The Republic of Iraq is divided into two legal jurisdictions – Federal Iraq and the Kurdistan Region of Iraq – with a legal system in place where laws enacted by the Iraqi Parliament must either be ratified, amended or rejected by the Kurdish Parliament, which holds legislative authority over its own area of jurisdiction.
Consequent differences between both jurisdictions in the application of commercial agency legislation have surfaced following the ratification of the new Commercial Agency Law (79/2017) by the Iraqi Parliament. While this new law has replaced the old Commercial Agency Law (51/2000) in Federal Iraq, it is yet to be deliberated by the Kurdish Parliament, where the old law remains applicable for all commercial agency matters in the Kurdistan Region of Iraq, along with the general provisions of the Iraqi Civil Law (40/1951) and the Companies Law (21/1997).
Based on the foregoing, the variations between Federal Iraq and the Kurdistan Region of Iraq from both a legislative standpoint and a practical perspective should be analysed and understood before entering into any agency or distribution relationship with any party in Iraq.
The old law, which still applies in the Kurdistan Region of Iraq, defines 'commercial agency' in Article 3 as:
"Any commercial activity undertaken in Iraq by a person as an agent of a foreign natural or juridical person whether through a commercial agency or an agency by commission or any other agency listed in the commercial, companies and transportation laws."
The law does not address the issue of exclusive commercial representation in Iraq and the only form of commercial representation stipulated for under Iraqi laws is the non-exclusive commercial representation, although granting exclusive commercial representations is not prohibited by law.
On the other hand, distributors, unlike agents, are not regulated under any specific law (except the Iraqi Civil Code); therefore, the relationship with a distributor is governed only by the contractual terms of the distribution agreement and the Iraqi Civil Code, without any industry-specific provisions.
Under the old law, any general trading company registered in Iraq, or any branch of a foreign company with a similar scope of work, can act as a distributor of the products of a foreign supplier in the Kurdistan Region of Iraq, regardless of the nationality of its shareholders, based only on the rights granted to it by the supplier.
The requirement to be registered as a commercial agent is largely unapplied for non-exclusive commercial representations, but is an effective tool in protecting registered exclusive agents from parallel import. The law itself does not expressly mention the rights resulting from registering any type of commercial representation; nevertheless, such registration still constitutes an essential step, among other requirements, to help prevent parallel import.
The new law, enacted by the Iraqi Parliament, was published in the Official Gazette on November 13 2017 and became effective on publication. Article 19 of this law grants commercial agents a one-year grace period to comply with its provisions in order to maintain the validity of their licences.
A number of new provisions have been introduced by the new law, mainly relating to the definition of 'commercial agency', its scope of application, registration requirements and termination procedures.
Article 1 of the new law provides a new definition for commercial agency, whereby its scope is expanded to include contracts in which goods and products are sold and distributed by an Iraqi natural person or legal entity, in their capacity as agents, distributors, franchisees or suppliers of after-sale services and spare parts for such products.
The new broader definition has added distributors, suppliers and franchisees to the scope of the commercial agency law.
Moreover, Article 13 of the new law authorises the Iraqi State Company for Fairs and Commercial Services at the Ministry of Trade and the Customs Authorities at the Ministry of Finance to prohibit the provision of any services and the import of goods and products from a foreign supplier by any party other than the registered commercial agent in Iraq.
When read together, these two articles pose a great risk to companies owned by foreign shareholders and operating in Iraq as distributors, as they limit the right to import and distribute goods and products to registered commercial agents, which are required by law to either be Iraqi nationals or companies wholly owned by Iraqi nationals.
Since it remains unclear how these articles will be enforced in practice, it is anticipated that their provisions will be used as an additional protection for registered commercial agents rather than a restriction from conducting any distribution business for all companies owned, wholly or partially, by foreign shareholders.
While termination provisions were absent from the old law, with such matters regulated solely by the Iraqi Civil Code, the new law provides several restrictions on unjustified termination of commercial agency rights by suppliers, without setting a clear explanation on what is considered as a justified termination of the contract. Therefore, it is essential that all provisions concerning termination and compensation are clearly addressed in commercial agency contracts until the application of this article is established in practice.
To conclude, it is essential to monitor the application of the new law and its enforcement in practice because a strict application will surely have a negative impact on the business of numerous companies operating in Federal Iraq, especially because many of the major players in the market are currently owned, wholly or partially, by foreign shareholders.
On another note, it is highly advisable for foreign suppliers to take into consideration the protections that this new law has introduced for commercial agents and consider revising any agreements signed prior to the publication of the new law.
For further information on this topic please contact Alain Hannouche at Hannouche Associates by telephone (+964 771 444 7447) or email ([email protected]). The Hannouche Associates website can be accessed at www.hannouchelaw.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.