UAE Agency law impacts upon many different aspects of commercial life in the United Arab Emirates. The governing law, Federal Law No 18 of 1981 (the Agency Law), is extremely broad and captures commercial activities ranging from a classic principal/agent relationship to franchising and distribution agreements. The Agency Law is a framework that serves to champion the rights of the local commercial agent, normally at the expense of the (typically foreign) principal.
The Commercial Agents (Council) Regulations 1993 (the Regulations) promulgated under the Agency Law recognise that commercial agents are often in a relatively weak position when contracting with principals, and for this reason the Regulations seek to impose certain restrictions on the actions of principals while conferring benefits on agents. The Regulations are in favour of protecting UAE nationals with the persons or entities able to qualify as commercial agents being very narrowly defined.
Commercial agency is defined as the:
'… representation of a principal by an agent for distribution sale display or provision of a commodity or service in the state in return for commission or profit'.
This very broad definition is further clouded with a narrow qualification on who may actually carry out such activities.
Commercial agency activities in the UAE may only be carried out by UAE nationals or companies wholly owned by UAE nationals. Once agency is granted and registered with the UAE Ministry of Economy, the termination of an agency relationship by a principal can be extremely difficult to effect and in most cases such terminations result in significant compensation awards in favour of the local agent.
Article 5 of the Agency Law stipulates that a commercial agency must be granted for a specified exclusive territory within the UAE, namely one of the seven Emirates. Exclusivity can also apply to multiple Emirates or the whole of the UAE.
Only UAE nationals or companies wholly owned by UAE nationals are entitled to carry out commercial agency activities in the UAE. This is a strict provision of the Agency Law.
Any commercial agency covered by the Agency Law must be registered in the commercial agencies register maintained by the Ministry of Economy in the relevant Emirate or, if for the entire UAE, with the Ministry of Economy in the federal capital, Abu Dhabi. An agreement must be signed before a notary public (and attested if signed outside the UAE).
Form of agreement
Under the Agency Law commercial agency agreements must be in writing in order to be deemed valid.
The Agency Law, initially enacted in 1981, has gone through numerous changes. The changes have gone back and forth between favouring the rights of the agent or those of the principal, with the most recent legislative changes in 2010, coming down firmly on the side of the local agent.
This is particularly evident in the current law relating to termination. Under Article 8 of the law, notwithstanding the written terms of the agreement, no termination of or failure to renew a registered agency agreement is effective in the absence of a 'valid reason' for termination as accepted by the Commercial Agencies Committee (the Comittee), which was created to administer the law or with the express agreement of both parties.
The legislation is silent on what qualifies as a 'valid reason' for termination. However based on our experience and the most common rulings of the courts we believe that 'valid reason' may include:
- failure by the agent to meet specified sales targets;
- where actions of the agent damage the reputation of the principal or its products or services;
- where the agent partakes in activities that compete with the products or services of the principal;
- any breach of the Agency Law by the agent.
Article 9 of the Agency Law governs the payment of compensation to the agent upon termination or non-renewal of an agency agreement. As with termination under Article 8, the exact calculation of a compensation payment is not set out in the Agency Law, however, the following are often taken into consideration in establishing compensation awards:
- the duration of the agency agreement;
- the demonstrable efforts of the agent in promoting the products or services of the principal; or
- the net profit generated by the agent, being the value of the contract.
Importation of products
The Agency Law provides that a principal may not import any product(s) covered by the agency agreement either directly or indirectly through another agent while the agreement covering the relevant product(s) is registered with the Ministry of Economy. If a principal does do this, they will be liable to compensate the registered agent for commissions earned.
Commercial Agencies Committee
The Committee was created under the 1981 legislation as the first port of call for any party wishing to resolve a dispute relating to the Agency Law. The Committee was disbanded under the 2006 amendment but was subsequently reintroduced in 2010. Under the current legislation, the Committee has full powers of investigation, including the ability to appoint experts and the ability to apportion the costs of a hearing between the parties. In order to be binding, the Committee must rule on disputes within 60 days of receiving a complaint from either party to an agreement. Parties can also appeal the decisions of the Committee before the UAE courts.
Competence and jurisdiction of the UAE Courts
Under the Agency Law, agency activities may not be performed within the UAE except by commercial agents registered with the Ministry of Economy. Furthermore, the UAE courts are effectively barred from hearing cases relating to unregistered agency agreements. The effect of Article 3 leaves parties with limited recourse where agency agreements are unregistered.
This article is an overview of what is a relatively complex law and underscores the need for both principals and agents to seek expert advice prior to entering into commercial agency activities in the UAE.
By Mark Gilligan, associate and Douglas G Smith, partner
Habib Al Mulla & Co.