Commercial Agency in the United Arab Emirates
Foreign principals who wish to conduct business in the UAE, but want to do so with a minimal investment, often turn to commercial agents to sell their goods or services. The main piece of legislation that governs agency arrangements in the UAE is Federal Law No. 18 of 1981, what is commonly referred to as the “Agency Law”. The Agency law is extremely wide and captures all forms of agreements for sale through third parties.
The UAE Commercial Agency Law, Federal Law No. 18 of 1981, as amended by Federal Law No. 14 of 1988, Federal Law No. 13 of 2006, and Federal Law No. 2 of 2010 (collectively, the “Commercial Agency Law”), regulates and governs the appointment of registered commercial agents, sales representatives and distributors in the UAE.
The Commercial Agency Law is supplemented by, inter alia, the UAE Commercial Transactions Law, Federal Law No. 18 of 1993 (the “Commercial Code”), implementing regulations, custom and practice.
Together, the Commercial Agency Law and the Commercial Code provide the primary regulatory framework for agency relationships through which foreign businesses provide products and services in the UAE.
Characteristics of commercial agency in the United Arab Emirates
Article 1 of this Agency Law defines a commercial agency as:
“the representation of a principal by an agent to distribute, sell, display or offer a merchandise or service inside the State in return for a commission or profit”.
There are important considerations that foreign principals should bear in mind before entering into agency agreements. These include:
As per Article 2 of the Agency Law, foreign individuals and companies are not allowed to practice the activities of commercial agency in the UAE, as the law has confined such activities to national individuals and UAE companies owned entirely by UAE nationals. As a result, it is a common practice for foreign companies seeking to market and sell their products in the UAE to enter into commercial agency or distributorship agreements with a licensed local business.
A further point to note is that an agreement can only be registered as a Registered Agency Agreement if the relationship between the principal and agent is exclusive with the corresponding products and services as listed on the certificate. Article 5 of the Agency Law states that the principal may appoint a separate agent for each Emirate, provided that the distribution of goods and services as per the agency agreement is restricted to the named agent for each Emirate.
Most importantly, Article 7 of the Agency Law clearly states that: “The agent shall be entitled to commissions for the transactions concluded by the agent himself or by other persons in the area of agency, even if the transactions were not concluded as a result of the efforts of the agent.” This is interpreted to mean that an agent has exclusivity over the named product or service in any given named area, as per the certificate.
Therefore, a registered commercial agent is entitled to commission in respect of the sale of all the products in the territory in which such agent is authorized to sell the products (the “Relevant Products”) even if the relevant sale was concluded by the principal himself or through others without the agent’s assistance.
Commercial agency and distributorship agreements must be registered with the Commercial Agencies Registry (the “Registry”) for the provisions of the Agency Law to apply to the relevant agency arrangement (“Registered Agency Agreement”). To qualify as a Registered Agency Agreement, the commercial agent must have an exclusive right to distribute the relevant goods or provide the relevant services (as described in the Registered Agency Agreement and corresponding certificate as registered with the Ministry of Economy) in at least one of the Emirates.
Article 3 of the Agency Law clearly states that “The activities of the commercial agency in the [U.A.E.] shall only be performed by persons whose names are inscribed in the commercial agents’ register provided for this purpose in the Ministry, any commercial agency not registered in this register shall not be considered, nor lawsuit shall be heard.
A Registered Agency Agreement can be terminated only by the mutual agreement of both parties except that the principal may terminate the Registered Agency Agreement if it has a legitimate “material reason”.
The 2010 amendments to clause No. 8 of the Agencies Law state that a principal may not terminate or refuse to renew an agency contract unless there is a “material reason” for termination or non-renewal.
A “material reason” to terminate an agency agreement may be determined by the Committee or a court to constitute failure to comply with any of the material provisions of the agency agreement such as pricing, competition, restrictions on sale or key performance indicators or targets, or repeated and consistent breach of the terms of the agency agreement.
Also, the law provides that, even if an agency is for a limited term, an agency cannot be registered in the name of a new agent unless:
1. the previous agency agreement was terminated by mutual consent of both parties; or
2. the Committee is satisfied that there is a material reason to justify termination or non-renewal of an agency agreement; or
3. a competent court passes judgment to cancel the agency.
It has always been important for parties to an agency agreement to ensure the termination provisions of the agreement are clear and unambiguous and provide for particular instances when the principal will have “justified cause” to terminate the agreement. Nevertheless, the 2010 amendments highlight the importance of this for principals, especially as a “material reason” is required to terminate an agency agreement at the expiry of a fixed term.
Failure to address the termination issue satisfactorily in the wording of the agency agreement could leave a principal in the invidious position of having to continue with an agent with whom the commercial relationship has broken down or being unable to proceed with a new agent.
Amendments to the law now state that either party to an agency agreement may seek compensation for the termination of an agency for incurred losses or damages, where previously, compensation for financial loss or harm to a principal was not contemplated. Compensation can be substantial and is in addition to any existing contractual rights. However, the exact calculation of a compensation payment is not set out in the Agency Law and several factors, such as duration of the agency, efforts of the agent in promoting the goods and net profit generated by the agent are taken into consideration in establishing compensation awards.
6. Dispute Resolution
The Agency Law stated that all disputes related to a formally registered commercial agency shall be heard by a Specialized Commercial Agencies Committee for resolution of disputes; The Committee must hear the case within 60 days from application. The Committee’s Decision is final and binding, unless challenged before court within 30 days, Courts can only hear appeals from Committee.
The appointment of an agent remains an attractive way to enter the UAE market. However, it is extremely important to conduct thorough due diligence on prospective commercial agents and to carefully draft agreements to ensure compliance with the provisions of the Agency Law.