A closer look at UAE’s commercial agencies law
Mohamed Abdelrehiem of Ibrahim & Partners considers changes to the UAE’s financial and corporate world brought in by Federal Law No. 11 of 2020
In the UAE, commercial agency is an arrangement whereby an international company appoints an agent to distribute, offer, negotiate the sale or purchase of goods on its behalf within the UAE market for commission or profit.
The UAE Agency Law No. 18 of 1981 (the law) is a federal law and is, therefore, applicable in all the Emirates. The law which is very favourable to agents offering certain protections such as exclusivity, commission protection and other statutory protections (as described below) was amended in May 2020 by virtue of Federal Law No. 11 of 2020, where fundamental requirements were introduced to UAE legal entities entitled to register as a commercial agents at the Ministry of Economy (MOE).
In light of the recent amendments of the law, in order for a commercial agency arrangement to be registered with the MOE, the agent must now be a:
UAE public joint stock company (PJSC) owned, at least, 51% by UAE nationals;
UAE private entity owned by a PJSC meeting the above requirements; or
UAE private entity that is 100% owned by UAE nationals.
Types of agencies
There are many types of agencies under UAE law. The agency types being addressing here are the two most common types: (i) distribution agreements and (ii) commercial agency agreements.
While a distribution agreement may have a similar commercial effect to a commercial agency agreement (for example, representation of a principal by a distributor, distribution in a certain jurisdiction, and commission based on sales), unless the distribution agreement is registered with the MOE as a commercial agency agreement, the law will not apply to it. Therefore, the exclusivity and other statutory protections under the Law will not be enforceable by the distributor.
If the agreement is not registered, the Commercial Code (Federal Law No. 18 of 1993) (and Civil Code (Federal Law No. 5 of 1987) in certain circumstances) will apply. The termination of such agreements, under these laws, is less onerous and will be subject to the usual contractual elements of breach, negligence and fraud.
The agent’s exclusive protections
Under the law, registered commercial agency agreements cannot be terminated or brought to an end (even if they have expired) unless there is mutual consent or if there is a ‘material’ reason. ‘Material’ reason is not defined under the law. Still, it includes (but not limited to) breach of a non-compete provision, failure to meet sales targets (when set out in the contract and hence contractual) or severe breach of key performance indicators (KPIs).
Furthermore, the agent will be able to block anyone else (including the principal) importing products, within the scope of its territory, into the UAE.
Termination of a commercial agent
In practice, the termination of a commercial agent who is registered at the MOE can only take place by one of two methods:
By mutual consent of both parties, where a settlement is conducted and a compensation amount is agreed to be paid by the principal in return for the agent to terminate the agency agreement; or
By virtue of the committee's decision (Articles 27 and 28 of the law) or a court judgment terminating the agency agreement.
The purpose of a settlement agreement with an outgoing registered agent is to (i) record the agent’s consent to the termination of the agreement (thereby avoiding the need to demonstrate a ‘material’ reason to the committee; (ii) set out the agent's obligation to de-register the agreement (because only the agent can do so); and (iii) agree compensation to be made to the agent for termination of the agreement, with any such payment only payable following receipt of the de-registration certificate.
In case of a dispute between the principal and the agent, any decision on whether there is a ‘material’ reason that justifies the agency's termination is subject to the committee’s discretion and their interpretation of the facts of the dispute.
The Commercial Agency Committee
According to Article 27 and 28 of the law, a commercial agencies committee is authorised to settle any dispute between a commercial agent in the UAE and the foreign principal. The commercial agency committee will take primary jurisdiction over all registered commercial agency disputes.
The following steps need to be taken prior to being able to terminate a registered agency agreement:
Initially, the principal needs to submit a request for cancellation of the agreement to the agency committee at the Ministry of Economy, prior to taking such a decision unilaterally;
The request should be based on substantive reasons which justify the cancellation;
If the committee’s decision is not acceptable to the principal, it can be challenged before the court within 30 days of the date of its issuance, otherwise the committee’s decision will be final and binding upon the principal;
The UAE courts, federal and local courts, have previously rejected claims filed in connection with a registered commercial agency for failure to approach the committee first in regard to the dispute that arose between agent and principal as per the law.
The process can be time consuming, taking up to six to eight months, during this time the principal cannot appoint a different agent in the same jurisdiction, or for the same product, before the dispute with the registered commercial agent comes to an end.
Governing law and dispute resolution provisions of distribution agreements
UAE law recognises the principle of freedom to contract, the parties to a contract are, in theory, free to select the governing law of that contract and select arbitration as the governing law, and arbitration as the dispute resolution mechanism.
However, UAE law and the jurisdiction of the UAE courts is mandatory in a number of instances, including any registered commercial agency agreement that is subject to the law. The principle and agent cannot opt out of this requirement.
A registered commercial agent protection under the law, which preclude the principal from terminating the commercial agency without a material reason. The agent also has a right to commission in respect of sales made in the UAE by the principal or any third party, which are in breach of the agent’s exclusive rights.
Further, in cases where the principal appoints a third party distributor during the term of its dispute with the registered agent, that registered agent may ask the court to compensate them based on the sales and/or profits of the registered products under the registered commercial agency agreement.
This type of claim is very common. In practice, these claims being accepted by the court are often seen, particularly in circumstances where the court is not convinced of the reasons submitted for the registered commercial agency agreement's cancellation.
Partner, Ibrahim & Partners