The new UAE Agency Law

• UAE

• Commercial agreements

01-02-2023

Summary

The Agency Law which has been in place since 1981 has been repealed and replaced by a new law, Federal Law No. 3 of 2022 Regulating Commercial Agencies which comes into force on 16 June 2023. The new law still provides protection for agents against the termination of the agency contract, which goes beyond the terms of the contract. However, this protection has been reduced and now provides greater balance between principals and agents. The de facto exclusivity which agents had under the old law continues under the new law.

The new agency regime

In practice, the scope of the arrangements covered by the new law is similar to that of the old law. The new law does however provide in Article 3 that “Commercial Agency business may not be practiced in the UAE except by those who are listed in the Commercial Agencies Register in the Ministry. Any Commercial Agency that is not listed in this Register shall not be valid.” There was a provision in the old law which had a similar effect, but many unregistered agency arrangements existed and were in practice often enforced under other relevant laws, such as the Commercial Transactions Law No. 18 of 1993 (“Commercial Code”) and the Civil Transactions Law No. 5 of 1985 (“Civil Code”). The effect of Article 3 of the new law is to make such unregistered arrangements unenforceable.

The new law provides that “Commercial Agency” in the UAE can be conducted by:

• a natural person who is a UAE citizen
• a public legal person
• a private legal person owned by public legal persons
• a private legal person wholly owned by natural persons who are UAE citizens
• a public joint stock company incorporated in the UAE and in which the shareholding of UAE citizens is at least 51% of its capital

Under the new law the UAE Cabinet can allow an international company to conduct “Commercial Agency” for their own products, provided that it does not have and has not previously had an agent in the UAE for the relevant products. This may give overseas companies which were previously forced to use local distributors a valuable alternative way of entering the UAE market.

Under Article 7, a principal may appoint one agent for the whole UAE or for one Emirate or a number of Emirates, so long as the appointment is exclusive within the territory of the agency. The agent may use the services of a distributor in one or more Emirates covered by their agency contract.

Expiry and termination

The new law provides (Article 9(1)) that, as a starting point, an agency contract will expire when the contract term expires. It also provides that the contract can be terminated by either party in accordance with its terms or by the agreement of the parties, as well as by a court order. In other words, Article 9(1) provides grounds for expiry and termination of an agency contract on the same basis as other contracts.

However, that is qualified by a number of provisions which provide additional protection for the agent. Under Article 10(1), if one party wants to terminate in accordance with a contractual term, it must give at least one year’s notice (unless agreed otherwise). If one party does not want to renew the contract on the expiry of the contractual term, it must give notice at least one year before the expiry date (unless agreed otherwise). In both cases, if the contract has a term of less than two years, the notice must be given in the first half of the term.

It is not clear how these provisions will work in practice in relation to a breach of contract by the agent. They seem to prevent termination for breach unless one year’s notice is given, or for breach which occurs in the second half of a shorter contractual term. That is likely to prove frustrating for principals who will not want to continue working with an agent who has committed, or is committing, a serious breach of the agency contract. (However, it is of course still an improvement on the current position so far as principals are concerned.)

In the case of termination, a party which wants to dispute the termination can refer the matter to the Agency Committee of the Ministry of Economy (Article 10(2)). During any such dispute, goods or services may, subject to the approval of the Ministry, be imported into the UAE “from exclusive sources.” It is not clear what this means. Presumably it refers to the principal or one of its other agents outside the UAE.

Following expiry or termination of the contract, the relevant assets of the old agent (e.g. stocks of products, spare parts and relevant machinery) must be bought by the principal or the new agent “at fair value” (Article 9(2)). This obligation does not apply if the parties agree otherwise, or if the assets are not in the possession of the old agent or there is some restriction on the transfer of their ownership.

Termination of existing agency contracts

The provisions on expiry of agency contracts and termination in accordance with their terms apply to existing agency contracts, but with additional restrictions set out in Article 30. Those provisions will not apply to Commercial Agency contracts in force at the date of issue of the law (13 December 2022) until two years after the new law comes into force (which will be on 16 June 2023).

If the agency contract has been registered with the same agent for more than ten years, or if the agent has invested more than AED100 million in the agency, those termination entitlements described above will not apply until ten years after the new law comes into force.

Minimum term

If the contract requires the Agent to establish premises to display or sell the products, or facilities for maintenance or repair, the contract term must be five years, unless otherwise agreed (Article 6). In practice, therefore, this requirement is likely to apply only if the agency contract (which must be in writing) does not specify the contract term.

Compensation on expiry or termination

Under Article 11, on the expiry of the agency contract the agent is entitled to claim for the losses it has suffered as a result of the expiry, unless there is express agreement to the contrary.

If the agency contract is terminated in accordance with its terms and that causes harm to either party, that party may claim compensation for the losses it has suffered as a result. The agent will also be entitled to compensation if it proves that its activity as agent has contributed to the significant success of the principal’s products or an increase in the number of customers and that the termination of the agency contract has deprived the agent of its profit regarding this success. This will presumably require the principal to pay the agent its loss of anticipated profit for a certain number of years which will be determined by the court, if the parties do not agree what the compensation should be. The outcome of any dispute is likely to depend heavily on the facts of each individual case.

Entitlement to commission

Under Article 8, the agent is entitled to commission on sales made in the UAE (or the relevant Emirates) by the principal or others, even if those sales are made without any contribution from the agent. That reflects the position under the old law.

Restrictions on imports by others

Under Article 20, products which are covered by a registered agency contract may not be imported for the purpose of trading other than through the registered agent. Customs departments may not release such imports other than through the registered agent, except with the approval of the Ministry of Economy or the agent. Again, that reflects the position under the old law, except that that restriction may be suspended during a dispute over termination, as noted above. The de facto exclusivity which agents had under the old law, regardless of whether the contract was stated to be non-exclusive, therefore continues under the new law.

Arbitration

Under the old law, disputes regarding registered agency agreements could be resolved only by the UAE courts. Article 26 of the new law provides that an agreement between the parties to refer disputes to arbitration is valid. Arbitration clauses in the agency agreement will therefore now be effective. In addition, decisions of the Agency Committee, the first step before agency disputes go to the UAE courts, will have no effect if arbitration proceedings are commenced within 60 days of notification of the Committee’s decision.

Next steps

• Parties to unregistered agency agreements should obtain advice on the legal status of those agreements
• Principals that have entered into registered agency agreements should consider if their agreements fall within the 2 year or 10 year prohibition on termination
• Principals should be devising their longer term strategies regarding their agency arrangements
• Template agreements that are being used for arrangements that will fall within the category of agency will need to be updated
• Teams responsible for agency arrangements should be upskilled on the new law

View our summary in PDF here.

Contacts

For more information and advice on specific agency and distribution agreements, please contact: