Kuwait Cassation Court no 3416/2019 Commercial Circuit – Decision issuance date 22/12/2020.
One of the most important challenging legal issue that parties to the distribution agreements might encounter, has always been the question of compensation upon a premature termination, expiration or non-renewal decision of their distributorship, whether it was occurred with or without stating cause that justifies such decision. Hence, the Kuwaiti courts have for so long relied on many factors and criteria in the reasoning of the legal basis leading to their verdicts when it comes to compensation claim.
Pursuant to the provisions of Kuwait Commerce Code no 68 /1980, Compensation claims of the agency or distributorship shall be exercised within 90 days from the termination date or it will be time-barred after the lapse of such period under a statute of time limitations, where other claims resulting from the distributorship shall lapse after 3 years from the termination date (Art 283).
Recently, the Kuwaiti courts have been more open and considerable vis -a vis the negative prescription concept and start to be more keen on the application of the preliminary defence whenever the legal timelines are not respected by parties in dispute.
Summary of Dispute: The Claimant, a KUWAITI Company (former distributor) filed a claim against the Principal (International Pharmaceutical Company, (the Defendant), requesting the court to appoint an accounting expert in order to ascertain and determine that the Defandant’s termination was a wrongful and unjustified and that the Claimant was not in breach of its obligations under the distribution agreement. The Claimant sought compensation for damages, loss of profits and future losses incurred as a result of the premature and unjustified termination of the agreement.
Pursuant to Article 282 Kuwait Commercial Agency law, the Principal shall pay compensation (that usually is determined by the judge) to the Agent in the event the Principal terminates or refuses to renew the agency agreement without justification or without the agent’s fault. Article 282 applied in these circumstances when the Principal had terminated the distribution agreement without justification. However, the Defendant argued that the Claimant failed to file the claim within 90 days from the termination date of the distribution agreement and therefore, his right of compensation has been forfeited due to time limitations in exercising such right, and it requested the court to dismiss the Claimant’s claim on the basis of negative prescription.
Kuwaiti Court of First Instance
The Claimant filed a case before the Kuwaiti’s Court of First Instance requesting to be compensated for Defendant’s premature termination without cause and justification. The claim for compensation was initiated against the Defendant and the new appointed distributor in the State of Kuwait to be jointly and severally liable towards the Claimant.
In its defense, the Defendant claimed that the claim was initiated prior to the legal period fixed by the Kuwaiti Code of Commerce for the extinction of its right to file a claim.
Nevertheless, the Court of First Instance, based on the report of the appointed expert, has decided to reject all of the Defendant’s defenses and issued a judgment in favor of the Claimant and ordered the Defendant to pay the Claimant solely the requested compensation.
Kuwaiti Court of Appeal
The Claimant challenged the verdict of the Court of First Instance before the Kuwaiti Court of Appeal and insisted on the joint liability of the Defendant and its new appointed distributor claiming that along the new appointment there was also a solicitation of employees as an indication of the collusion between them, and therefore; the compensation should be jointly paid by both the Defendant and the new appointed distributor.
At the same time, the Defendant challenged the verdict of the Court of First Instance before the Kuwaiti Court of Appeal and maintained its reasoning in reference to the negative prescription of the Claimant’s right of bringing legal action and consequently for claiming compensation, especially that as per the dates shown, the Claimant has brought the claim after 90 days of the distribution agreement’s termination.
Moreover, the Defendant has challenged the expert’s report that denied the prescription plea on the basis that Claimant has filed a case within the 90 days against a wrong defendant, but had corrected the defendant’s name after the said 90 days, which is still, in the Defendant’s defense, a misinterpretation of the terms of the Kuwaiti Code of Commerce.
In its verdict, the Court of Appeal relied on two primary grounds:
- Articles 281 and 283 of the Code of Commerce and the purpose of the legislator to limit the threat that can be caused by the non-breaching party and to set out a reasonable timeframe for the claim of compensation or any other request and demand.
- The correctional action that was made by the Claimant is considered as insinuation of a co-defendant and not as a correction of a legal fault, since at a first stage, the Defendant is an incorporated body existing under a foreign jurisdiction, and having its own legal entity.
Based on the foregoing, the Kuwaiti Court of Appeal accepted the Defendant’s arguments and overturned the lower court’s judgment and accordingly decided to dismiss the Claimant’s claim on the basis of negative prescription for the right to institute proceedings.
Kuwait Court of Cassation
The Claimant objected and challenged the judgment of the Court of Appeal, seeking the cancelation of the court of appeal’s decision by emphasizing on the fact that the Defendant(Swiss entity) is the same legal entity (of the US legal entity) and that the claim was initiated within the legal time limits and in accordance with the article 283 of Commerce Code and thus, it is entitled for compensation for wrongful termination on the ground that it has filed the compensation claim within the fixed legal period.
The Court of Cassation dismissed the appeal and upheld the court of appeal’s ruling and adding that the Court of Appeal was correct as a matter of law and the challenge to its decision was accordingly dismissed.
It is well established that the responsibility and liability of a Supplier or Principal towards its former Distributor is governed by the applicable law and the relevant agency or distribution agreement entered into between the two parties. This agreement also regulates how the services and obligations shall be performed and also sets out the events of termination and its effects. In the event of a non-renewal or termination of distribution agreement without cause or material breach, the aggrieved party should file a compensation claim within 90 days from being notified of contract’s termination in order to avoid the loss of its right to claim compensation, provided always that it wasn’t in breach of its obligations. Also, Parties to the Agency and Distribution agreements should be aware that the time- barred plea must be made to the court prior to invoking any other procedural plea, request, or defence or discussing the subject matter.
Adib A. Dib, IDI country expert for agency & distribution in Kuwait