This category includes countries such as the territory of Palestine and Algeria where there are no specific commercial agency laws and the manufacturer has a largely unfettered right to terminate and appoint distributors in accordance with the terms of the agreement. The typical features of these free market jurisdictions are as follows:
- The right to choose foreign law and arbitration clauses as a general rule, the courts will uphold and enforce contractual clauses that provide for a foreign governing law and for disputes to be referred to the courts of a foreign jurisdiction or to arbitration.
- The right to terminate the agreement in accordance with the terms of the agreement: the parties are generally allowed to agree on the circumstances under which the agreement may be terminated. Even if the agreement is terminated without justifiable cause, the courts will not force the manufacturer to remain a party to the agreement, although the distributor may still have a contractual right to claim damages.
- A limited right to seek compensation from the manufacturer: should the distributor wish to seek compensation from the manufacturer for breach or wrongful termination of the distribution agreement, damages will be assessed in accordance with general rules of contract law rather than in accordance with some statutory formula.
- No right to block imports: the distributor does not have the ability to block the manufacturer from importing products into the market through another distributor.
Key issues for manufacturers
In entering into and terminating distribution contracts in the MENA region, it is important for manufacturers to be familiar with the applicable laws and seek advice when appropriate.
In protectionist states, the application of draconian commercial agency laws can often be avoided by careful drafting of the agreement and due diligence on the distributor. Where an agreement has been registered, however, it will usually be very difficult to terminate and deregister it unless the distributor agrees. While it may be possible for the manufacturer to obtain a court order terminating and deregistering the agreement, court proceedings can be lengthy and expensive and the manufacturer may be ordered to pay compensation to the distributor at the end of the case. Moreover, the distributor may be blocked from accessing the market while the court proceedings are ongoing. As a result, it is important for manufacturers to approach the termination of a distribution agreement in a protectionist jurisdiction very carefully and, where possible, try and negotiate a settlement.
In moderate and free market jurisdictions, the manufacturer may be able to adopt a more robust approach, although caution is still advised. In our experience, regardless of the jurisdiction, a disgruntled distributor will almost always threaten to sue the manufacturer when the prospect of termination is raised. The key is to assess whether, in light of the applicable law, that threat is a credible one and act accordingly.
In light of the legal risks involved, manufacturers selling products in across the MENA region are well advised to look at each jurisdiction individually and seek advice before entering into, or terminating a distribution agreement.
Author’s note: At the time of writing this article, Oman had just issued a decree amending its commercial agency laws. On its face value, the decree alters Oman’s status from a protectionist state to a moderate state. We will be publishing a separate article on Oman when the effect of the law change is more fully understood.
If you would like further information on any issue raised in this update please contact:
Richard Bell, Partner
Rebecca Soquier, Associate
Clyde & Co LLP
PO Box 7001
Level 15, Rolex Tower
Sheikh Zayed Road
Dubai, United Arab Emirates
T: +971 4 384 4000
F: +971 4 384 4004
Clyde & Co accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. www.clydeco.com
Rushika Bhatia Editor
Rushika Bhatia is one of the region’s leading commentators on business and current affairs issues. She is the Editor of SME Advisor magazine - the flagship title of CPI Business. She is passionate about infographics – with special emphasis on data, research and statistics. Rushika has a Bachelor’s Degree from Indiana University, USA and is also CIMA qualified.