The UAE Agency law impacts upon many features of commercial life for commercial agents and distributors in the United Arab Emirates. In this article Reema Ashraf discusses the UAE Commercial Agency Law, Agency Agreement registration procedures and also the practical effect the Agency Law has when terminating an agency agreement.
In brief:
Commercial agency and distributorship agreements must be registered with the Commercial Agencies Registry in order for provisions of the Agency Law to apply to the relevant agency arrangement.
Foreign individuals and companies are not allowed to practice the activities of commercial agency in the UAE.
A registered commercial agent is entitled to commission in respect of the sale of all of its Relevant Products in the territory in which such agent is authorised to sell and is entitled to prevent products which are the subject to his/her agency arrangement from being imported into the U.A.E.
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".
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.
The UAE Commercial Agency 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 ("Agency Law"), regulates the appointment of commercial agents, sales representatives, and distributors in the UAE.
[It is important to note that, although agencies and distributorships are commercial designations, no distinction is made under the Agency Law between an agency and a distributorship. Accordingly, references to "agency" or "agencies" throughout this discussion contemplate both agency and distributorship arrangements.]
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".
As per Article 2 of the same 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 that 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.
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." Bearing this in mind, only the registered agent as stated on the certificate is legally entitled to any commission in relation to the products and/or services in the designated territory.
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. This information has been confirmed by the Commercial Agencies Department at the Ministry of Economy.
Therefore, a registered commercial agent is entitled to commission in respect of the sale of all of its Relevant Products in the territory in which such agent is authorised to sell the Relevant Products even if the relevant sale was concluded by the principal himself or through others without the agent's assistance.
According to Case No. 97 of 2008 from the Dubai Court of Cassation issued on 2 June 2008, the principal is obligated to limit the distribution of its products and services which is the subject of the Registered Agency Agreement to the registered agent and no other agent in the designated territory. The principal is not permitted to establish more than one agency relationship for each designated territory under the Registered Agency Agreement or conclude deals related to the same products or services with any other agent in order to avoid any direct competition with the registered agent. If an alternate agent is appointed despite this prohibition, the registered agent will receive all commissions related to the products and services in his designated territory even if they have been obtained through the efforts of the alternate agent.
Case No. 308 of 2005 from the Dubai Court of Cassation issued on 26 December 2005, establishes the same principle of granting the agent full rights to commission payments for deals concluded in his designated territory, whether or not they were concluded by the registered agent.
With regards to products, Article 23 of the Agency Law clearly states that only registered agents may import the products which are the subject of a Registered Agency Agreement and subsequent certificate. Therefore, an alterative agent will be blocked with dealing with such products as the registered agent will have exclusive rights in relation to those products.
A registered commercial agent is entitled to prevent products which are the subject to his/her agency arrangement ("Relevant Products") from being imported into the U.A.E. if it is not the one who imported it.
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 Agency Law does not define what is accepted as a "material reason". Currently the Courts take a very narrow view of what constitutes a "material reason" to terminate a Registered Agency Agreement so the principal's right to terminate a Registered Agency Agreement is very limited as it is unlikely to meet the high threshold.
Although issued before the most recent amendments, Case No. 257 of 2007 from the Dubai Court of Cassation issued on 23 October 2007 and Case No. 250 of 2009 also from the Dubai Court of Cassation and issued on 14 February of 2010, establish the principle that Registered Agency Agreements must be renewed continually unless de-registered by mutual agreement.
The mere fact that a certificate is still registered with the Commercial Agency Register, despite the apparent expiration of the Registered Agency Agreement, is likely to be interpreted by the Committee ("defined below") /Courts that the Registered Agency Agreement is still valid.
Upon a review of precedents relating to the commercial agency agreements and the principal's attempts to terminate the same, judgments have always been in favour of the agent. Essentially, each ruling repeats the verdict that it is not permissible for the principal in a commercial agency to terminate the contract of agency unilaterally, or to refuse to renew the period of the contract without reasonable excuse and most reasons presented to the Courts as "material reasons" have not met the high threshold. There are countless cases that have resulted in the same manner but two from the Federal Supreme Court are noteworthy:
Union Supreme Court 474/Judicial Year 21 (2001); and
Union Supreme Court, 405 and 537/Judicial Year 24 (2005).
As mentioned above, the Ministry of Economy will not de-register the Registered Agency Agreement if it does not receive a written renewal letter as it is deemed to be valid for the duration as stated on the certificate. In addition, Article 8 puts a further obligation on the principal to continue to renew the Registered Agency Agreement indefinitely.
Further, the principal cannot de-register the Agreement unilaterally - this is not even a remote possibility. As mentioned above, it can apply to the Committee to do the same, but passing the "material reasons" threshold under Article 8 is often not surmounted by principals.
The risks have been stated above, however, to reiterate, please note that despite the amendments to the Agency Law, the reality is that the Committee/Court is likely to decide in favour of the agent.
Historically, the Committee has been very pro-agent and rarely ruled in favor of principals seeking to end their agency arrangements. Principals often try to protect their interests by including provisions in their agency agreements, for instance, obligating agents to meet specific yearly target sales. The failure of an agent to meet specific target sales would, in theory, enable the principal to take up the matter with the Committee to request termination of the agency agreement on justified grounds. However, even with the inclusion of target sales provisions in an agency agreement, and substantial evidence of underperformance by an agent, the Committee has never been persuaded to rule in favor of a principal and terminate the agency. Alternatively, when the Committee did acquiesce in the termination of agency agreements, it would order for the payment of significant liquidated damages from the principal to the local agent.
The practical effect of these provisions of the Agency Law is to make terminating an agency agreement by a principal a difficult and costly exercise. As a result, foreign principals endeavored to enter into non-exclusive and/or unregistered agency agreements in an effort to remain outside the ambit of the Agency Law.
Disputes between parties related to Registered Agency Agreements are heard by the Commercial Agencies Committee within the Ministry of Economy (the "Committee") as per Article 28 of the Agency Law although Article 6 gives the courts jurisdiction to adjudicate any dispute arising from such a Registered Agency Agreement. Therefore, although the Committee has original jurisdiction over any disputes between parties to the agreement, such decisions, although enforceable, can be appealed to the Courts.
Recent Amendments to the Agency Law
Before the most recent amendments to the Agency Law in 2010, Article 8 stated that, agency agreements for a fixed period of time shall terminate on their applicable date, unless renewed by agreement of the parties a year before such date.
The English version of the 2010 amendments to the Agency Law in Article 8 states that, unless both parties agreed to do so, a principal cannot terminate an agency agreement with an agent unless there was cause, even if the agency agreement is stated to be for a limited period of time.
The new amended law:
"Subject to Articles 27 and 28 of this law, the principal may not terminate or refuse to renew the agency contract unless there is a material reason for termination or non-renewal. In addition, a Commercial Agency may not be re-registered in the Register of Commercial Agencies in the name of another agent, even if the previous Commercial Agency was established under a fixed-term contract, unless the Commercial Agency has been consensually terminated between the agent and principal or there are material reasons which, being satisfactory to the Committee, give rise to termination or non-renewal of the Commercial Agency or upon a final judgment confirming its abolishment."
Previously, Article 9 called for the compensation to an agent if the agency was 'withdrawn at an inopportune time' and not through any fault of his own. Any compensation for financial loss or harm to a principal was not contemplated by Article 9. The new language of Article 9 states that either party to an agency agreement may seek compensation for the termination of an agency for incurred losses or damages. The amendment to Article 9 introduces a broader framework and, at least, the principle of reciprocity for both agents and principals. Agents who were previously unconcerned about any negative consequences to ineffectual services now have to be concerned with potentially paying monetary damages to an affected principal. Again, how this amendment will be applied by the Committee/Courts is a matter that remains to be seen.
Although the newly amended Agency Law seems to be a step towards liberalization, the Agency Law is still skewed in favour of the agent. Questions remain as to how these amendments will be implemented by contracting parties, and interpreted and applied by Committee/Courts. We would not anticipate that the Courts would adopt a more liberal attitude.
© Hadef & Partners 2013
