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17 Mar 2023

The new Commercial Agencies Law in the UAE - a move towards flexibility in the commercial agencies practice in the UAE

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In a much anticipated and welcomed recent move, the United Arab Emirates (UAE) Cabinet has now approved and issued Federal Law No. 3 of 2022 regulating Commercial Agencies ("New Law") in the UAE Federal Gazette which repeals and replaces UAE Federal Law No. 18 of 1981 (the "Old Law").

Background

The Old Law was perceived to be more in favour of the agents; providing a more favourable legal stance for agents compared to that of principals. However, the New Law comes with the spirit of striking a balance between principals and agents. Furthermore, the New Law is heavily reliant on provisions contained in agency agreements. Absence of which the provisions of the New Law shall apply in full.

The New Law, which is set to come into force on 15 June 2023 (the "Effective Date") introduces significant changes to the law relating to commercial agencies, showing a move towards greater flexibility, potentially encouraging greater foreign investment. Notably, the New Law grants the right for international companies that are not owned by UAE nationals to apply to act as agents for products they own which are not subject of a commercial agency and allows for the early termination or non-renewal of commercial agency agreements, subject to certain conditions being met.

This Article summarises the key changes in the New Law.

Who can become an "agent"

The New Law restates the position that only UAE nationals or entities wholly owned by UAE nationals, in addition to public joint-stock companies with 51% or more of national capital contribution can become an agent. However, changes in relation to the types of agents permissible under the New Law are as follows:

  • International companies, even if not owned by UAE nationals can apply to act as agents in selling its own products in the UAE, on the condition that the products did not previously have an agent and are not subject of an existing agency. International companies must however obtain the UAE Cabinet's permit, acting under the recommendation of the Minister of Economy, to be registered as commercial agents.
  • The term "international companies" has not been defined by the New Law.

Dispute resolution

Pursuant to the Old Law, the Commercial Agencies Committee ("Committee") had exclusive jurisdiction over any disputes relating to the registered commercial agencies, while the UAE Courts had the exclusive jurisdiction to determine any appeals over the Committee's decisions.

In keeping in line with the UAE's support in allowing parties the leniency to choose arbitration as a mechanism for dispute resolution, the New Law now allows parties to enter into an arbitration agreement to resolve any disputes in relation to the commercial agencies.

However, an important caveat is that the position remains that any disputes relating to commercial agencies are to be heard in the first instance by the Committee. The parties can thereafter resort to arbitration as a next step, in which case, the Committee's decision will neither bind the parties nor the arbitrator.

As for the seat of arbitration, unless otherwise agreed by the parties, the seat is to be within the UAE.

Termination

The position under the Old Law and practice of the Committee provided that the only way to terminate or refuse the renewal of a registered commercial agency was following the party's mutual agreement to terminate the agency. Otherwise, by the party wishing to terminate the agency to convince the Committee with "material reasons" for terminating the agreement.

The term "material reasons" was not defined under the Old Law which has caused confusion and resulted into lengthy litigation before the Committee.

The New Law however introduces flexibility in choosing to terminate a commercial agency agreement, under the following circumstances:

  • on expiry and non-renewal of the commercial agency agreement;
  • by mutual consent of the parties;
  • by the unilateral will of either party as per the terms of the commercial agency agreement; or
  • by court order.

The New Law therefore introduced two new routes for terminating agencies being:

  • termination upon expiry and non-renewal of the commercial agency agreement; and
  • by the unilateral will of either party.

Notices

The party wishing to not renew the agency term must serve the other party with a legal notice prior to the expiration of the agency agreement:

  • one year prior to the expiration of the agreement; or
  • one year prior to the lapse of half the term of the agreement. Whichever comes first.

The party wishing to unilaterally terminate the agreement before its expiration date must serve the other party with a legal notice:

  • one year prior to the elected termination date; or
  • one year prior to the lapse of half the term of the agreement. Whichever comes first.

Challenging termination notices

The party affected by the termination notice may challenge the termination notice before the Committee whereby a decision should be issued within 120 days of the challenge registration. Failure which the challenge would be considered as rejected.

The agency would however be considered ongoing until a decision is issued by the Committee or the lapse of the notice period, whichever comes later.

Temporary release of products subject of a dispute - as a post termination provision

The New Law maintains the position that entry of goods, products, materials and other property (the "Products") subject of a registered commercial agency can only be permitted and released for trading to the registered agent.

Where the Products in question is the subject of a dispute, the relevant competent authorities may, based on the request of the registered agent, seize imports and store them in a warehouse until the dispute is settled, unless the principal obtains the permission of the Ministry of Economy for the temporary release of such products until the dispute has been concluded. Provided that principals remain liable to their agents for compensation due in respect of the sale of the goods (i.e. commission payment).

Transfer of products subject of agency - as a post termination provision

Upon termination of a commercial agency agreement, and unless otherwise agreed by the Parties, any assets held by the agent will be transferred to the principal or the new agent at a fair value if:

  • the assets are subject to the commercial agency contract; and
  • there are no restrictions on the transfer of the assets' ownership, and they are in the possession of the agent at the time of termination of the commercial agency.

The term "fair value" is not defined in the New Law. Thus, unless the parties agree on valuation criteria, it is unclear how the provisions on the transfer of assets will be interpreted and particularly, how the court will come up with what a "fair value" of the assets is. However, we believe that the Committee will either interpret this as being the cost at which the agent acquired the product or the fair market value of the product at the point of termination.

Compensation

The right to receive compensation for any damages suffered as a result of termination was available under the Old Law, however, the New Law expanded these rights and provides that:

  • if the commercial agency agreement terminates upon expiry by way of a legal notice being issued by either of the parties, and assuming the agency is terminated by the principal, the agent may claim compensation for any damages incurred as a result of the termination. We suspect agents could rely on efforts or investments made during the term of the agency to claim compensation.
  • if the commercial agency agreement is terminated by either party for reasons other than the expiry of the contract, the affected party can claim compensation for damages suffered.
  • if the commercial agency agreement is terminated by the principal for reasons other than the expiry of the contract, the agent may claim compensation for lost profit provided it can provide that its activities have achieved "visible and significant" success for the principal and led to the promotion of such products or the increase in the number of customers in the territory, and that the termination would be depriving the agent of its profit from such contribution to success.

Entry into force and applicability

The New Law will come into force on the Effective Date. However, it is worth noting that for existing agencies, the rules relating to the expiry and early termination of commercial agency agreements under the New Law will not be immediately effective:

Duration of the registered commercial agency

Investments made by the agent

Applicability of the termination provisions introduced by the New Law (i.e. relating to expiry and early termination)

Any

Any

After two years following the date of the New Law's entry into force (i.e., June 2025).

Any

AED 100,000,000

After 10 years following the date of the New Law's entry into force (i.e., June 2033).

10 years

Any

After 10 years following the date of the New Law's entry into force (i.e., June 2033).


Conclusion

The changes introduced to the commercial agencies law is expected to provide more support and comfort to foreign investors in the UAE as it provides them with more flexibility, such as the ability to elect a familiar international dispute resolution forum, terminate any commercial agency agreements more easily and even register as commercial agents, should they meet the requirements stipulated under the New Law. Moreover, the New Law is heavily reliant on provisions agreed by the parties to commercial agency agreement. Companies are therefore advised to pay close attention to drafting clear and unequivocal terms in the agency contracts.

Contact us

Should you have any queries or require any specific advice please do reach out to your usual contact at Stephenson Harwood, or Sandeep Dhama, Mark Lakin and Ranna Musa on the contact details listed, who will be happy to assist you.

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