The commercial agency framework in UAE has been a key element of commerce. This enables foreign companies or freezone companies to distribute, offer and negotiate the sale or purchase of goods and services on its behalf within the UAE, through commercial agents in return for commission or profit. These companies can thus offer their products or services in the UAE through commercial agents, without the need to establish a mainland company or have physical presence in the UAE.
Commercial agencies were governed under the Federal Law No. 18 of 1981 (Old Law). This has now been replaced by the Federal Law No. 3 of 2022 (New Law), as can be seen in the course of the Article. The New Law seeks to balance the interests of principals, agents and end consumers. It will be applicable to new agency contracts entered after 15th of June 2023. Existing agency contracts will not be subject to the New Law for a further period of two years from the 15th of June 2023. Further to this, the New Law will apply only after ten years if the agency is registered for more than ten years with the same commercial agent, or the agent has invested an amount of more than AED 100 million.
Commercial agents are exclusive to UAE nationals, public legal persons or private legal persons wholly owned by UAE nationals. The New Law also permits Public Joint Stock Companies having a minimum of 51% capital held by UAE nationals to act as commercial agents, subject to controls laid down by the Council of Ministers. Interestingly, the New Law has introduced a provision allowing an international company (even if not owned by UAE nationals) to act as a commercial agent in the UAE to promote and sell its own products, providing that:
- There is no existing commercial agent for the relevant products in the UAE; and
- The commercial agency shall be new and not previously registered in UAE.
These newly introduced concepts will be supplemented by additional implementing regulations, which will provide further clarity on the application of these provisions.
The obligation for registration is retained in the New Law and is mandatory to register all commercial agencies in the Commercial Agencies Register at the Ministry of Economy. If the registration has not been finalized, the agency will not be deemed to be valid.
Termination of Commercial Agencies
One of the hurdles faced by principals under the Old Law was in relation to the termination of a commercial agency. Previously, the parties should either mutually agree on termination or there should exist a fundamental reason for termination (expiry of term was not considered a fundamental reason). This made termination of agencies difficult by requiring a ‘material’ or ‘fundamental’ reason for non-renewal. The term ‘fundamental’ reason not being defined, was often subject to the discretion of the Courts, resulting in more favorable terms to the local agent.
It is now possible to terminate the agency by either party for convenience, based on the terms of the agreement or upon the expiry of the term. However, further to such termination, the principal or the new agent may be required to pay a fair value for the assets linked to the agency. If parties cannot mutually agree on the fair value of the assets, the determination will be done by the local courts.
In case of non-renewal, either of the parties wishing not to renew the contract shall notify the other party of the non-renewal. One year is needed prior to the expiry of the term, or before the expiration of half of the term, whichever is less, unless the two parties agree otherwise.
Irrespective of the ability of either party to terminate the contract, a claim for compensation can still be made under the New Law. If the contract is terminated due to the expiry of term, the agent may request compensation from the principal for damages incurred as a result of the termination. If the contract is terminated by either party, based on the terms of the agreement, the affected party may request compensation. The agent shall further be entitled to compensation if he has contributed to the success of the principal’s products. As a result of the termination, the agent will be deprived of the missed profits in relation to that success.
The position under the Old Law is maintained with respect to the competencies of the Commercial Agencies Committee (Committee). All disputes between the principal and the agent must be presented to the Committee prior to its submission to the Court. Timelines have been reduced under the New Law, and the Committee is expected to give its decision within a period of 120 days from the date of submission of application.
Departing from the position under the Old Law, parties are now free to agree to arbitration as a method of dispute resolution. The default seat of arbitration will be UAE; however, parties are free to mutually agree otherwise. If a party initiates arbitration after the issuance of the Committee’s decision, the decision of the Committee will be disregarded. Further, arbitration cannot be opted in relation to a dispute that arose before the Committee or Courts before the publication of the New Law.
During the pendency of a dispute, the Old Law permitted agents to seek import bans on the relevant products, thus creating a disruption of goods in the local market. Under the New Law, the Ministry of Economy has been granted the power to ensure supply and demand which is maintained by temporarily permitting imports or appointing a new agent.
The enactment of the New Law is a progressive step in line with UAE’s ambition of becoming an international business hub. The Old Law took a more protectionist approach and provided considerable safeguarding to the commercial agents. The New Law seeks to modernize the agency framework, while still retaining the core elements of agencies. The approach is to increasingly open the UAE market to international business and welcome foreign investments. Though, the New Law has improved certain archaic aspects of the Old Law, the underlying goal of protections to local agents remains. As with any law, the practical impact of these changes is yet to be seen.
Should you require further information on commercial agencies in the UAE or require assistance with drafting agency contracts, please contact us at email@example.com.