KEY CONSIDERATIONS: AGENCY AND/OR DISTRIBUTION ARRANGEMENTS IN THE UAE14-03-2018
Author: Kochi Vasylyeva
One of the ways a foreign based company can do business in the UAE is by appointing a local agent or distributor. Appointing a local agent or distributor in the United Arab Emirates (UAE) can be a simple and straightforward procedure. It is vital for a foreign principal to be aware of the UAE agency legal framework, characteristics, limitations and pros and cons of the agency arrangements prior to making a decision to engage in an agency or a distribution relationship.
In this article, we will highlight some of the areas that a foreign based principal shall consider when contemplating appointing a UAE based agent or distributor.
The relationship between the principal and a local agent is regulated by Federal Law No.18 of 1981 (as amended) (the Agency Law)1.
So what is a commercial agency agreement? It is an agreement whereby the principal or manufacturer of the goods will appoint an agent to distribute and sell the products of the principal in a certain territory in return for a commission.
The Agency Law requires certain criteria to be met on agency agreements between principals and agents in the UAE – namely:
- The agent must be a UAE national or a company wholly owned by UAE nationals (Article 2);
- The agent must be registered with the relevant Ministry of Economy (MOE);
- The arrangements between the principal and agent must be exclusive with respect to the products and/or services which are to be marketed or sold by the agent/distributor on behalf of the principal (Article 5);
- The arrangements must be in respect of a defined territory (Article 5);
- The agency agreement must be notarized, in Arabic and registered with the MOE in the Commercial Agencies Registry (Article 3).
Once the agreement is entered into the Register, the Agency Law will apply and the local agent/distributor is granted high level of protection. Foreign principals are usually unaware of the consequences of such registration and surprising imbalance until a dispute arises between the parties and/or they wish to terminate the local agent.
A registered agent or distributor in the UAE has numerous rights and protections. These include the right to commission on sales of the product irrespective of whether or not they contributed to these sales. The agent is protected against termination or non-renewal of the agency agreement. The principal may also not appoint another agent within the same territory. Finally, the agent has a right to be compensated if, for some reason, there is no renewal of the agreement.
The most significant of all the above rights is the agent's right to protection against termination. Under Article 8 of the Agency Law, termination of a registered agency is only permitted for a “material reason”. Interestingly though, what constitutes a material reason is not provided for in the Agency Law.
What happens if the agency/distribution agreement is unregistered? Article 3 of the Agency Law provides that only trade agency agreements registered with the MOE shall be considered legally valid. However, Federal Law No. 18 of 1993 (Commercial Code) establishes the regulatory framework for the various types of commercial agencies, including un-registered agency/distribution agreements.
It should be noted here that there are some conflicting judgments issued by the UAE Courts on un-registered agency/distribution arrangements. There are cases where the Courts have declined to hear a claim on the basis that the agency agreement was not registered. There are also cases where the UAE Courts have accepted that an unregistered agency is valid under the Commercial Code.
In theory compensation claims brought by unregistered agents and distributors can be easily defended but in practice many unregistered distributors pursue damages upon termination as if they are registered agents.
HOW THE PRINCIPAL CAN BE PROTECTED?
The key point to bear in mind for principals is to seek legal advice prior to entering into an agency/distribution agreement in the UAE. Steps can be taken when drafting agency/distribution agreements to at least give the principal a stronger bargaining position when it comes to terminating the agreement.
These steps can comprise of an Inclusion of enhanced termination rights in the agency/distribution agreement. For example, it can be said that the agent must achieve defined targets related to the products sold under their agency/distribution agreement to ensure renewal. Another step the principal can take is to choose a foreign governing law. However, to ensure that the choice of a foreign governing law is recognized, the agency/distribution agreement is to refer to arbitration as the sole method of dispute resolution and not foreign courts. Of course, this will not work with arrangements registered under the Agency Law as the commercial agencies committee will automatically have jurisdiction to hear disputes.
The principal can also explicitly make the agreement non-exclusive. This would impact the agreement as to the amount of any compensation that may be payable. The principal can also restrict the territory of distribution to a specific Emirate as well as enter into an unregistered agency/distribution agreement to be outside the realm of the Agency Law.
However, note that these steps are no guarantee that they afford protection to principals. Yet, steps such these can give the principal a stronger position or at least to mitigate payment where there may be high levels of compensation.
Note: This article is an overview of the agency arrangements & is intended for general information only. If you are considering entering the UAE market, please contact one of our team members who would be happy to offer legal advice
©The Legal Group Advocates & Legal Consultants 2018