BACKGROUND
Like any country the United Arab Emirates also has a protectionist approach towards its citizens and the Federal Law No 2 of 2010 (the "Law No 2 of 2010") amending the provisions of Federal Law No. 18 of 1981 on Commercial Agencies in UAE (the "Commercial Agency Law") serves as one of such example in respect of rights of commercial agents. This article mainly focuses on the rights of the commercial agents under UAE law with particular attention on the protection with regards to restriction on foreign parties to terminate or withhold the renewal of a registered commercial agency agreement.
A commercial agency is defined in UAE legislation as, "representation of a principal by an agent for distribution, sale, display or provision of a commodity or service in the state in return of commission or profit". Pursuant to a ministerial order franchise relationships are deemed to be "commercial agencies" and within the scope Commercial Agency Law. Throughout this article, agent and franchisee; and principal and franchisor are used interchangeably.
The law on Commercial Agency underwent several amendments in order to address the above issues swinging the pendulum between the rights of the principal and the agent from time to time.
Prior to the amendments made to the Commercial Agency Law in 2006, a termination of an agency agreement or a refusal to renew the agency agreement could only be successfully achieved provided that there was 'valid reason' for termination and what amounts to this valid reason is what was accepted by the Commercial Agencies Committee in the Ministry of Economy and Planning as being valid. The regulations then in place no doubt made it unattractive for foreign principals to penetrate into the UAE market without feeling exposed and unprotected.
In 2006, the Commercial Agency Law was amended and relaxed to some extent providing that the commercial agency agreement shall terminate on the date if such is fixed in the agreement. In addition to that, the amendment of 2006 also allowed either party to the agency agreement to seek compensation in the event of any breach of the agreement or law. It further abolished the Commercial Agencies Committee to hear the matters arising from the agency agreement placing the authority exclusively in the hands of the courts.
The amendments to the Commercial Agency Law resulted in foreign principals being able to terminate the agency agreements and/or refusing to renew the same with greater predictability and comfort than before. The agent was required to prove the foreign principals' consent for initial registration and renewal of an agency.
THE COMMERCIAL AGENCY LAW TODAY
The 2006 provisions were short-lived and the latest amendment to the agency law repealed many of the amendments made in 2006, for example the Commercial Agencies Committee has been reinstated reprising its role to hear disputes pertaining to commercial agency. Therefore the termination or non-renewal of the agency agreements shall not be referred to court unless it is dealt in the Committee first.
As per the Commercial Agency Law today the agent has to be a UAE national or a company wholly-owned by UAE national. Further it is mandatory that the agency relationship is registered in the Ministry of Economy and Planning, once registered the agent is entitled to all the statutory protections offered by the Commercial Agency Law and any contrary provisions in the agreement are automatically overridden. It is common for most foreign manufacturers who wish to establish a market for their goods in the UAE, to enter into an agreement with a commercial agent instead of going through the establishment of their own operations in the region. Whilst entering into such agreement may seem fairly straight forward, the difficulty arises when the principal no longer wishes to remain in the agency agreement and wants to seek its termination.
The provisions governing termination of an agency relationship as per the Commercial Agency are based on stringent regulations whereby the foreign principal usually finds it extremely hard to effect the termination of the agency agreement. Moreover, the principal finds itself in the position of compensating the local agent if it terminated the agency or withheld its renewal without a material cause.
Requirement of consent by the Franchisor for registration of the agency
Under Ministry Circular No. 14 of 1991, an agency agreement may not be registered at the Ministry if more than six months have elapsed since its execution or effective date unless the agent obtains a letter from the principal certifying the validity of the agreement and his approval to its registration. Furthermore, Ministerial resolution No. 168 of 2006 makes it mandatory for a franchisee to give evidence of consent of the franchisor/principal to the registration of the agency agreement. The consent to such registration can be present in the agreement itself, for example, if the agreement states that the agent is the sole and exclusive agent of the principal or such evidence can be provided in the form of a consent letter issued by the franchisor.
Therefore, the franchisors must at the outset stay aware of its rights and contest the registration that has been done surreptitiously by the agents. The franchisors are also recommended to carefully draft their agency agreements by explicitly stating therein that it is a non-exclusive, non-renewable agreement.
Termination of a registered agency agreement
As per Law No.2 of 2010 the termination of agency agreement can be granted provided there is a material reason justifying its termination. The provisions on termination and renewal of the agency agreement have once again been tightened switching back to the similar spirit of the original law whereby the principal will have to show a 'material reason' to justify the termination or non-renewal of the agency agreement. Moreover, either party will have to prove a 'justifiable reason' which although is not clearly defined in the legislation, it does place the onus of proof on the principal to give a very convincing reason which based on the unique facts and circumstances of each seems justifiable.
In a recent judgment of the Dubai Court of Cassation Judgment No. 157/2010, the court upheld that the principal has a right to terminate the agency agreement if the agent has failed to comply with the agreed terms and that the failure of achieving the set purchase target as per the agreement is a justifiable reason to cancel the agency agreement.
Some of the non-exhaustive reasons that a judge may take into account while considering cancellation of the agency agreement by the principal may include: failure of the parties to meet specified sales target; action of agent that impinges the reputation of the principal's products or the services; where the agent is involved in activities which are in conflict with the principal's product and services; where the agent breaches the provisions of the agency law. Conclusively, it is safe to say that the judges or the Committee enjoy certain discretion in determining what counts as a valid reason.
Procedure for termination
The Agency Law also has the effect of overriding any foreign law/foreign jurisdiction provision, given the English translation of Article 6 of the Agency Law which states:
"A Commercial Agency Agreement shall be considered concluded for the mutual interest of both signatories thereto. It is within the jurisdiction of the UAE Courts of Law to hear any dispute arising between the Principal and Agent, from the execution of the Agreement. Any agreement in contravention thereto shall not be entertained."
As per Law No. 2 of 2010, the franchisor cannot file lawsuits in the UAE courts seeking termination of the Agreement unless the matter has first been referred to Commercial Agencies Committee, a special mediation committee to hear and consider evidence in respect of the proposed termination of the Agreement.
The franchisor shall file a request with the Commercial Agencies Committee, in accordance with the rules of the UAE Cabinet Resolution No.3 of 2011 (the "Resolution") which sets a fee of AED 6000 before the application can be recorded. Once the application is recorded the Committee shall schedule to hear the dispute within sixty (60) days.
The Committee shall demand the submission of information and documentation involved in the dispute and is permitted to seek the assistance of any expert while reaching a decision.
Pursuant to the Resolution, the Committee is permitted to abstain from settling a dispute if it is not satisfied and may advise the parties to refer the matter to litigation. If the Committee issues a resolution settling a dispute, the Committee's resolution shall include a summary of the subject matter and the grounds upon which the Committee based their decision.
A party may challenge the determination of the Committee by bringing a matter to the UAE courts within thirty (30) days of the date of receiving notice of the Committee's resolution; however they must state valid grounds for being desirous of taking the matter to the court and must give these grounds to the Dubai Court of First Instance.
Upon termination of the Agreement, the Ministry will be ordered to delete the registration.
Termination without a valid reason
If an agency agreement is terminated or non-renewed without a valid reason, then in accordance with Article 9 of the Commercial Agency Law, the principal is obligated to compensate the agent and this is one of the few instances under UAE law when termination does not restore the parties to their pre-contractual position, but to what their position would have been had the agreement in fact been performed. Therefore, the calculation of an agent's compensation takes into account the duration of agreement, the profits generated by agent and other such factors which would put the agent in the same position in which it would have been had the agency agreement continued.
So what is the solution?
Firstly, exercise extreme careful review of the agreement's terms and ideally seek assistance from a local party who is genuinely aware of the pits and falls of agency and franchising laws in UAE. Secondly, agree on well drafted termination clauses, the UAE laws do uphold the rights of termination as agreed by the parties in their agreements, therefore, a well drafted agency agreement which expressly specifies the reasons and events which would allow termination, for proper regulation of the relationship between the parties.
Ms. Shadha Zawawi is our associate in the real estate practice group at The Legal Group and can be contacted on +971 4 4477044. The views expressed in this article do not necessarily constitute the views of Zawya.
© The Legal Group 2011
