Table of Contents
Federal Law No. (3) of 2022 on the Regulation of Commercial Agencies, also known as the “New Agency Law,” marks a significant milestone for the UAE’s commercial agencies regulatory regime, superseding the decades-old Federal Law No. (18) of 1981 on the Regulation of Commercial Agencies. Effective from 15 June 2023, the New Agency Law maintains the presumption of exclusivity in favor of registered agents, while addressing long-standing concerns of foreign principals and bringing greater balance to commercial agency agreements. As a result, foreign brands and manufacturers can now benefit from a more attractive and secure route to accessing the UAE market through commercial agencies.
The Old UAE Agency Law heavily favored UAE national commercial agents by making it difficult for foreign principals to terminate their services and providing various compensation options. In contrast, the New Agency Law aims to address this imbalance by granting parties greater flexibility to establish enforceable commercial terms through contractual agreements. Although it remains to be seen how the New UAE Agency Law will function in practice, its clear intention is promising and aligns with the UAE’s broader legislative efforts to enhance its appeal as a competitive and attractive foreign investment destination.
The New UAE Agency Law has significantly broadened the scope of its application, covering all manner of distribution, reseller and sales representation arrangements for goods or services. Although the law refers to commercial “agencies,” it should be construed to cover that broader set of arrangements.
Contractual Termination Rights
One of the key changes under the New Agency Law is the recognition and upholding of contractually agreed termination rights. This includes the express recognition of contract expiry as a termination event and the right of parties to contractually agree other termination events, such as termination at will. Under the previous Old Agency Law, provisions in agency contracts around term and termination were not enforceable, and only limited grounds for termination were recognized.
Arbitration as a Dispute Resolution Mechanism
Another significant change is the introduction of arbitration as an available dispute resolution mechanism, including arbitration seated outside the UAE. Previously, all commercial agency disputes fell under the exclusive jurisdiction of the commercial agencies committee initially, and then the UAE courts.
Continuation of Product Importation during Dispute
The New UAE Agency Law also provides a route for products to continue to be permitted for import into the UAE, either directly or through a third party, during an ongoing dispute between the principal and the agent. Previously, supply could be effectively blocked until any dispute with an agent had been finally settled, significantly skewing the bargaining power in favor of the agent.
Transfer of Assets on Termination
On termination of a commercial agency, the New UAE Agency Law provides for the transfer of assets of the old agent that are subject to the commercial agency to be transferred to the principal or the new agent at fair value.
Administrative and Process Improvements
The New UAE Agency Law has also implemented administrative and process improvements in respect of registration and de-registration of commercial agencies.
Notable Provisions for Agents
Some notable protections for agents have been retained in the New UAE Agency Law, including commercial agents’ right to commission in respect of parallel imports and compensation payments on unilateral termination by a principal.
The New UAE Agency Law has made significant changes in terms of contract termination rights, dispute resolution mechanisms, continuation of product importation during dispute, transfer of assets on termination, and administrative and process improvements. Notable provisions for agents have also been retained. While some provisions require further clarification, the overall changes aim to provide a more balanced and equitable regulatory framework for commercial agency arrangements in the UAE.
Key Changes
Termination Provisions Under the Old UAE Agency Law, termination or non-renewal of a commercial agency contract was not possible without a “fundamental reason.” Moreover, the contract could not be re-registered in the name of another commercial agent without a “fundamental reason” or the mutual consent of the existing commercial agent and principal. However, local courts in the UAE have interpreted “fundamental reason” narrowly, making it challenging for principals to terminate an agency relationship even if the contract contained termination provisions or a fixed term had expired.
The New Agency Law expressly permits termination of an agency contract in the following events:
- Expiry of a Limited Term Agency Contract – The agency contract can be terminated if the limited term has expired unless renewed with mutual agreement.
- Termination at Will – Either party may terminate the contract in accordance with terms and conditions agreed in the agency contract.
- Mutual Agreement – Both parties may agree to terminate the contract before the expiry of the term.
- Final Court Judgment – The contract may be terminated upon the issuance of a final court judgment.
- Any Other Event – The New UAE Agency Law allows for termination in any other event mentioned in the law.
Implications of Changes
The New UAE Agency Law allows for automatic termination of an agency contract upon the expiry of a limited term, providing much-needed comfort for foreign principals. This provision encourages foreign principals to test their products in the UAE market through a commercial agency arrangement for a limited time without the fear of being “locked in” for an extended period.
Additionally, the requirement for mutual consent for contract renewal motivates commercial agents to maximize the success of the agent/principal relationship. They know that their exclusive position is no longer guaranteed under law, and foreign principals have greater opportunity to transfer their business to a more competitive or motivated commercial agent if deemed desirable.
The New Agency Law brings significant changes to the termination provisions of commercial agency contracts in the UAE. The changes provide more flexibility for both principals and commercial agents, making it easier for foreign principals to test their products in the UAE market without fear of being “locked in” for an extended period. Commercial agents are now incentivized to maximize the success of the agent/principal relationship, knowing that their exclusive position is no longer guaranteed under law.
Termination for Convenience
The most notable change introduced by the New UAE Agency Law is the removal of the requirement for a “fundamental reason” to terminate an agency relationship. This change paves the way for termination for convenience, which allows parties to agree on termination events under the contract. Such termination events may include agreed milestones and performance targets, enabling foreign principals to better hold their agents accountable.
Changes of Control
The New UAE Agency Law allows termination events to be agreed upon concerning changes of control of the commercial agent, including to manage succession issues in the case of commercial agents who are natural persons. This change is particularly significant as under the Old UAE Agency Law, a commercial agency would automatically pass to an individual agent’s heirs, which is not addressed under the New Agency Law.
Statutory Notice Periods
The New UAE Agency Law provides for statutory notice periods applicable to termination at will or non-renewal on contract expiry. The terminating party must provide notice to the other party one year before the expiry of the term or before the lapse of half of the contract term, whichever is less, unless the parties have agreed otherwise.
Effective Date and Exemption
Principals in existing registered commercial agencies will have to wait to benefit from and implement the changes to termination at will and non-renewal rights as these will not apply to existing registered agents until either two years after the New Agencies Law comes into effect (June 2025) or, for commercial agencies that have been registered for more than ten years with the same agent or where the agent has invested more than AED100,000,000 into the agency, for a period of ten years after the New UAE Agency Law comes into force (June 2033).
Compensation
Even when expiry or termination rights are available, compensation may still be claimed. The agent may claim compensation from the principal if the agent suffers damage as a result of the expiry of the agency contract, unless otherwise agreed in the contract. Either party may claim damages from the other in the event of termination of the agency under the terms and conditions agreed in the contract. Additionally, the agent may claim compensation from the principal in the event of unilateral termination by the principal if the agent can show that its actions contributed to the visible and significant success of the principal’s products and led to the promotion of the products or increased the number of customers, and that the termination of the contract deprived the agent of its lost profit arising from such success.
Contractual Exclusion of Liability
1.The New UAE Agency Law permits the parties to an agency contract to contractually exclude liability to pay compensation in the event of non-renewal of the contract.
2. However, it should be noted that such contractual exclusion does not extend to compensation for damages arising from termination at will.
3. The parties to an agency contract may still attempt to contractually exclude or limit such liability, but it cannot be guaranteed that such exclusion will be enforceable in practice.
4. Until the UAE Courts provide guidance on how they will approach disputes relating to compensation payments under the New Agency Law, or until the Ministry issues clearer guidance, it will remain uncertain whether provisions excluding liability or fixing compensation through liquidated damages clauses will be upheld.
Arbitration as a Dispute Resolution Mechanism
1. Both the Old Agency Law and the New UAE Agency Law provide that the UAE Courts have jurisdiction to hear disputes in relation to commercial agency contracts.
2.However, the New UAE Agency Law allows the principal and agent to contractually agree to refer any dispute arising between them to arbitration, including arbitration outside of the UAE.
3. A dispute that has already been determined by the Commercial Agencies Committee can also be challenged and referred to arbitration by either party within 60 days of the Committee’s decision.
4. It is worth noting that the New Agency Law does not clarify whether referral to the Commercial Agencies Committee must be done before the initiation of any arbitration proceedings.
5. The timelines for the Commercial Agencies Committee to issue a decision on any dispute referred to it have been capped at 120 days by the New Agency Law, while the period available for challenge of the decision has been extended to 60 days.
The updates to the commercial agencies regime in the UAE, particularly the option of arbitration, provide welcome relief to foreign principals seeking to bring or defend claims against local commercial agents.
However, it is important to note that until the UAE Courts and Ministry provide further guidance on the practical application of the New Agency Law, the extent of its effectiveness in contractual exclusion of liability and in arbitration as a dispute resolution mechanism remains uncertain.
Import of Goods during a Dispute
Under the Old Agency Law, in case of a dispute between an agent and a principal, the agent could block the import of relevant goods at UAE Customs until the dispute was resolved. This prevented any other party from importing the products subject to the agency. However, the New Agency Law has introduced provisions that allow the continuation of supply to the market with the Ministry of Economy’s approval to admit entry of such products or services from exclusive sources on a temporary basis.
The principal remains liable to pay any compensation that may be awarded to the old agent by the final judgement of the courts throughout this period. The requirements and conditions for obtaining the Ministry’s approval in such cases will be outlined in secondary regulations to be issued by the Ministry, which means that practical implementation of this provision still requires clarification.
Process Improvements
The New UAE Agency Law has introduced positive changes to the processes for registration and deregistration of commercial agencies. The previous long period for objection to local courts in deregistration applications has been removed, and timelines have been shortened.
While detailed requirements for the registration application (including applicable fees and required documents) are yet to be issued and expected to be covered in future implementing regulations, the Ministry is now required to issue a decision on the registration of a commercial agency within 10 working days of receiving all registration requirements. A lack of a response within the 10-day period will be deemed a rejection. Under the Old Agency Law, this period was 15 days, with deemed rejection after 1 month with no response.
A party whose application for registration has been rejected (or deemed rejected) will have 60 days to file a challenge with the UAE Courts.
Registration and Deregistration Process
Under the new law, a registered commercial agent has a maximum of 60 days to submit an application for de-registration in the event of expiry, non-renewal or if any of the specified registration conditions are no longer satisfied. Additionally, the Ministry may initiate the deletion of a registration if it is satisfied that any registration conditions are no longer being met. Such deletion will take effect 10 working days after notifying the relevant parties.
It is noteworthy that the Old UAE Agency Law had previously allowed for a period of up to 120 days for any concerned party objecting to the deregistration decision to appear and present their objections. However, this provision has now been removed.
Implications
The amendments to the registration and deregistration process for commercial agents are aimed at making the replacement of commercial agents quicker, easier, and less disruptive for ongoing UAE business and product supply. The new law’s shorter timelines for registration and deregistration, coupled with the ability to terminate fixed-term contracts, will enable the seamless transition of commercial agents.
Penalties for Violating the New UAE Agency Law
The Old Agency Law had set out various penalties for breaches, including fines and the potential closure of an offending agent’s business premises. However, penalties under the New UAE Agency Law remain to be seen, as the law provides for the UAE Cabinet of Ministers to issue additional regulations addressing violations and administrative penalties for anyone who breaches the law.
The law’s focus on making the replacement of commercial agents quicker, easier, and less disruptive for ongoing UAE business and product supply is a welcome development. However, it is important to note that penalties for violating the law are yet to be determined and will be subject to further regulations from the UAE Cabinet of Ministers.
Eligibility Requirements
The eligibility criteria for commercial agents in the UAE are based on the ownership structure of the agency. UAE national ownership, either directly or indirectly, is mandatory for commercial agencies to operate in the country. Public companies and their subsidiaries are eligible to act as commercial agents if they have at least 51% UAE national ownership.
Expansion of Eligibility
The New Agency Law expands the eligibility criteria for commercial agents in the UAE. The UAE Cabinet, upon the recommendation of the Minister of Economy, has the authority to permit international companies to conduct commercial agency business in the UAE for their products. However, this provision applies only to new commercial agencies and where no existing registered commercial agent is in place.
Impact of Updated UAE Federal Commercial Companies Law
International companies can establish local entities with 100% foreign ownership and control, and carry out trading/distribution activities through those companies, which can include trading in their own products. Even for products restricted to UAE national commercial agents, there is existing precedent for exceptional approval being granted for their sale and distribution in the UAE directly by the manufacturer (i.e. Tesla).
The New Agency Law has largely maintained the list of who can practice commercial agency business in the UAE. The UAE Cabinet’s recent authority to permit international companies to conduct commercial agency business for their products is a welcome development. It remains to be seen whether more international companies will seek approval under this provision and the terms on which the UAE Cabinet will grant them.
Scope of Agency Relationship
The New Agency Law, like its predecessor, provides for a wide range of principal/agent relationships to be classified as commercial agencies capable of registration. This includes contracts of agency, distribution, sale, offer or concession/franchise, or the provision of a commodity or service within the UAE in return for a commission or profit. Such contracts are deemed commercial agency agreements under the New Agency Law, and must be registered in the UAE Ministry of Economy’s Commercial Agencies Register to be enforceable.
Registration of Commercial Agency Contracts
The New UAE Agency Law only applies to written commercial agency agreements that are registered in the Commercial Agencies Register. Any agency, distribution or reseller arrangement that is not registered would be treated as a regular commercial contract, governed by the law chosen by the parties to the contract. This means that parties can avoid the application of the New Agency Law by not registering their contract.
Exclusivity and Compensation
As with the Old Agency Law, the New UAE Agency Law requires a commercial agent to be granted exclusivity within the territory of the agency. This right can be protected through import restrictions by the customs authorities and seizure of products being imported other than through the registered commercial agent.
Moreover, a registered commercial agent is entitled to receive commissions in respect of parallel imports or sales transactions concluded in their exclusive territory, whether by the principal directly or a third party. The right to exclusivity and compensation remains one of the registered commercial agent’s greatest protections under the New Agency Law.
Foreign Principals
Foreign principals are likely to be interested in benefiting from the reduced protections offered to agents under the New UAE Agency Law. In light of this, foreign principals should consider amending their existing contracts and negotiating new ones to take advantage of the reduced protections afforded to agents under the New Agency Law. Specifically, foreign principals should consider the following:
- Term: Foreign principals should consider the term of the agency agreement and ensure that it is sufficiently long to maximise the benefits of reduced protections for agents under the New Agency Law.
- Termination: Foreign principals should consider the termination provisions of the agency agreement and seek to limit the compensation payable to agents in the event of termination.
- Exclusion or limitation of liability for compensation: Foreign principals should consider whether it is possible to exclude or limit their liability for compensation payable to agents in the event of termination.
- Arbitration agreements: Foreign principals should consider introducing arbitration agreements to resolve any disputes arising from the agency agreement, as this will likely be faster and more efficient than going to court.
Implications for Foreign Principals
The Old UAE Agency Law was unattractive to foreign principals who appointed a UAE-owned business to be their agent, distributor or reseller. Many foreign principals would seek to structure their contracts to avoid registering with the Commercial Agency Register to avoid the application of the Old Agency Law.
The New UAE Agency Law appears to be significantly more balanced, and it will be interesting to see if this dynamic changes. Foreign principals may find the New Agency Law more attractive and be more willing to register their contracts with the Commercial Agency Register. However, this may also mean that foreign principals will need to navigate the exclusivity and compensation requirements of the New Agency Law when appointing commercial agents in the UAE.
Local Agents
Local agents, who may have relied heavily on the protections afforded by the Old Agency Law and the favourable treatment of the UAE Courts in negotiating contracts, will need to pay closer attention to the contractual provisions they agree to under the greater contractual freedom offered by the New Agency Law. Specifically, local agents should consider the following:
- Contractual provisions: Local agents should carefully review the contractual provisions they agree to, as they are more likely to be enforceable against them under the greater contractual freedom offered by the New UAE Agency Law.
- Termination: Local agents should be aware that the grace periods offered to existing and long-established commercial agencies in respect of termination rights may not be applicable to them, and should seek to negotiate fair and reasonable termination provisions.
- Compensation: Local agents should be aware that the compensation payable to them in the event of termination may be reduced under the New Agency Law, and should seek to negotiate fair and reasonable compensation provisions.
Practical Implementation
The practical implementation of the New Agency Law remains to be seen, particularly with respect to the grace periods offered to existing and long-established commercial agencies in respect of termination rights. Additionally, further details are awaited on implementing regulations, including registration application requirements, penalties, and conditions for permitting import of products during a dispute. We will continue to monitor developments in this area and provide updates as more clarity becomes available.
The New Agency Law represents a significant step forward in the development of the commercial agency regime in the UAE. However, both foreign principals and local agents should carefully consider the legal implications of the changes brought in by the New Agency Law on existing and new commercial agency agreements, and seek legal advice where necessary to maximise the potential benefits and mitigate any additional risks.
Conclusion
The New Agency Law in the UAE has introduced provisions related to the import of goods during a dispute and process improvements to the registration and deregistration of commercial agencies. While the requirements and conditions for obtaining the Ministry’s approval in import disputes require clarification, the changes to the registration and deregistration processes are expected to benefit businesses in the UAE.
The New UAE Agency Law provides for a wide scope of principal/agent relationships to be classified as commercial agencies capable of registration. Commercial agency agreements must be registered in the Commercial Agencies Register to be enforceable under the New Agency Law. The law requires commercial agents to be granted exclusivity within their territory, and registered commercial agents are entitled to receive commissions in respect of parallel imports or sales transactions in their exclusive territory.
The New UAE Agency Law may have implications for foreign principals who may find the law more attractive but also need to navigate the exclusivity and compensation requirements when appointing commercial agents in the UAE.