Automotive industry disputes in the United Arab Emirates

The automotive industry in the United Arab Emirates is a key industry in the Gulf, falling only second to Saudi Arabia. The initiative by Abu Dhabi’s Government to establish an ‘Auto City’ will create advanced workshops and centres, contributing to the UAE becoming a hub for vehicle parts in the Gulf region and thereby, attracting global investment for the automotive sector. A recent example is the Dubai Expo 2020 (now postponed due to COVID-19) which attracted increased automotive imports to facilitate the smooth sailing of the fair. Amidst fears of contracting COVID-19, consumers are shunning the use of public transport and moving towards the purchase of vehicles. Therefore, the showrooms must be digitalised to provide today’s tech-savvy customers’ with an online experience simulating in-person purchases to combat the crisis and contribute to the growth of the industry. In this short read, the author will highlight common automotive industry disputes in the UAE, the feasibility of manufacturers as entrants in the industry and the steps customers may take to file complaints.

According to a report by the GCC Automobile Industry in 2016, most of the consumer complaints in the automotive sector related to defective products, breach of contracts regarding the terms of sales or service agreements, refunds and warranties. Since 2014, the persistent softness in oil prices has caused a deficit in the Gulf region. This economic slowdown has resulted in a shortage of consumer demand. Therefore, car dealers in the UAE who find themselves burdened with excess supply of products are slashing prices to advertise terms of sales or service agreements that lure customers to their dealership. However, the dealers have the intention of conducting aggressive sales tactics to sell customers something that is inconsistent with what was being advertised. Warranty fraud occurs when dealers submit false warranty claims to manufacturers for work that was never implemented. Complaints regarding defective products relates to dealers’ failure to inform customers about the material facts of the product. Dealers may also replace the original vehicle parts with counterfeit parts, selling them for the original price in order to make an extra cut. Product recalls of such defective products have a negative influence on brand loyalty and reputation of manufacturers, thereby having a negative impact on sales. According to Harvard Business Review (1996), the solution of such disputes is having a close-knitted network of dealers who are honest in their work and loyal to the brand. This approach will help to foster great customer relationships. As for customers affected by a faulty supply chain, they may file their complaint with the Department of Economic Development on the Ahlan Dubai number 600 54 5555.

Anticompetitive disputes

Practices that reduce competition are strictly prohibited in the UAE. Such practices include but are not limited to:

Market sharing: whereby parties agree to divide territories, customers or suppliers amongst themselves. Agreeing to market products subject to assigned territories leads to the establishment of cartels.
Bid rigging: agreements amongst manufacturers/distributors to set bids at raised prices allow the parties to secure contracts with increased profitability, thereby undermining free-market competition. Abusing their dominant positions, these manufacturers/distributors defeat the bidding process.

Consumers who find themselves subject to anticompetitive practices may file complaints to the Ministry of Economy.

UAE Competition Law

Anticompetitive schemes in the automotive industry are sanctioned by the general principles of Competition Law, particularly the Federal Law No. 4 of 2012 on the Regulation of Competition. As per Article 2, Competition Law aims to enhance ongoing efficiency in the marketplace and prevent the abuse of power allocated to the distributors/manufacturers by their dominant positions in the industry. All in all, Competition Law is in place to facilitate sustainable development in the UAE. Having been implemented in 2013, Competition Law is subject to further regulations which may be in the form of amendments, hence, it is fairly uncertain as to how its principles will be enforced in the UAE.

UAE Competition Law is applicable to disputes outside the jurisdiction

Disputes in international practice (outside the UAE jurisdiction) that affect competition or lead to exploitation of Intellectual Property rights in UAE are governed by the UAE Competition Law and its regulations.

Jurisdiction to investigate cartels

The Competition Department at the Ministry of Economy has the jurisdiction to investigate disputes and implement the Competition Law where required. The Competition Committee, chaired by the undersecretary of the Ministry of Economy, supervises the Competition Department.

The Ministry of Economy has the right to settle disputes by entering into a settlement agreement

The Ministry of Economy can enter into a settlement agreement provided that the settlement is agreed upon before referring the dispute to a public prosecution office. The settlement is binding where:

It is signed in writing;
Includes the admission of the parties’ infringement of Competition Law;
payment of an amount that is not less than double the minimum penalty of violation of the Competition Law

If any signatories do not comply, the Ministry of Economy is required to refer the dispute to the prosecution office.

According to Khaleej Times, the automotive industry ranks the third most complained about industry, following services like electronics and e-commerce. However, disputes between manufacturers and distributors are not that frequent. This rarity stems from the fact that manufacturers have a slim chance of being successful in a dispute against a distributor. Distributors in the automotive industry are required to be UAE nationals and are protected by Federal Commercial Agencies Law No.18 of 1981. This law offers extensive protection for distributors against manufacturers seeking to terminate their relationship. Theoretically, manufacturers should ensure that their contract with the distributor outlines arbitration provisions. This would ensure that the arbitrators' award is binding and would release the distributor from protection under the UAE law. Such a provision would ensure that the manufacturer and distributor are on equal footing in the arbitration process. However, enforcement of an arbitral award is practically impossible. When it comes to disputes, it is more beneficial for manufacturers to enter into a settlement agreement through the Ministry of Economy, as mentioned above.

Advantages for a manufacturer entering into a settlement agreement;

Prevents the publication of the dispute in the local newspaper. Since the publication would attract wide criticism and potentially damage the entity’s reputation, the settlement agreement saves the day. Moreover, for the duration of the dispute, the manufacturer will be unable to appoint another local distributor to distribute its products in the UAE. This would be an enormous loss for manufacturers.
Increases efficiency as the settlement agreement is an alternative way to litigation.
Saves time by preventing lengthy litigation proceedings.
Saves costly legal fees.
Protects the entities’ prior criminal records to be used as precedent in current proceedings. Article 21 of the UAE Competition Law states the imposition of double fine on Competition Law violators with a criminal history. Therefore, entering into a settlement agreement may be cost-friendly.

Disadvantages for a manufacturer entering into a settlement agreement;

As mentioned above, in order to reach a settlement agreement, the infringing party must admit its infringement of the UAE Competition Law. If the settlement agreement fails and the Ministry of Economy refers the dispute to the prosecution, the written admission of liability will substantially reduce the infringing parties’ chance of success in the proceedings. Moreover, the admission of liability may also negatively impact the entities parallel proceedings, despite originating in separate jurisdictions.

Having outlined the pros and cons of a settlement agreement to anticompetitive disputes, it is recommended that the manufacturer and distributor resolve their dispute amicably. The two parties rely on each other to conduct business and should, therefore, be supportive of each other in times of distress. The ultimate goal of the distributors and manufacturers is to satisfy the customers. Thus, remaining united in the greater interest will reduce complaints in the automotive industry as a whole. Customer satisfaction is on the trajectory of improvement as seen by the establishment of bilingual customer care counters. Such an approach will tackle customer complaints and resolve disputes before the commencement of litigation.

Intellectual Property disputes

Although disputes between distributors are rare in the UAE, history recalls no disputes relating to Intellectual Property. These disputes between manufacturers originate in the international market and thereby, affect the UAE indirectly. Between manufacturers and distributors, disputes regarding Intellectual Property often relate to non-authorised distributors importing or exporting counterfeit parts of automobiles and selling them to consumers illegally. Authorised distributors’ selling point is usually higher than the counterfeit products. Thus, authorised distributors may see a shortage in demand as customers opt for a relatively cheaper product. Hence, this practice is disadvantageous to authorised distributors. Furthermore, counterfeit products may potentially lead to safety concerns for consumers.

To resolve IP disputes, manufacturers and distributors will have to work closely with authorities such as the police to effectively implement anti-counterfeiting measures in the UAE.

In the UAE, the parties constituting the supply chain tend to resolve disputes amicably. Owing to confidentiality as a statutory requirement, the public has inadequate information regarding disputes. However, only a handful of disputes have been filed and examined by the Ministry of Economy yet. Considering the fact that the UAE has a large automotive industry with a global reach, a handful of disputes means that the parties perceive the cooperative approach for one’s own benefit, as mentioned above.