Commercial Agency Contracts in the UAE - Behind the Scenes
Do you represent a popular foreign brand that is planning to make a mark in the UAE? Are you confused about how to establish your international brand in the UAE market?
Well, you’re reading the right piece of work! Every corporate lawyer in UAE should have written about commercial agencies at least once considering the number of foreign companies and brands that rush to the country. But what most lawyers fail to understand is the technicalities of these arrangements that permit foreign enterprises to sell their prized and popular products in the UAE – so here we are. A commercial agency agreement is an agreement which is entered into between the principal (who is the manufacturer of the product inside or outside the country), and the commercial agent (the appointed distributor or agent of the product). In this agreement, the principal appoints the commercial agent as his agent to distribute and sell the products in the agreed territory in return for an agreed commission paid to the commercial agent. Whereas, to regulate the relationship between the principal and the commercial agent, the UAE commercial agency law has witnessed changes in the past few years. That change is reflected in the Commercial Agency Law Number 18 of 1981 as amended by Federal Law Number 14 of 1988, Federal Law number 13 of 2006 and Federal Law Number 2 of 2010 (the Agency Law).
It should be noted that the Law Number 18 of 1981 (the Old Agency Law) was not fair to the principal as it favored the commercial agent and established severe consequences to the principal in case of termination. No foreign individual or company may be registered as a commercial agent in the UAE, and only Emirati nationals or companies owned by Emirati(s) are allowed to be registered as commercial agents in the UAE. Further, a commercial agent must be registered at the Ministry of Economy in a registrar, and any commercial agency agreement which has been signed and not registered shall not be deemed valid, and the Courts will not hear any claim based on such unregistered agency agreements. Few but effective changes were made to the old agency law which indeed altered the relationship between the principal and the commercial agent and brought stability and fairness to it.
Termination of a Commercial Agency Agreement
Article (8) of the Old Agency Law was intolerable to the principal, and it favored the commercial agent as it did not allow any room for termination of the commercial agency agreement. It stipulated that the principal is not permitted to terminate the commercial agency agreement unless there is a valid reason for termination which does not include expiry of its term! Further, the said article prohibited registering another commercial agent in replacement of the previous commercial agent unless the agreement is mutually terminated between the parties or a Court verdict has been issued to cancel the agency agreement. Should the principal wish to terminate the commercial agency agreement, then such decision must be issued by a committee. Also, there has to be a valid reason for the request for termination, and the principal must present substantial evidence that the appointed commercial agent is breaching the commercial agency agreement and that the violation is incurring losses on the products. In the case in which the principal (without the acceptance of the commercial agent) were to terminate the agreement, the principal would be subject to claims of heavy compensation from the commercial agent. However, this article was replaced by the agency law which is now stating that the principal cannot terminate the commercial agency agreement unless there is a valid reason for termination. Also, the commercial agency agreement cannot be registered under a new commercial agent unless the term has expired without renewal between the parties, or if it has been mutual terminated, or if a Court verdict has been issued with its termination. A commercial agency agreement shall expire upon the expiry of its term unless renewed mutually between the parties within a year before its expiry. This means that the agency agreement shall automatically expire upon expiry of its term unless it has been mutually renewed. This is unlike before, where the principal was forced to continue with the commercial agency agreement unless it was mutually terminated, so unless the agent agreed to the termination. Such change to the Old Agency Law adds more fairness to the relationship between the commercial agent and the principal.
Demand for Compensation
Article (9) of the Old Agency Law states that if the principal terminates the agency agreement at an inconvenient time, the commercial agent has the right to demand compensation. In the case where the principal refuses to renew the commercial agency agreement, the commercial agent can demand compensation especially if they can prove that the principal has generated profits from the distribution of the products and non-renewal would make the agent incur losses and damages! In other words, according to the old agency law the principal cannot terminate the agency agreement and cannot even refuse to renew the term of the agreement. Whereas, according to the new agency law, any party may claim compensation due to damages incurred by terminating the commercial agency contract whether such termination is made by the principal or the commercial agent. This shows that the new agency law completely shifted to become in favor of both parties and to protect their interest. This is the reason behind issuing the agency law which is in alignment with agency laws in other countries. The goal is to bring balance in the relationship between the principal and the commercial agent, to allow fair competition in the UAE economy, to assure transparency in dispute resolutions and most importantly to create stability in the market and prevent any increase in cost from the commercial agents. When a dispute arises between the parties, the matters listed above have to be presented to the committee to decide.
Prohibitions and Violations
It should be noted that article (23) of the Old Agency Law states that it is prohibited to bring items or products which are registered under the name of a commercial agent in an attempt to trade under a different name to the country. In such situations, the commercial agent can request the competent authority to place an order of attachment on the items in the storages or ports until the Court issues its verdict. As per the new agency law, the same article was amended. It now states that no items or products are allowed to enter the country to be traded under a different name other than that of its registered commercial agent. In the event where such violation occurs then the customs must not release such items or products without the approval of the commercial agent or the Ministry. Upon the request of the commercial agent through the ministry, both competent authorities and customs must order attachment on such products and place them in storages until a Court verdict is issued. Unless the Council of Ministers issued a decision for these items to be released and traded in the country, then the commercial agencies for these products shall be canceled.
It is clear that this amendment is still protecting the commercial agent and puts the responsibility to protect the agent's interest in the customs and the competent authorities. According to the new agency law, the commercial agent can through the Ministry of Economy request the Customs Department not to allow the entrance of such items and place attachment on them until a Court judgment is issued. However, such items can be released if allowed by the council of ministers and in this event, these items will no longer be registered under the name of the commercial agent. This article shows that the final decision is for the council of ministers to make and it gives a chance for approval by the commercial agent or ministry. This is unlike before, where it was solely up to the commercial agent to determine the fate of the products and the relationship with the principal.
It is important to note that the agency law does not allow any cheat or violation of the commercial agency contract. Many principles though that by changing the product name or design it will allow them to bring such products to the country to trade under a different name other than the registered commercial agent. Such act is a violation as per article (23) of the commercial agency law and cases were filed by the commercial agents against the principals demanding the attachment on such items through the ministry of economy and compensation. Changing a product name, color or design does not make the product different as this is “an upgrade” which is accepted especially if the product is old and requires certain upgrade and additions. It shall still be deemed as the same product as mentioned in the commercial agency agreement. Cases of such violation will be referred to an expert who will check the product and confirm to the court whether such goods are the same product mention in the agency agreement or not.
Be sure to always consult one of the law firms in Dubai or UAE that specializes in agency law before importing your goods or trying to establish your brand in the UAE. It is pertinent for foreign investors to understand the different risks that they may face and options that are available to them prior to distributing their foreign products in the UAE mainland.