UAE Commercial Agency Law - A Detailed Insight
An agency agreement is a legal contract which creates a fiduciary relationship between two parties, whereby the first party (the Principal) agrees that the actions of the second party (the Agent) binds the Principal to later agreements made by the Agent, as if the Principal himself, had personally created the agreements.
Federal Law Number 5 of 1985 of the United Arab Emirates (the Civil Code) and specifically Article 149 of the Civil Code determine part of the legislation in regards to agency contracts. Article 149 states that ‘a contract may be made by a principal and it may also be made by an agent unless the law stipulates otherwise.’
Foreign parties who wish to take part and conduct business within the UAE but want to do so with a minimal investment, often turn to commercial agents to sell their goods. The prominent and customary piece of legislation that governs agency agreements is Federal Law No.18 of 1981 commonly referred to as the Agency Law. Law No.13 of 2006 drastically amended the 1981 legislation but was repealed again in 2010 whereby the provisions in Law No.18 of 1981 were reinstated. Arguably, this legislation is generic and somewhat abstract in nature and whilst capturing all forms of agreements for sale through third parties, this law can be blurry and ambiguous in form. A commercial agency is defined 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.’ The Agency law tends to remain conserved and biased in some areas and therefore it is a prerequisite that any foreign principal looking to begin or expand in the UAE market, should obtain legal advice before making any concrete commitments regarding an arrangement with a prospective agent. A foreign individual should be made aware of certain important factors before entering into or terminating agency agreements and it is without confusion we note that, like the majority of countries, the UAE also has a protectionist approach towards its citizens. Federal Law No.2 of 2010 was introduced to make amendments to the provisions of Federal Law No.18 of 1998 and this serves an accurate example in respect of the rights of commercial agents.
The Principal-Agent Relationship and its Termination
It must be understood that only UAE nationals or companies owned by UAE nationals are able to act as commercial agents within the UAE. This is an absolute provision of the UAE Agency Law. An agency agreement must be exclusive to a territory within the UAE, namely one of the Emirates, although exclusivity can apply to multiple Emirates or the UAE as a whole. The commercial agent must be registered in the Commercial Agencies Register which is to be maintained by the Ministry of Economy in the respective Emirate. If the agency agreement is registered, the agent is provided with protections and privileges such as to claim damages on behalf of the Principal.
Termination of an agency agreement can be extremely burdensome and once the agency agreement is granted and registered with the Ministry of Economy, the termination of an agency relationship by a Principal can be very difficult to effect. In most cases when Principal attempts to terminate a relationship with an agent or to abandon an agency agreement, in most cases such terminations usually result in significant compensation being awarded to the local agent. Agents are entitled to statutory compensation as a result of the termination of the agency agreement. Compensation considered by the courts will be substantial and furthermore, be in addition to any contractual rights. That said, the specific calculation of compensation has been set out in the Agency Law and several factors will be taken into consideration by the courts. The duration of the agency agreement and the efforts of the agent in the promotion of goods and net profit generated by the agent will be deliberated upon. For this reason, the law can be advantageous for the Principal and offer a degree of equality and fairness. If the agent has fulfilled his role as an agent acceptable and without ample, there would seemingly be no need for the Principal to initiate the termination of the agency agreement.
The law surrounding agency agreements has undergone several amendments in order to address particular issues and to prevent the swinging of a pendulum between the rights of the Principal and the Agent from time to time. Prior to the amendments made to the law in 2006, the termination of an agency agreement or the refusal to renew the agency agreement could only be successfully effectuated provided there was a ‘valid reason’ for the termination and what would amount to a ‘valid reason’ was for the Commercial Agencies Committee within the Ministry of Economy to decide. Following 2006, the law was amended and relaxed slightly, which no doubt made the prospect less unattractive for foreign Principals who wished to penetrate the UAE market without feeling exposed and unprotected. The advancement provided leeway for Principals in that they were able to terminate agency agreements on a fixed date indicated within the agency agreement. Furthermore, the law incorporated the legal right for either party to the agreement to seek compensation in the event of any breach and or default to the law.
In order to establish the business within the UAE, the appointment of an agent remains an attractive way to enter however it is paramount to conduct thorough due diligence on prospective commercial agents and to have your lawyer examine or draft over agreements carefully. The use of a lawyer will also ensure that you have correctly complied with the provisions of the ‘Agency Law.’