The United Arab Emirates is one of the most attractive destinations to conduct business in the world. Several businesses flock to UAE every year to expand their business and enter new territories. In UAE, a commercial agency is an arrangement where an international company appoints a commercial and distribution agent to conduct business. Foreign companies enter into agency agreements with the Emirate nationals to expand their business in the country. The arrangement helps both parties where foreign principals could hire an agent on commission with minimal investments. The agents help distribute, offer, negotiate, and make a purchase on behalf of the principal in the UAE market.
The law that governs agency arrangements in the UAE is Federal Law No. 18 of 1981, called “Agency Law”, popularly known as UAE Agency Law. The Agency Law is elaborate and covers all forms of agreements for sale through a third party.
The law was amended four times since 1981 to make it relevant to the changing economic environment. Regulatory authorities recognized that commercial agents are often in a weaker position. Thus, the Commercial Agents (Council) Regulations 1993 promulgated that it is necessary to impose some restrictions on the activities on principals to provide legal protection and benefit to the agents.
According to Article 2 of the Agency Law, till 2020, foreign individuals and companies were not allowed to practice as a commercial agency in the UAE. The law limited that all such activities be confined to nationals and UAE companies owned entirely by UAE nationals. As a result, it was common for foreign companies to get into commercial agencies or distribution agreements to market and sell their products in the UAE.
Amendments in UAE Commercial Agency Law
Earlier, only UAE nationals or companies (wholly owned by the UAE nationals) were registered as commercial agents by the MoE. The law was last amended in May 2020 and published in UAE official Gazette No. 679. As Federal Law No. 11 of 2020. The amendment brought in the most fundamental modifications in ‘UAE Commercial Agency Law.’ The amendment now allows public joint-stock companies with at least 51% of national capital contribution to act as commercial agents.
There are essential points that foreign principals should bear in mind before entering into agency agreements. Below are few major points.
What is a commercial agency?
According to Agency Law, a commercial agency is an arrangement where a UAE agent represents a foreign company (principal) in “distributing, selling, offering, or providing goods or services in the UAE in exchange of commission or profits.” The commercial agents act in accordance with the principal’s request or instructions.
Who can act as an agent?
After the enactment of Federal Law No. 11 of 2020, there is some relaxation to who could be an agent in commercial agency arrangements. The agent must now be:
- a UAE national;
- a private entity owned by a public joint-stock company;
- a private entity that is 100 % owned by UAE nationals; or
- public joint-stock companies incorporate in the UAE owned with at least 51% by natural UAE national.
The commercial agency arrangement between the parties must be exclusive, either in respect of an Emirate, Emirates, or entire UAE. Article 5 of Agency Law states that the agreement must grant the agency exclusivity to operate in a ‘defined territory.’ The principal may appoint a separate agent for each Emirate provided the services according to the agency agreement is restricted to the specific agent for each Emirate.
Article 7 of the Agency Law states that the agent has the exclusive right to receive a commission for the services provided in their designated territory, irrespective of whether or not the agent contributes to the service. This clearly interprets that the agent has exclusivity over the named product or services in the ‘defined territory.’
Therefore, once the agreement is registered, the commercial agent is entitled to receive a commission on profits for all the sales of products and services in the defined territory, whether the sale was made by an agent, another party, or principal.
As per Article 3 of Agency Law, the commercial agent and the agency agreement must be registered in the Commercial Agency Register of the Ministry of Economy. However, the distributors who are UAE entities do not need to register themselves with MoE. The article also states that the activities of the commercial agent must be performed by the person whose name is mentioned in the commercial agent’s register.
According to Article 4 of UAE Agency Law, the agency agreement is only considered effective unless it is in written nature and notarized. However, a distribution agreement can be written or non-written.
Transferring Agency to the Heirs
With the new amendment, the commercial agencies can now be transferred to the heirs of the deceased agent.
Termination of Agency
The amendment ensures the commercial agents are protected under the law. The 2010 amendment to clause 8. states that the principal cannot terminate or refuse to renew an agency agreement without a “material reason” (strong justification) for termination or non-renewal. The law also prohibits the principal from entering an agency agreement with another commercial agency unless the previous agreement was terminated with the mutual agreement or if the Commercial Agency Committee agrees to the justifications and reasons given by the principal for termination or non-renewal of the agency.
A ‘material reason’ to terminate an agency agreement is determined by the committee or a court. Some of the material reasons considered are pricing, competition, restriction, key performance indicators, repeated or consistent breach of terms by the commercial agent.
A registered agency agreement can be terminated only by mutual consent. However, the principal can also terminate only if the committee or the court finds the principal has legitimate ‘material reason.’
The exact calculation of compensation is not stated in the UAE Agency Law. Article 9 of the UAE Agency Law governs the payment of compensation to the agents in case of terminations of the agency agreement. The factors that are considered in establishing compensation are:
- the duration of the agency;
- efforts of the agent in promoting the goods; or
- the net profit generated by the agent.
After the amendment of Federal Law No. 10 of 2020, the law now states that the principal also is entitled to seek compensation. Previously, only commercial agents were entitled to seek compensation for the incurred losses or damages.
The amendment reinforces that the Commercial Agency Committee has the jurisdiction to hear the disputes arising between the parties. The parties need to submit an application to the committee, and the committee can hear the dispute within 60 days from the date of submission of the applications. The parties are not allowed to approach the courts before taking it up through the committee. If any of the party is not satisfied with the decision made by the committee, they can contest the decisions before the local UAE courts within 30 days of the notification. If no appeal is made in 30 days, the decision of the committee is deemed final.
The enactment of Federal Law No.11 of 2020 has brought remarkable changes to the UAE Commercial Agency Law. The latest amendment can be described as a landmark in encouraging local companies to get additional funding and investment. There is no doubt that this is going to act as a stimulus to the local financial markets.
Due to the extensive protective rights provided to the commercial agents, foreign principals must choose their agents wisely. The amendments have effectively allowed non-UAE nationals to be commercial agents through public joint-stock companies; the law still has maintained the benefits that UAE commercial agents have enjoyed since the Law’s inception.