| On 15 December 2022, the Government of the United Arab Emirates issued the Federal Law No. 3 of 2022 regulating commercial agencies (“New Agency Law”), which replaced the current commercial agency law at the time of this publication, the Federal Law 18 of 1981 (“Old Law”), after 41 years of application. The New Commercial Agencies Law becomes effective 6 months from date of its issuance, on 15 June 2023. It introduces significant reforms to the commercial agencies regime under the Old Law. It adopts a seemingly more balanced approach between the principal and its agent. The actual application of the law will determine the extent of how the new changes will affect the rights and options of foreign principals. This paper highlights the significant features of this law in comparison to its long-standing predecessor.
· Who is permitted to become an agent?
The general rule persists; commercial agency/distributorship/franchise activities can only be pursued by UAE citizens, public entities, private entities owned by public entities, private entities that are wholly owned by UAE citizens, and public joint stock companies established in the UAE, which the majority of shares are owned by UAE citizens.
Yet, the New Agency Law adds a new exception, international companies. The Cabinet, based on a recommendation by the Minister of Economy, may permit international companies to pursue agency activities connected to their own products, even if they are not owned by UAE citizens. However, such permission may only be granted to international companies that had no previous commercial agents in the UAE. The implementation of this exceptional permission remains to be seen. In public forums, the Minister of Economy confirmed that UAE citizens will be granted a wider scope for agency activities, so it is unlikely that the exceptional permission will be granted freely to international companies.
· Is the registration of the agency a requirement for its validity?
Registration of the agency in the Commercial Agencies Register is still a requirement, and unregistered commercial agencies are not considered valid. The commercial agency must be in writing and notarized. However, in practice up until the date of this publication, agents are appointed and remain unregistered; and historically, unregistered agency agreements were considered valid in court, but they were subject to the Commercial and Civil Codes, not to the special provisions of agency law. This is unlikely to change under the new regime.
Tip: Registration of the agency should be avoided, if possible, to sidestep the application of the significantly agent-favorable agency law. An unregistered agency takes the contract outside the realm of agency law and subjects it to the more balanced general rules governing commercial contracts in the UAE.
| · When can a party terminate the agency contract?
According to the Old Law, principals are neither entitled to terminate the agency contract nor appoint a new agent, even if the agreed term of the agency contract expires. A principal may walk out on the contract when its term lapses only if both parties agree to end the agency, or in the event of a “fundamental reason” to terminate the contract, which was almost always judged in favor of the agent.
The New Agency Law finally recognizes the expiry of the agreed upon term of the agency contract as a valid grounds , per se, for the termination thereof. Also, either party may terminate the agency based on the “contract’s terms and conditions”, i.e., upon the occurrence of any incident defined by the contract as a termination event. The mandatory minimum notice period for non-renewal is one year, or before the lapse of half of the contract term, whichever is shorter.
However, in the event of harm (forgone profit included) caused by the non-renewal of an expired agency contract, damages are payable to the agent, unless they are expressly excluded in the contract (Art.11 (a) of the New Agency Law). The same goes for a unilateral termination based on the contract’s terms and conditions, if it causes harm to the other party (Art.11 (b) of the New Agency Law). Upon termination of the agency, the New Agency Law expressly mandates the transfer to the principal or the new agent of all goods, spare parts, material and equipment subject of the agency contract and under the agent’s possession, on a “fair value” basis. Either party may request the competent court to determine the value of the said inventory.
Existing agencies under the Old Law will not be subject to the newly introduced termination terms for two years from its implementation, until 15 June 2025. The grace period extends to 10 years in the event that the agent invested more than DHS 100 Mil. (USD 27 Mil.), or if 10 years lapsed since the registration of the agency under their name, so not before 15 June 2033. Renewal of the contract, i.e., change of its terms, might subject the contract to the new termination terms.
Tip: To avoid the agent-favorable termination terms, the best scenario for foreign principals is to opt for a foreign governing law coupled with arbitration, but the efficacy of these contractual shields is minimized, if the agency is registered.
· Do national courts still maintain exclusive jurisdiction?
UAE courts maintain the default jurisdiction to hear agency disputes. The New Agency Law reinforces the prerequisite step set by its predecessor in its latest amendment in 2020; no dispute may be heard in court before it is referred to the Commercial Agencies Committee. The Committee must issue a decision (practically an advisory opinion) on the dispute within 120 days as of the date of submittal of the claim. The Committee’s decision becomes binding only after the lapse of 60 days from the date whereat the parties were notified thereof, if a claim is not filed by then in court.
However, courts are no longer the exclusive venue. The New Agency Law finally recognizes arbitration as a valid dispute settlement mechanism, which parties may agree to in their agency contract. If not otherwise agreed between the parties, the default place of arbitration must be the UAE. Albeit inconclusive, the language of Article 26 of the New Agency Law on the arbitrability of agency disputes suggests that the prerequisite submittal of the dispute to the Commercial Agencies Committee, before recourse to courts, also applies to arbitration.
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Tip: By resort to arbitration, there is a reasonable chance to avoid the mandatory payment of damages upon termination by the principal, absent reasonable grounds to justify such damages, especially in the event of non-renewal of the contract term. Party autonomy may prevail in arbitration. If the assets of the party against whom/which enforcement is sought is located outside the UAE, it is advantageous to choose a place of arbitration located outside the UAE to avoid any arbitral award set-aside actions in the UAE.
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· May the parties agree on the application of a foreign law?
Article 5 of the New Agency Law expressly states that its provisions govern all [registered] agency contracts in the UAE. No agreement to the contrary by the Parties is considered valid in court. But, if the parties agreed to arbitrate their disputes, a tribunal may honor the parties’ agreement to apply foreign law. If the agency contract is registered, the arbitration clause/agreement will be recognized, due to the separability doctrine, however, the award will be unenforceable in UAE courts on grounds of violating ordre public, whether the place of arbitration is in the UAE, which will trigger the application of Article 53 (2) (b) of the UAE Arbitration Law, or if the place of arbitration is located outside the UAE, which will invoke the application of Article V(2)(b) of the New York Convention.
Tip: The choice of foreign law shields foreign principals from mandatory non-contractual protections granted to the commercial agent. UAE courts should be avoided altogether, as they are precluded from applying any other law than the New Agency Law, by virtue of Art.5 thereof, regardless of the parties’ choice of foreign law.
· Can goods be banned from entry into the UAE during the ongoing dispute?
The Old Law entitles a registered agent to stop the entry of the contracted goods under the name of any other person during an ongoing dispute with the principal. Only the Minister of Economy and the registered agent may permit the release of the imported goods. Customs and competent government authorities are mandated by the law to seize and store the goods in entry points’ warehouses until the dispute is settled.
Essentially, the rule remains unchanged in the New agency Law. However, the categorical language of the entry ban instated by the Old Law has been supplemented by a less restrictive text. Whereas a ministerial approval is still required for the entry of the banned goods, the language suggests that it may be obtained if the new agent or principal presents a sufficient surety to guarantee the payment of damages to the allegedly wronged agent upon the final judgment/award in the ongoing dispute. Also, the new agent may cause the entry of the goods or services on a temporary basis only via “exclusive sources” whereas the Ministry of Economy shall “monitor/limit the flow” of the said goods during the dispute.
| Sherif El Saadani, IDI Member |
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