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The most significant update to the UAE commercial agencies regulatory regime in over 40 years has been enacted under Federal Law No. (3) of 2022 on the Regulation of Commercial Agencies (the “New Agency Law”) which comes into force on 15 June 2023. The New Agency Law entirely replaces Federal Law No. (18) of 1981 on the Regulation of Commercial Agencies (the “Old Agency Law”). The New Agency Law still retains a presumption of exclusivity in favour of a registered agent, however it reforms many of the main risks that have troubled foreign principals for many years, enabling commercial agencies to be entered into on a more balanced footing and making this a more attractive route for foreign brands and manufacturers to access the UAE market.
While the Old Agency Law took a very protectionist stance in favour of UAE national commercial agents, in particular making termination by foreign principals difficult and providing for various heads of compensation for UAE national commercial agents, the New Agency Law seeks to redress some of this imbalance and offers parties greater freedom to contractually agree commercial terms that are capable of enforcement. While the application of the New Agency Law in practice remains to be seen, the clear intention behind the new law is encouraging and in line with the wider legislative agenda over recent years that has sought to make the UAE a more attractive and competitive destination for foreign investment (see also our Law-Now article on the latest updates to the UAE Commercial Companies Law for example).
While the law refers to commercial “agencies”, its application is significantly broader and covers all manner of distribution, reseller and sales representation arrangements for goods or services. For the purposes of this note, we will continue to refer to “commercial agencies”, however this should be construed to cover that broader set of arrangements.
Key changes under the New Agency Law include:
- Recognising and upholding contractually agreed termination rights, including the express recognition of contract expiry as a termination event and the right of parties to contractually agree other termination events such as termination at will – previously, provisions in agency contracts around term and termination were not enforceable under the Old Agency Law which recognised only very limited grounds for termination;
- Introduction of arbitration as an available dispute resolution mechanism, including arbitration seated outside the UAE – previously all commercial agency disputes fell under the exclusive jurisdiction of the commercial agencies committee initially, and then the UAE courts;
- Providing a route for products to continue to be permitted for import into the UAE (either directly or through a third party) during an ongoing dispute between the principal and the agent – previously supply could be effectively blocked until any dispute with an agent had been finally settled, which significantly skewed the bargaining power in the event of a dispute in favour of the agent;
- Conditions for assets of the old agent that are subject to the commercial agency to be transferred to the principal (or the new agent) at fair value on termination of a commercial agency;
- Administrative and process improvements in respect of registration/de-registration of commercial agencies.
Some notable protections for agents have been retained in the New Agency Law including commercial agents’ right to commission in respect of parallel imports and compensation payments on unilateral termination by a principal. There are also a number of provisions that would benefit from clarification, with practical application currently unclear or subject to secondary legislation. Below we set out more detail on what’s changed and what’s stayed the same.
What’s changed?
Termination of commercial agencies
The most significant change under the New Agency Law is in respect of termination. Under the Old Agency Law termination or non-renewal was not possible without a “fundamental reason”, and the contract could not be re-registered in the name of another commercial agent without a “fundamental reason” or the mutual consent of the existing commercial agent and principal. Local courts in the UAE have historically interpreted “fundamental reason” very narrowly, such that, in the vast majority of cases, the principal could not unilaterally terminate the agency relationship, even if the relevant agency contract contained mutually agreed termination provisions or a fixed term had expired. This dynamic, coupled with the fact that registered commercial agencies give the relevant agent exclusive rights to distribute the relevant products in the UAE (or in specific named Emirates of the UAE) afforded the agent substantial bargaining power against the principal, enshrined under law.
While agents will still enjoy exclusivity, the New Agency Law now expressly permits termination of the agency contract in the following events:
- the expiry of a limited term agency contract, unless it is renewed with the mutual agreement of both parties;
- termination at will by either party in accordance with terms and conditions agreed in the agency contract;
- the mutual agreement of both parties before expiry of the contract term;
- upon the issuance of a final court judgment terminating the agency contract; or
- any other event mentioned in the New Agency Law.
Express provision for automatic termination on contract expiry (in the absence of mutual consent to renew) will provide much needed comfort for foreign principals who will be more encouraged to test their products in the UAE market through a commercial agency arrangement for a limited time without fear of being “locked in” for an extended period.
The requirement for mutual consent for renewal could also be used to motivate commercial agents to maximise the success of the agent/principal relationship knowing that their exclusive position is no longer guaranteed under law and a foreign principal will have greater opportunity to transfer their business to a more competitive or motivated commercial agent if deemed desirable.
Removal of the requirement for a “fundamental reason” and the introduction of the ability for parties to agree termination events under the contract not only opens the door to termination for convenience but will also enable foreign principals to better hold their agents to agreed milestones and performance targets via contractually agreed events of default (however see below regarding compensation payable on termination at will).
Termination events could also be agreed around changes of control of the commercial agent, including to manage succession issues in the case of commercial agents who are natural persons (under the Old Agency Law a commercial agency would automatically pass to an individual agent’s heirs, this is not specifically addressed under the New Agency Law).
The New Agency Law provides for statutory notice periods applicable to termination at will or non-renewal on contract expiry. In each case, unless the parties have specifically agreed otherwise, the terminating party will be required to provide non-renewal/termination notice to the other party either one year before the expiry of the term or before the lapse of half of the contract term, whichever is less.
Principals in existing registered commercial agencies will, however, have to wait to benefit from and implement the changes to termination at will and non-renewal rights as these will not apply to existing registered agents:
- for a further 2 years after the New Agencies Law comes into effect (i.e. June 2025); or
- for commercial agencies that have been registered for more than 10 years with the same agent, or where the agent has invested more than AED100,000,000 into the agency (based on calculation methodology to be confirmed by the Ministry), for a period of 10 years after the New Agency Law comes into force (i.e. June 2033).
Even when expiry or termination rights are available, compensation may still be claimed:
- by the agent from the principal if the agent suffers damage as a result of the expiry of the agency contract (unless otherwise agreed in the contract);
- by either party from the other in the event it suffers damages as a result of the termination of the agency under the terms and conditions agreed in the contract; or
- by the agent from the principal in the event of unilateral termination by the principal, if the agent can show that its actions: (i) contributed to the visible and significant success of the principal’s products, and (ii) led to the promotion of the products or increased the number of customers, and that the termination of the contract has deprived the agent of its lost profit arising from such success.
The New Agency Law does enable the parties to contractually exclude liability to pay compensation in the event of non-renewal of the contract but this is not extended to compensation for damages arising from termination at will. The parties can still seek to contractually exclude or limit such liability but enforcement of this may not be available in practice. Until the UAE Courts have indicated how they will approach disputes in relation to compensation payments under the New Agency Law, or until the Ministry offers clearer guidance, it will remain unclear as to whether provisions excluding liability, or fixing compensation through liquidated damages clauses, will be upheld.
Arbitration as a dispute resolution mechanism
Both the Old Agency Law and the New Agency Law provide that the UAE Courts have jurisdiction to hear disputes in relation to commercial agency contracts, however, previously the UAE Courts were granted exclusive jurisdiction to hear such disputes. While agency contracts will still be governed by UAE law, under the New Agency Law the principal and agent may contractually agree to refer any dispute arising between them to arbitration, including arbitration outside of the UAE. A dispute that has already been determined by the Commercial Agencies Committee can also be challenged and referred to arbitration by either party within 60 days of the Committee’s decision. This is a significant update to the commercial agencies regime in the UAE. The UAE Courts can be an unpredictable (and arguably unfriendly) forum for foreign principals to bring or defend claims against local commercial agents so the option of arbitration, and in particular arbitration through an international arbitration centre with which the principal is already familiar and comfortable, will be very welcome.
While both the Old Agency Law and the New Agency Law provide that no dispute can be referred to the UAE Courts without having first been referred to and heard by the Commercial Agencies Committee, the drafting of the New Agency Law is not clear on whether referral to the Commercial Agencies Committee must also be done before initiation of any arbitration proceedings (although this may be the practical application). The timelines for the Commercial Agencies Committee to issue a decision on any dispute referred to it has been capped at 120 days by the New Agency Law while the period available for challenge of the decision has doubled to 60 days.
Import of goods during a dispute
Under the Old Agency Law, where a dispute arose between an agent and a principal, the agent could seek to block import of the relevant goods at UAE Customs until the dispute had been resolved, meaning that no other party would be permitted to import the products subject to the agency. The New Agency Law contains provisions that would enable continuation of supply to the market with the Ministry of Economy’s approval to admit entry of such products or services from exclusive sources on a temporary basis. The principal would, however, be liable throughout this period to pay the old agent any compensation that they may be awarded by final judgement of the courts. The requirements and conditions for obtaining the Ministry’s approval in such case will be set out in secondary regulations to be issued by the Ministry so the practical implementation of this still requires clarification.
Process improvements
The New Agency Law introduces positive changes to the processes for registration and deregistration of commercial agencies including shortening timelines and removing the previously available long period for objection to local courts in deregistration applications. Detailed requirements for the registration application (including applicable fees and required documents) are yet to be issued and expected to be covered in future implementing regulations. Under the New Agency Law the Ministry will be required to issue a decision on registration of a commercial agency within 10 working days of receiving all registration requirements, while a lack of a response within the 10-day period will be deemed a rejection (under the Old Agency Law this period was 15 days with deemed rejection after 1 month with no response). A party whose application for registration has been rejected (or deemed rejected) will still have 60 days to file a challenge with the UAE Courts.
Under the New Agency Law, a registered commercial agent still has 60 days to submit an application for de-registration in the event of expiry, non-renewal or one of the specified registration conditions no longer being satisfied. The Ministry can also now delete a registration on its own initiative if it satisfies itself that any registration conditions are no longer met, such deletion to take effect 10 working days after notifying the relevant parties. The Old Agency Law had provided for a period of up to 120 days for a concerned party objecting to the deregistration decision to appear and present their objections, this has now been removed. The shorter timelines for registration and deregistration of commercial agencies, combined with the ability to terminate fixed term contracts, will make the replacement of commercial agents quicker, easier and less disruptive for ongoing UAE business and product supply.
Penalties for violating the New Agency Law
The Old Agency Law set out various penalties that would be imposed for breaches, including fines and potential closure of an offending agent’s business premises. Penalties under the New Agency Law, however, remain to be seen as the law provides for the UAE Cabinet of Ministers to issue additional regulations addressing violations and administrative penalties for anyone who breaches the law.
What’s stayed the same?
Who can be a commercial agent
The list of who can practice commercial agency business in the UAE has largely stayed the same under the New Agency Law, having been previously expanded in 2020 to enable public companies and their subsidiaries to act as commercial agents. UAE national ownership (directly or indirectly) is still required with at least 51% UAE national ownership for public companies.
The New Agency Law does now also expressly refer to the possibility of the UAE Cabinet (based on a recommendation of the Minister of Economy) to allow an international company (not owned by UAE nationals) to carry out commercial agency business in the UAE in respect of their own products provided it is a new commercial agency and there is not an existing registered commercial agent in place. However, this does not represent a significant development in practice. Under the updated UAE Federal Commercial Companies Law, international companies are generally permitted to establish local entities with 100% foreign ownership and control, and carry out trading/distribution activities through those companies, which can include trading in their own products and, even for products otherwise restricted to UAE national commercial agents (e,g, new cars) there is already existing precedent for an exceptional approval being granted for their sale and distribution in the UAE directly by the manufacturer (i.e. Tesla). It remains to be seen whether this update in the law will lead to more applications and approvals for such exceptions by global brands producing products that have previously required a UAE national commercial agent and the terms on which the UAE Cabinet is prepared to grant these.
Wide scope of agency relationship
As with the Old Agency Law, the New Agency Law provides for a wide range of principal/agent relationships to be classed as commercial agencies capable of registration, covering contracts of agency, distribution, sale, offer or concession/franchise, or the provision of a commodity or service within the UAE in return for a commission or profit.
Registration of commercial agency contracts
The New Agency Law will only apply to written commercial agency agreements that are registered in the UAE Ministry of Economy’s Commercial Agencies Register. As with the Old Agency Law, under the New Agency Law, any agency, distribution or reseller arrangement that is not registered would be treated as a regular commercial contract and should be governed by whatever law the parties to the contract have chosen in the contract.
The Old Agency Law was manifestly unattractive for foreign principals, meaning many foreign principals who appointed a UAE-owned business to be their agent, distributor or reseller, would seek to structure their contracts in order to specifically avoid the agent registering the contract with the Commercial Agency Register, in order to avoid application of the Old Agency Law. As the New Agency Law appears to be significantly more balanced, it will be interesting to see if this dynamic changes at all.
Exclusivity and compensation
As with the Old Agency Law, the New Agency Law requires a commercial agent to be granted exclusivity within the territory of the agency, which may be the whole UAE or one or more emirates within the UAE (provided there is only one agent per emirate). This right can be protected through import restrictions by the customs authorities and seizure of products being imported other than through the registered commercial agent. A registered commercial agent also continues to be entitled to receive commissions in respect of parallel imports or sales transactions concluded in their exclusive territory, whether by the principal directly or a third party. This right to exclusivity and compensation remains one of the registered commercial agent’s greatest protections under the New Agency Law.
What Now?
Given the significance of the changes brought in by the New Agency Law, both foreign principals and local agents should carefully consider both existing and new commercial agency agreements and seek legal advice to help them capitalise on the potential benefits and/or mitigate any additional risks the New Agency Law will bring.
Foreign principals will be keen to benefit from the reduced protections for agents under the New Agency Law and may seek to amend existing contracts (and negotiate any new ones) with careful thought around term, termination and exclusion or limitation of liability for compensation, as well as introducing acceptable arbitration agreements.
On the other hand, local agents, who may have relied heavily on the protections afforded by the Old Agency Law and the favourable treatment of the UAE Courts in negotiating contracts, will need to pay closer attention to the contractual provisions they agree to on the understanding that they will be more likely to be enforceable against them under the greater contractual freedom offered by the New Agency Law.
The New Agency Law represents a big step forward in the development of this area although the pace of practical implementation remains to be seen, particularly with the grace periods offered to existing and long established commercial agencies in respect of termination rights. We also await further details to be provided under implementing regulations, in particular around registration application requirements, penalties and conditions for permitting import of products during a dispute. We will continue to monitor developments in this area and provide updates as more clarity becomes available.
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