Commercial Agency and Distribution Agreements in the UAE
“We become what we behold. We shape our tools, and thereafter our tools shape us.”
― Marshall McLuhan
What is the difference indeed between using a commercial agency or a commercial distributor in the United Arab Emirates (UAE)? Principals (foreign companies and brands in this case) face difficult decisions day in and day out to this end. Companies tend to only rely on the tools they are equipped with to help make business decisions; however, in unfamiliar territory, new decision-making tools can expedite the growth of the business substantially and place you ahead of any competition. Every business leader will agree that knowledge is power, therefore, this article will aim to equip businesses, no matter how big or small, with the knowledge on the best route to introduce their products into the UAE with the support from a commercial agent or distributor, whichever suits the toolkit (company) best.
A popular method of conducting business in the United Arab Emirates (UAE) is the formation of commercial arrangements with local and licensed agents or distributors. This is one of the primary methods of conducting business for companies based outside the country, who desires to sell their products in the UAE by foregoing the establishment of subsidiary companies in the region. Instead, companies based in foreign jurisdictions choose to contract with local companies and/or individuals, who may already have a well-established sale network in the country. In the UAE, such agreements can entail parties of two types: local agents and distributors. This section will deal with and analyse the presence of agents in the UAE, thus outlining the various facets of the legislation that governs the functioning for the same.
In theory, such arrangements, which are known as commercial agency agreements, carry far less risk, and require minimal investment from the “principal party”, the foreign commercial party that wishes to conduct “on-shore” business in the UAE (as compared to establishing local subsidiary companies). Commercial agency arrangements allow foreign businesses to leverage the invaluable local knowledge and experience that comes from having local agents, allowing the principal party to benefit from the agent’s pre-existing relationships.
However, whilst commercial agency agreements may seem to be of great advantage to the principal party, an understanding of the intricacies that govern local customs and laws on this matter, would ensure that the parties entering into agency contracts stay aloof of any misunderstandings or complications.
UAE Legislation on Agency Law
In the UAE, commercial agencies are governed by the Federal Law Number 18 of 1981 concerning “Organizing Trade Agencies” (as amended by Federal Law Number 14 of 1988, Federal Law Number 13 of 2006, and Federal Law Number 2 of 2010). This law is often simply referred to as the UAE Agency Law.
Article 1 of the UAE Agency Law defines the terms “trade agency”, and “principal” (primary parties to an agency agreement), as follows:
- Trade Agency: It refers to the representation of the principal by the agent for the purposes of distribution, display, selling, or the rendering of a service or a commodity in the State (the UAE), for a profit or commission.
- The Principal: It refers to the producer or manufacturer of the commodity, noting that the producer does not carry out any marketing functions himself in the UAE.
Pursuant to the provisions of the UAE Agency Law, commercial agencies must adhere to the following requirements with regards to their nature, and the nature of the agreement:
- the agent must either be a UAE National or a company that is wholly owned by one or more UAE nationals (under Article 2);
- the commercial agent and the agency agreement must be registered in the Commercial Agency Register of the Ministry of Economy (MoE) (under Article 3);
- the agency agreement will only be effective if it is of a written nature, and is notarized (under Article 4);
- the agency agreement must specify the defined territory of the agency, within which it is allowed to operate (which can be one, several, or all of the Emirates), and that the agreement must grant the agency exclusivity to operate in that defined territory (under Article 5).
Under the UAE Agency Law, the trade agent enjoys a wide range of privileges and legal protections. Once registered, trade agents are greatly protected under UAE laws. The UAE Agency Law provides for the following significant statutory protections for trade agents: -
- the exclusive right to seek commission on all sales that are made within the aforementioned ‘defined territory’ in the UAE, irrespective of whether or not the agent contributes to those sales (under Article 7);
- the protection from termination or non-renewal of the agreement (i.e., even if the agreement was for a fixed term, and may have expired, it automatically gets renewed in perpetuity) (under Article 8);
- the right to restrict the principal party from replacing the current agent with a new agent (under Article 9); and
- the right to prevent any unauthorized parties from importing the principal party’s products into the defined territory (under Article 23).
Of the aforementioned protections, perhaps the most important and contentious provision of the law is article 8, which safeguards the agent against termination. Under this article, the law only allows for termination under ‘material reasons’. However, noting the limited number of cases in the UAE which have dealt with this matter, the definition of “material reasons” is unclear and vague. The reasons behind this are twofold: (a) most cases pertaining to the termination of contracts in the UAE are settled out of court, and (b) each case is decided independently from one another, and on the basis of its own facts (in most cases, the court assigns an expert to ascertain the facts), thus leading to a system wherein there is effectively no judicial precedent.
However, in most instances, a ‘material reason’ may account for any one of the following: -
- non-performance on the part of the agent;
- the breach of the UAE Agency Law by the agent;
- failure of the agent to uphold the image of a principal party in the defined territory or the actions of the agent in such a manner that it deteriorates the image of the principal party in the defined territory; or
- the engagement of the agent in any activity that seeks to compete with the products or services provided by the principal party.
As stated earlier, these outlined ‘material reasons’ will not always be applicable without question, as each case is decided on independently. Thus, it would serve foreign companies very well to keep abreast of the functioning of the dispute resolution process pertaining to the UAE Agency Law.
Dispute Resolution on UAE Agency Law: A Unique Process
In the event of any dispute arising out of a commercial agency agreement under the UAE Agency Law, the parties are to first approach the Commercial Agency Committee, established with the Decree Number 3 of 2011, which is applicable in the UAE. The Committee’s primary role is to review any dispute concerned to any and all commercial agencies registered with the MoE. Once a mater is decided upon by the Committee, parties are free to appeal to the courts of competent jurisdiction. The Committee was established with the outlook of instituting a purpose-built judicial body to address agency law disputes, given the proliferation of such agreements in the UAE.
It is important to note that the UAE Agency Law does not provide any special legal recourse in disputes concerning unregistered commercial agency arrangements. Consequently, such disputes would fall outside the scope of the UAE Agency Law, and would instead, most likely, come under the Commercial Transactions Law (Federal Law Number 18 of 1993) (for example, in the cases of distributors).
The flowchart outlined below seeks to elucidate, in a simple manner, the dispute resolution process followed by the Committee:
- The case investigates the issue appeared between two companies: the supplier and distributor of a cigarette brand. The distributor filed a claim demanding payment of AED 2,498,000 as the supplier was allegedly non-compliant with the terms of the agreement and did not supply the agreed quantity of cigarettes for the period of four (4) months, which led to the total loss of USD 200,000 USD. Both Court of First Instance and Court of Appeal supported the claim and ordered the defendant to pay the amount. The matter was taken to the Court of Cassation by the defendant where the court, referring to the articles 3, 4 and 7 of the UAE Agency Law, as well as to Paragraph 12 of the commercial agency agreement between the parties, upheld the decision of the Court of First Instance and stated that the claimant is entitled to the payment ordered.
- In another case, an issue arose between a bank and the company, wherein the bank requested the company to pay AED 2,590,136.67 with the 12% (legal) interest in respect of the tourism check in accordance with the agreement between them dated 25 September 1991. In order to ensure the amount is paid, the bank filed a lawsuit against the company itself and its insurance firm. Initially, the case was dismissed on the ground that the court does not have jurisdiction over it as the cited agreement was finalized in India. When the case went to the Court of Cassation, the main issue to decide was whether the claim is eligible to be heard or not due to the lapse of time. The agreement was terminated in August 1998, and the case was filed in July 2002, which constitutes the period of 3 years and 11 months. According to the Article 228 of the Commercial Transactions Law ‘in case of denial and lack of legitimate excuse, all cases arising from an agency agreement are not admissible after the lapse of three years from the expiry of the agency agreement.’ Hence, the Court of Cassation ruled to dismiss a case on the ground of lapse of time.
- The last case for this section pertains to a dispute between the principal party, a Canadian pharmaceutical company, the defendant, and two other parties, which were the two plaintiffs. Here, the principal party employed company A as its exclusive agent for a defined territory over a certain area, and also entered into a contract with company B, whom it had led to believe that it was the exclusive agent for the principal party. However, it was later revealed by the first plaintiff, that the principal party had drawn up what was essentially a distribution agreement. Following this development, the dispute was taken to court, where both the two plaintiffs were present. The court held that the principal party had unfairly drawn up a false agreement with the intent of limiting the rights of the plaintiffs. The Court ultimately decided for the two contracts to be terminated, and issued damages for the afflicted parties.
A Brief Comparison between Distribution and Agency Agreements
Whilst most foreign businesses opt for the agency route for the establishment of their presence in the UAE, there is another mechanism of agreements that allow for the same. Such agreements termed as distribution agreements, fall on the opposite end of the spectrum for all characteristics pertaining to agency agreements. In almost every aspect, distribution agreements represent a differing outlook on commercial agreements, when contrasted with agency agreements. The following sections of this article will seek to elucidate and outline the attributes of distribution agreements and contrast them with those of agency agreements.
Distribution Agreements vs Agency Agreements
Distribution agreements are generic and non-specific in nature
Agency contracts are specific and definite in nature
The principal – agency relationship in agency agreements are governed by the UAE Agency Law (Federal Law Number 18 of 1981), under which the agreements are protected, and renewable. This does not apply in the case of distribution agreements. Distribution agreements are governed by the UAE Commercial Transactions Law (Federal Law Number 18 of 1993), which is a law with a wide and general purview.
Distribution agreements do not require the distributor to be a UAE national or a company that is wholly (100%) owned by a UAE national
Agency agreements require that the agent has to be a UAE national or a company that is wholly owned by a UAE national
As established under article 2 of the UAE Agency Law, the agent has to be a UAE national or a company wholly owned by a UAE national. No such restriction is placed on distributors, and in the case of a principal – distributor relationship, the distributor may appoint any party (a free – zone company, an LLC, or any other company that is not 100% owned by a UAE national) as a distributor.
Distribution agreements do not require the distributor to be registered with the UAE Ministry of Economy (MoE)
Agency agreements require the agent to be registered with the UAE MoE
Article 3 of the UAE Agency Law necessitates the registration of agents with the UAE MoE. However, distributors, as long they are based as UAE entities, do not need to register themselves with the MoE.
Distribution agreements may be expressed or implied, i.e., written or non-written
Agency agreements can only be of a written and expressed nature and must be notarized
As specified in Article 4 of the UAE Agency Law, agency agreements have to be written and notarized to gain legitimacy. Distribution agreements can be implied or expressed.
Distribution agreements may grant exclusive, or non – exclusive rights to the sale of the product to the distributor
Agency agreements are always granted the exclusive right of sale to the agent
Under article. 5 of the UAE Agency Law, the agent is granted exclusive rights to sell the principal’s product, and this exclusive right to sell must apply to a defined territory. However, a principal party may appoint multiple distributors in the same area.
Distribution vs Agency
Now that a clear distinction between distributors and agents has been established, a question thus arises, whether an agency is a more preferred means of conducting business for foreign companies in the UAE, or are distribution agreements more prevalent?
Whilst this may be an issue of a subjective nature, agency agreements have long been the preferred route or mechanism for most foreign businesses to grow in the UAE. It is to be noted that agency agreements bode well for foreign businesses that have enjoyed a great reputation and success overseas. Such businesses have often enjoyed a long-standing reputation amongst their customers, and are likely to be of a capital-intensive nature. Such companies have leveraged the deep ties that their agents possess in the region, by virtue of which they have enjoyed great success. Thus, the formation of agency contracts proves fruitful for foreign businesses that seek to grow a large consumer base within the UAE, and have the accordant capital to facilitate the same.
Whilst the majority of such commercial agreements are comprised of agency agreements, distribution agreements also have great utility for smaller companies that wish to enter the UAE market. Take, for example, companies with limited resources and capital, that operate in niche markets and product categories overseas. It would be in the best interests of such companies to employ distributors in the UAE, as it would render their agreements to fall outside the scope of the UAE Agency Law, thereby alleviating concerns of the tight restrictions and statutory protections offered to agents under the law. Thus, distribution agreements in the UAE grant greater influence to the principal party, whereas the opposite case is true for agency agreements.
Intricacies under the UAE Commercial Transactions Law & Dispute Resolution in Distribution Agreements
There are some aspects of the UAE Commercial Transactions Law, which governs distribution agreements in the UAE, which overlap and intersect with the UAE agency law, which would be later analysed in detail with case law. For example, under article 227 of the Commercial Transactions Law, if a distributor is granted the sole and exclusive right of sale of the principal's product in a certain geographic area, it may be considered as an agency, and some elements of the UAE Agency Law may apply. Similar provisions in the Commercial Transactions Law often constitute the basis for contentions and disputes amongst parties in such agreements. For example, inter alia, the most common issue includes the differentiation of distributors from agents.
In the event of such disputes, the question thus arises, as to which laws would govern the dispute resolution process for distribution agreements. In the event of a dispute between the principal party and the distributor, the UAE Commercial Transactions Law would apply (and not the UAE Agency Law). The courts would honour and respect the terms of the distribution agreement, as long it is compliant with the aforementioned law.
With regards to the termination of distribution contracts, there are no statutory restrictions on a principle's/supplier's right to terminate the distribution relationship without cause where the agreement permits it, or when the deal reaches the full contract term. The UAE Civil Transactions Law is the guiding legislation in such matters.
For a clearer understanding of the dispute resolution process with distribution agreements, we turn to case laws.
Case Analysis for Distribution
- The more recent case in the Abu Dhabi Courts between the defendant (distributor) and the plaintiff (principal) showcases a successful defence claim for compensation brought by the distributor upon termination by the foreign principle without any notice. There was no written agreement between the parties, only a commercial relationship. The distributor claimed for loss of profit from the date of termination without notice up to the date of the judgement. The claim was unsuccessful in the Court of Cassation and all the courts prior due to the lack of proof and specific terms specifying the duration of the relationship; thus, either party could terminate the relationship at any time. The distributor failed in the claim for compensation as there was no proof of his losses or damages. The case proves that there is still a possibility to have commercial relations without a detailed distribution agreement; however, with a written agreement, the chances of possible compensation increase significantly.
- In another case, an agreement was signed between a principal and an ‘agent’ (who was in fact, not a wholly 100% UAE owned entity), and the agreement was expressly termed as an ‘Agency Agreement’. The agreement put the agent in a position for the management for 5 to 6 restaurants. The contract had also included an arbitration clause for the resolution of any disputes between the parties. Whilst this article does not wish to go into the merits of arguments put forth by the principal party and the agent, it seeks to analyse the judgment in this case, which distinguishes between agents and distributors. In this case, where the issue was whether the contract had formed a distribution or agency agreement. The court held that agreement did not constitute agency, for primarily 2 reasons: (i) the agent was not a company which was 100% owned by a UAE national, and (ii) the agreement contained an arbitration clause, which is against the public order that prevails in matters relating to commercial agency, as the dispute resolution capacity in such matters is vested purely with the Commercial Agency Committee, and thus local courts, arbitration bodies, and tribunals do not possess primary jurisdiction required.
- The case concerns the issue between the commercial agent and client – according to the contract signed by the parties, the commercial agent is under obligation to give a full effort to promote the products of the client. The client has filed a claim for the breach of contract. According to the facts of the case, the client has brought a large number of its products into the country without the knowledge of the defendant, who is the exclusive distributor of these products. It caused the defendant to be unable to perform its duties as such act did not allow the respondent to increase the demand for those products and urge customers to buy them and fulfil their obligations to increase demand for those products. Therefore, it was held that the plaintiff's request to terminate the contract is based on unfounded fact and shall be dismissed.
In conclusion, the process of decision making involves; identifying problems, generating alternatives, choosing an alternative and implementing the decision. Every single step is important as the business targets cannot be achieved without a well-rounded decision process. Thus, this article has sought to summarise and encapsulate the two major avenues for conducting business in the UAE for foreign businesses, in great detail, by covering elements such as, but not limited to, agency law, distribution law, and the dispute resolution processes and practical case law for the same.
With the necessary consideration given to the legal implications within the cases discussed above, the principal will be able to make an informative decision to achieve success for the business. It is vital for any principal to identify all the risks involved and law governing these areas to determine the best option suitable to them.
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