- January 23, 2020
The United Arab Emirates (“UAE”) continue to be an important sales market for foreign enterprises. Just as well, the Emirates’ excellent infrastructure serves as a major logistic hub for re-exportation of foreign products bound for the Middle East, Asia and Africa. The applicable legal parameters in the UAE include direct export, the incorporation of a local company and the appointment of a local commercial agent tasked with handling the distribution of foreign products. Hence, this article will give a brief overview on a number of legally sensitive issues that are outlined below.
I. Legal Framework
In the UAE, distribution agreements are mainly subject to the so-called Commercial Agencies Law (Federal Law No. 18 of 1981, as amended by Federal Law No. 14 of 1988 and Federal Law No. 2 of 2010) The subject matter of the Commercial Agencies Law includes trade / commercial law matters such as the personal requirements to commercial agents, the registration of agreements, etc. It does, however, also include substantive provisions relating to the termination of agreements and claims for compensation. Significantly, the Commercial Agencies Law makes provision exclusively for the protection of the commercial agent – and not the principal.
II. Type of agencies
a. Commercial agency
The Commercial Agency Law defines a commercial agency as any arrangement whereby a foreign company is represented by an agent to “distribute, sell, offer, or provide goods or services within the UAE for a commission or profit”. (Article 1 of the Commercial Agencies Law). The Commercial Code (Federal Law No. 18 of 1993) augments the Commercial Agencies Law and establishes the regulatory framework for the various types of commercial agencies permitted under the law. The most common type of agency is the contracts agency, whereby the agent undertakes “on a permanent basis and in a specific area of activity, the instigation and negotiation of the conclusion of deals, to the advantage of the principal and in return for payment”. (Article 217 of the Commercial Code). Distributor contracts are treated like contracts agencies when they involve one agent as the sole distributor. (Article 227 of the Commercial Code).
b. Registered and Non-Registered Commercial Agency
Under UAE law, agency and distribution arrangements are largely treated in the same way as each other. There are many different options and types of agents / distributors to choose from and a distinction needs to be drawn between registered and unregistered agreements. A registered arrangement (agency or distribution) is only possible where the agent or distributor is a UAE National or a company wholly owned by a UAE national(s). Furthermore, the agent can obtain the various protections afforded to agents under the UAE Commercial Agencies Law (Federal Law No. 18 of 1981, as amended by Federal Law No. 14 of 1988 and Federal Law No. 2 of 2010). These protections include: (a) Exclusivity thereby products imported must be exclusive to the agent; (b) Commissions whereby registered commercial agents are entitled to receive commissions on the sales they make as well as commissions on sales made in the UAE by the principal or any other party; and (c) Termination of registered agency/distribution agreements can be difficult and costly as there are strict rules and restrictions which apply.
By contrast, the Commercial Agency Law is inapplicable to non-registered commercial agency contracts. This typically proves to be disadvantageous for the respective agent because the agent will then be entirely unable to invoke any protective rights under the Commercial Agency Law. The non-registered commercial agency agreements are subject to the significantly less strict provisions of the Civil and Commercial Codes No. 5 of 1985 and No. 18 of 1993.
According to the Commercial Agency Law, a Commercial Agencies Committee (“Committee”) is authorized to settle any dispute arising between a commercial agency in the UAE and the foreign principal. As per Commercial Agency Law, it is compulsory for agent and principal in dispute with one another to refer the matter to that Committee before going to the courts. A party may challenge the determination of the Committee by bringing a matter to the UAE courts within thirty (30) days of the date of receiving notice of the Committee’s resolution. As per Article 3 of the Commercial Agency Law, only the commercial agency which are registered with the Ministry of Economy may be heard by the Committee in case of dispute. Any unregistered agency agreement would therefore be heard in the Courts and would be governed by the Federal Law No. 18 of 1993 on Commercial Transactions and the Federal Law No. 5 of 1985 on Civil Transactions.
On another hand, there are a general rule and practice of UAE courts that they will not adjudicate upon an agreement wherein there is a specific arbitration clause. However, if either of the parties decided to go to the court despite arbitration clause and the other party does not object then the arbitration clause becomes inoperative. However, the Dubai Court of Cassation has rendered a judgment concluding that the arbitration agreement shall be valid if it does not contradict the UAE Agency Law.
The appointment of a commercial agent becomes increasingly attractive for entrepreneurs who are seeking for a solution to distribute goods in the UAE. However, it is advisable to limit: (1) the exclusivity of the contract to a predetermined and clearly defined set of products, (2) the distribution area under the contract e.g. to one Emirate, (3) to include detailed descriptions of possible causes for termination of the contract as well as a specified formula governing the calculation of any compensation claims resulting from a potential termination of the contract.