There are active trading relations between the states of the Gulf region and the European Union. When distributing products, European manufacturers often use either agents or distributors who are based in the Gulf region and therefore know the regional markets and have the necessary contacts for successful distribution. If a commercial agent is used, he or she will only broker business between the European manufacturer and the customer. However, the commercial agent himself does not become a contracting party to the sales contract. The situation is different with distributors: they buy the products in their own name and for their own account from the European manufacturer and sell them in their own name and for their own account to the customer in the Gulf region.
Before a company from the Gulf States agrees to act as a commercial agent or distributor and to conclude a corresponding contract with the European manufacturer, various aspects should be given special consideration, including legal ones.
Often the European manufacturer will demand that the distributor accepts that a court or arbitration tribunal in the European Union should decide on any disputes that may arise between the parties. Furthermore, it is almost always demanded that this court must then also apply the law of a European member state, for example German or French law. Often there is very little or no willingness to negotiate on these two points on the part of European manufacturers. For the commercial agent or distributor based in the Gulf region, the question then arises whether he or she can accept this or not. However, vehement rejection will often mean that the contract will not come into effect as a result.
Is the agreement on the jurisdiction of European state courts acceptable?
In principle, one can answer this question in the affirmative. The courts in Europe have a good reputation. The judges are basically well trained and considered neutral. However, there are differences from country to country. It can be helpful to take a look at the ranking of the World Justice Project ("WJP Rule of Law Index®") (https://worldjusticeproject.org/rule-of-law-index/global/2022/table), which, for example, gives indications of corruption problems in the countries concerned. Nine of the ten states with the best scores in this index are in the EU, e.g. Germany, the Netherlands or Sweden.
Should a legal dispute arise and should the distribution company from the Gulf region win the case, a judgement by a court in Europe would also be enforceable in the entire European Union. Whether such a judgement would also be enforceable in the Gulf region is another matter. For example, it is disputed whether a German judgment would be enforceable in Kuwait. It would probably not be enforceable in the United Arab Emirates, but it would be enforceable within the scope of the Dubai International Financial Centre rules. Therefore, a German company would possibly make a mistake if it agreed in a contract that a German court should have jurisdiction if later enforceability is not ensured. From the perspective of the commercial agent or distributor from the Gulf region, this point of view can be taken into account in a tactical consideration.
A further question in this context is whether the distribution company, despite the choice of forum agreement, can still sue in the court of its own domicile, e.g. in Qatar. The view of the European courts on this would be that this is not permissible. Nevertheless, it may be that local law in the respective Gulf state allows this in the case of disputes arising from distribution contracts. This is probably the case in the United Arab Emirates, for example (at least according to Amereller in Martinek/Semler/Flohr, Handbuch des Vertriebsrechts, 4th ed. 2016, § 73 marginal no. 29 and Klaiber in Recht der Internationalen Wirtschaft 2009, p. 154, 158).
Is it acceptable to agree on the jurisdiction of a European arbitration court?
Generally, one will be able to answer this question in the affirmative as well.
Arbitration courts are private institutions that exercise jurisdiction. The arbitrators' decision has the same effect as the judgment of a state court. The advantage of international arbitration is in particular that arbitral awards are enforceable internationally in most states, including all states of the EU and also all states in the Gulf region, as they are all signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention"). The only state in the region that is not a signatory is Iraq.
However, there are large cost differences between the various arbitral institutions. Therefore, before signing an arbitration agreement, it makes sense to check whether the arbitration institution chosen by the European manufacturer is particularly expensive. Excessive costs can be countered by drafting the arbitration agreement in such a way that a particularly efficient procedure is imposed on the arbitrators. In this context, the so-called "Prague Rules" ("Rules on the Efficient Conduct of Proceedings in International Arbitration", available on the internet at https://praguerules.com), which can be referred to in the arbitration agreement, can be of particular interest.
Since, as a rule, each of the parties selects one arbitrator and these two party appointed arbitrators (sometimes also the arbitral institutions) appoint the president of the arbitral tribunal, the parties usually do not have to worry that the arbitral tribunal would not be independent or impartial. If the parties agree on the arbitral tribunal of the German Arbitration Institute (DIS), for example, this does not mean any particular advantage for the German party. The arbitrators themselves are independent and impartial and the institution under whose rules the proceedings are conducted has no influence on which party the arbitrators decide in favour of.
Is it acceptable to choose European substantive law?
If the parties have not stipulated in the distribution agreement which law is to be applied, a European court would normally apply the law of the state in which the commercial agent or authorised distributor has his or her habitual residence (Art. 4 Rome I Regulation). If there is no provision in the contract, the European court seised would normally have to apply the law of Kuwait or the United Arab Emirates, for example.
In most cases, however, as stated above, the parties to the contract will demand that the law of their own domicile be applied. If the manufacturer has its registered office in Germany, it would therefore mostly demand that German law should be applicable. Is this acceptable from the point of view of the company from one of the Gulf States? Generally speaking, the answer is yes. This is especially true for commercial agency contracts, because the commercial agency law in all European countries is very friendly to commercial agents.
A disadvantage is, of course, that this foreign law will be unknown to the an authorised distributor dealer from Oman or the a commercial agent from Bahrain. The effort to determine and analyse this foreign law in detail before concluding the contract will often be too high. As far as commercial agency contracts are concerned, however, there is at least one considerable advantage: all M member S states of the European Union have very similar commercial agency law. This is due to the fact that there is a European Directive which prescribes in relative detail to all Member States which legal provisions they have to adopt to regulate commercial agency relationships (available in English at https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:31986L0653&from=DE). This commercial agency law is very commercial agent-friendly. For example, there are minimum notice periods, the length of which depends on the duration of the contract. In addition, the commercial agent is entitled to indemnity or compensation under certain conditions if the contractual relationship can be is terminated. This claim can be very high, in Germany approximately up to an average annual commission calculated on the basis of the average of the last five years. However, if the commercial agent is to work outside the EU, e.g. in the Gulf States, the parties can exclude such a claim. Commercial agents and their legal advisors should pay particular attention to this: If the contract provides for such an exclusion, it should be objected to and it should be insisted that this sentence be deleted. This can be well justified by saying that the commercial agent agrees in principle to accept foreign (e.g. German) law, but then only in its entirety. A cherry-picking approach, allowing the manufacturer to choose , on the other hand, could not be accepted. This can be combined with the suggestion that otherwise the law of the agent's country should be applied, e.g. the law of Kuwait.
However, the EU Directive does not specify all the details. It sets a minimum standard applicable in all member states of the EU. Some states go well beyond these minimum standards. Again, Germany is one example: Under German law, commercial agents had have very far-reaching information claims against the manufacturer. For example, the commercial agent can at any time demand that the manufacturer produce a so-called book extract. Such a book extract is a detailed and structured list of all business transactions for which the commercial agent was or is possibly entitled to receive a commission. Doubtful cases must also be included. In Germany, commercial agents are given additional protection by the fact that a very strict law on general terms and conditions (GTC) applies. GTC are contractual provisions that have been pre-formulated for a number of contracts and are not negotiated individually. Distribution contracts are very often, if not almost always, GTC in this sense. The special characteristic of the German law on GTC is that it provides for a content review. Provisions which, in the opinion of the court, unreasonably disadvantage the commercial agent contrary to good faith are invalid. Case law is often very strict to the disadvantage of the manufacturer. All in all, this leads very often to the result that provisions in the agency agreement which are considered unfair are ineffective and the submitted agreement can therefore often be accepted even if individual provisions do not appear to be balanced.
If no agency agreement but a distribution agreement is to be concluded, the above-mentioned EU Directive does not apply. Therefore, the legal situation in this regard is also different in all states of the European Union. This applies, for example, to notice periods or to the question of whether a claim for indemnity or compensation can arise under certain circumstances. Under Belgian, German or Austrian law, for example, a distributor may have such a claim. Under Italian or Polish law, on the other hand, this is not the case. It depends more on the details of the law of the individual countries. If German law is applicable, the strict law on GTC, which was described above and also protects the authorised distributor, also applies. It is also interesting for distributors that manufacturers are often obliged to buy back stock goods after the end of the contract, which the distributor had to take delivery of according to the contract, even if the contract does not say anything about such a buy-back obligation (this is the case e.g. in Germany and Austria, but not in Poland and the Czech Republic).
The author, Oliver Korte, is a lawyer and certified specialist in commercial and corporate law based in Hamburg, Germany. He is a partner with the law firm SKW Schwarz and specialises in international commercial and distribution law, as well as litigation and arbitration in these fields. He is co-author of Westphal/Korte, Vertriebsrecht („Distribution Law“), 2nd edition 2023, Carl Heymanns Verlag/Wolters Kluwer (in German language) and author of numerous other legal publications. Oliver Korte is Chairman of the Hamburg Arbitration Circle. He inter alia is ranked/recognized by Chambers, The Legal500 and Best Lawyer