The Government of the United Arab Emirates (UAE) introduced Federal Law No. 3 of 2022, (New Commercial Agency Law) which supersedes the commercial agency legislation, Federal Law No. 18 of 1981 (Old Commercial Agency Law) which has undergone amendments in the year 2006, 2010, and 2020. Effective from the 15th of June 2023, this New Commercial Agency Law is based on the principle of autonomy or individual will, with contractual obligations governed by the principle of pacta sunt servanda (agreements must be kept) protecting all parties. The New Commercial Agency Law incorporates substantive transformation that has a more equitable legal framework and clear regulations for the seamless operation of commercial entities.
Parallel to the provisions of the Old Law, the New Commercial Agency Law captures any agreement which appoints a distributor, licensee or franchisee as well as agents in the more traditional sense. It categorizes a commercial agency as an agent acting on behalf of a principal for commission, as well as a distributor procuring from the principal and engaging in sales within the designated territory. As per Article (1) of the New Commercial Agency Law the term "Commercial Agency" is defined as "the representation of a Principal by an agent under a contract of agency, distribution, sale, offer or concession, or the provision of a commodity or service within the territory of UAE in return for a commission or profit".
According to the Article (2)(1) of the New Commercial Agency Law, the constitution of Commercial Agency business shall be limited to individual citizens, and companies and institutions that are wholly owned by any of the following:
a. A natural person who is a citizen;
b. A public legal person;
c. A private legal person owned by public legal persons; and
d. A private legal person wholly owned by natural persons who are citizens.
In other words, individuals who are citizens of the UAE or entities entirely owned by legal and natural UAE nationals are authorized to conduct Commercial Agency operations within the country.
However, for international companies to practice as a Commercial Agency, cabinet approval is mandatory. Moreover, these entities must not currently have a commercial agent in the UAE, and they must be new and not previously registered in the market.
Companies wholly owned by the UAE nationals can act as commercial agents as was the case under the Old Commercial Agency Law. The New Commercial Agency Law also allows for public joint-stock companies with at least 51% UAE National shareholding, such companies shall be excluded from the requisitions as stated under Article (2)(1) above.
Registration
Article (3) of the New Commercial Agency Law mandates registration of the Commercial Agency in the Commercial Agencies Register (CAR). Without such registration, a Commercial Agency would not be considered valid.
The application for registration in the Commercial Agencies Register should be submitted to the Ministry of Economy (MoE). It shall be accompanied with the following documents:
a. A copy of valid business license; and
b. A copy of the Commercial Agency Contract attested and legalized by the official authorities.
Following the submission, the MoE is obligated to render a decision within ten (10) working days subsequent to the fulfillment of registration prerequisites in the CAR. In the event of rejection, an appeal may be pursued before the appropriate court in the UAE within a period of sixty (60) days from the notification date or awareness thereof.
Contractual Term.
In accordance with Article (6) of the New Commercial Agency, if a commercial agent display buildings, commodity stores, or maintenance or repair facilities, the contractual term for a commercial agency shall be five (5) years, unless otherwise agreed upon by the commercial agent and principal.
Exclusivity.
Consistent with the provisions of the Old Commercial Agency Law, the New Commercial Agency Law under Article (7) states that a commercial agency must be exclusively granted for one or more of the seven Emirates or for the whole of the UAE. Consequently, any agreement that lacks exclusivity will not meet the criteria for classification as a Commercial Agency under the revised law. It is important to emphasize that, akin to the provisions in the Old Commercial Agency Law, mandatory registration may be applicable in instances involving the supply of specific goods or services to government entities in the UAE or for particular product categories that necessitate a registered commercial agent to import, such as pharmaceuticals and fire safety equipment, among others. In contrast to registered commercial agents, an unregistered agent lacks a statutory entitlement to exclusivity. Consequently, exclusivity becomes a subject for negotiation between the concerned parties.
Termination.
Under the Old Commercial Agency Law, a principal faced significant challenges in terminating or refusing to renew a registered Commercial Agency agreement unless the courts were provided with compelling 'material reasons' for termination. However, the New Commercial Agency Law has introduced more flexibility in terminating Commercial Agency agreements. The new law permits termination under the following circumstances:
a. Upon expiry of the contract, unless both parties agree to renew the agreement; or
b. Termination in accordance with the terms and conditions specified in the contract; or
c. Termination before the contract's expiry through mutual consent; or
d. Termination by court order.
In cases where termination is based on the contract's terms and conditions, the party initiating the termination is required to provide notice to the other party:
a. A notice period of at least one (1) year in advance; or
b. Prior to the completion of half of the contract duration, whichever is less.
Significantly, termination owing to gross misconduct by the commercial agent is no longer regulated under the New Commercial Agency Law.
While there are now broader grounds for lawful termination, the provisions mentioned earlier regarding expiration and early termination will not immediately apply to:
- Any agreements already in effect at the time of the issuance of the New Commercial Agency Law, until the 15th of June 2025 i.e., two (2) years from the date of the New Commercial Agency Law's enactment.
- Any agreements that fall into either of the following
categories:
- agreements registered with the same commercial agent for more than ten (10) years; or
- agreements in which the investment volume of the commercial agent exceeds the UAE dirham (AED) 100,000,000, until the 15th of June 2033 i.e., ten (10) years from the date of 15th of June, 2023.
Non-Renewal / Termination Notice Period.
In cases of non-renewal of a limited-term agency contract, principals must adhere to stipulated notice periods outlined in the New Commercial Agency Law. The party not seeking renewal must notify the other party one (1) year before the contract's expiry or before the lapse of one-half of the contract term, whichever is shorter unless otherwise agreed upon.
In situations where a party seeks premature termination, a notice period of not less than one (1) year before the contract term's expiry or before the lapse of one-half of the stipulated term, whichever is shorter, is mandated.
Compensation.
The New Commercial Agency Law has significantly broadened the entitlement to compensation for damages resulting from contract termination, incorporating the following provisions:
- Expiry of Contract: In the event of contract termination upon the expiry of the agreement, the commercial agent has the right to request compensation from the principal for any losses incurred due to the termination.
- Termination According to Contract Terms: When the contract is terminated in accordance with the terms and conditions, both parties have the option to seek compensation for the losses suffered. Notably, the commercial agent holds the right to compensation if they can demonstrate that their activities significantly contributed to the success of the principal's products, resulting in product promotion or an increase in customer base, and they experienced financial losses due to the termination of the contract.
- Dispute Resolution through Commercial Agencies Committee (CAC): If either party disagrees with the terms of contract termination as outlined in the agreement, they have the option to escalate the matter to the CAC. This committee is vested with the authority to settle disputes between parties registered with the MoE. Importantly, any dispute must be presented to the Committee before resorting to legal action in court.
Dispute Resolution and Arbitration.
The New Commercial Agency Law, confers exclusive jurisdiction upon the CAC for the resolution of disputes. The CAC is mandated to address disputes submitted for hearing within 22 working days from the application submission date and to adjudicate disputes among parties involved in a Commercial Agency contract within a period of 120 days (4 months) from the registration of the case. In the event of a challenge or non-decision, either party has the option to seek recourse before the court within 60 days from the expiration of the 120 days deadline or from the date of receiving the decision of CAC. Strict adherence to the 60 days' timeframe is imperative, as any challenge against the decision CAC beyond this period is not admissible. In such instances, the decision of CAC holds the authority equivalent to a writ of execution.
Additionally, Article (26) of the New Commercial Agency Law permits the parties to mutually agree to resolve any disputes through arbitration, even opting for a foreign arbitration seat.
Prohibitions.
In accordance with Article (20) of the New Commercial Agency Law, entry in UAE of goods, products, manufactured goods, materials or other property which are subject matter of Commercial Agency is restricted to trading exclusively through the designated commercial agent. Customs clearance for such goods requires approval from the MoE associated with the appointed commercial agent. Customs authorities retain the discretion to confiscate or seize imported goods until the resolution of any related disputes.
Conclusion.
The New Commercial Agency Law provides a comprehensive framework delineating the rights and responsibilities of both principals (including foreign principals) and agents. It introduces dispute resolution mechanisms, including arbitration. Notably, the law permits international companies not owned by UAE citizens to serve as agents for their products. Additionally, it accommodates the possibility of early termination or non-renewal of Commercial Agency agreements, subject to specific conditions. Overall, it is no doubt, the New Commercial Agency Law is being welcomed by foreign principals looking to enter the UAE market.
Further, this balanced approach in defining the dynamics of the principal-agent relationship is anticipated to instill greater confidence among prominent business investors, fostering an environment conducive to attracting increased foreign direct investment into the country. Situated in Dubai, we are a global law firm specializing in corporate and commercial law. Our proficient team is adept at scrutinizing your present commercial agency agreements and providing counsel on navigating the Commercial Agency Law for both novel and ongoing setups. Feel free to reach out for any queries or assistance you may require.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
