A new era for UAE commercial establishment law: Key reforms unveiled | Hogan Lovells

The new law will come into effect on June 15, 2023. This article examines the key changes brought about by the new law and their impact on commercial representation arrangements in the UAE.

What are the key changes?

Some of the key changes introduced by the new law are:

• commercial agent: The scope of commercial agents has expanded. The new law reiterates the general rule that only UAE nationals, 100% UAE-owned companies or public joint-stock companies (at least 51% UAE-owned) can act as commercial agents. However, for the first time, the cabinet may now allow international companies that are not UAE nationals to act as agents for products they own and sell directly into the UAE market, provided certain criteria are met.
• Contract period: The new law now requires a minimum contract period of five years (unless the parties agree otherwise) if an agent needs to establish a building for display, a merchandise store, or a facility for maintenance or repair.
• Termination/Notification: The client’s termination rights have been expanded. Under the old law, a settlor could not terminate or refuse a renewal of a registered business establishment without “substantial cause”. In practice, proving “substantial cause” is difficult and often results in loss/damage recovery by the registered agent. This is largely the reason why settlors avoid registering their business establishments. This restriction is now lifted and may terminate under the following circumstances:
  • After contract expires (unless renewed);*
  • According to the terms of the commercial agency contract, as desired by either party;*
  • agreed by both parties prior to the expiry of the contract period;* and
  • By court order.

* Provided that a notice of termination (or notice of non-renewal) is given to the other party at least one year before the proposed date of termination or half the term of the contract, whichever is shorter (unless the parties agree otherwise).

Although there are now broader legal grounds for termination, the above provisions regarding expiration and early termination will no apply immediately:

• any agreements that were in force when the new law was enacted – by 15 June 2025 (that is, two years from the date the new law came into force); and

• Any agreement: (i) has been registered with the same agent for more than ten years; (ii) the investment of the agent exceeds AED 100,000,000 – as of 15 June 2033 (ten years from the date of entry into force of the new law).

• Dispute Resolution: According to the old law, only the Commercial Institutions Committee and the UAE courts have jurisdiction over disputes, and any agreement to the contrary is void. The new law provides new flexibility to allow parties to refer disputes to arbitration (noting that the Business Institutions Commission is still responsible for hearing disputes in the first place).

• goods during the dispute: During the dispute, subject to the approval of the Ministry of Economy, the principal may continue to temporarily bring goods and services into the UAE through an exclusive source other than the agent (provided that the principal remains liable to the former agent for any compensation that expires).

• compensation: The agent may seek compensation for damages suffered: (i) due to non-renewal of the contract (unless otherwise expressly provided for in the contract); (ii) due to early termination (if the agent can prove that its efforts success of the agent’s products and resulting in an increase in clients for such products, and early termination will result in the agent being deprived of the profits it has earned for its work to facilitate such success).

What impact will these changes have?

International businesses looking to expand or develop in the UAE market often work with commercial agents to benefit from their local knowledge and well-established distribution network. These changes are intended to make the proxy market more accessible and attractive to foreign principals. Of particular note is that the new law provides principals with greater termination rights, the ability to choose familiar international dispute resolution forums, and even registration as a commercial attorney if the requirements are met.

However, the impact of these measures in practice and how they will be interpreted and applied by UAE courts remains to be seen. The necessary regulations to implement the new law have not yet been enacted. Nonetheless, careful analysis of these changes and clear drafting of future new agency agreements is warranted, especially given the new law’s emphasis on freedom of contract.