31 May 2023
The Government of the United Arab Emirates has recently issued Federal Law No. 3 of 2022 regulating commercial agencies (New Law), replacing the current commercial agency law after more than 40 years since its initial enactment, Federal Law 18 of 1981 (Old Law).
Omnium Resolve’s dispute resolution & claims management team reports on the UAE Government’s Federal Law No. 3 of 2022 regulating commercial agency agreements.
The New Law, which comes into force on 16th June 2023, will bring significant legal reforms for commercial agencies, distributors, and principals who will now be able to benefit from a more balanced legal framework and clear rules for their operations. It provides a much-needed legal update for the foreign principals of commercial agencies operating in the UAE, enabling them to pursue their business goals with greater confidence and security.
The New Law restates the position that only UAE nationals or entities wholly owned by UAE nationals, in addition to public joint-stock companies with 51% or more of national capital contribution, can become an agent. However, changes in relation to the types of agents permissible under the New Law are:
“International companies”, even if not owned by UAE nationals can apply to act as agents in selling its own products in the UAE, on the condition that the products did not previously have an agent and are not the subject of an existing agency. International companies must however obtain the UAE Cabinet's permit, acting under the recommendation of the Minister of Economy, to be registered as commercial agents.
The term “international companies” has not been defined by the New Law.
Under Article 11 of the New Law, on the expiry of the agency contract, the Agent is entitled to claim for the losses it has suffered as 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 in each case.
Under Article 8 of the New Law, an 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. This reflects the position under the Old Law.
Under the Old Law, the Commercial Agencies Committee ("Agency Committee") provides that the only way to terminate or refuse the renewal of a registered commercial agency was following the parties’ mutual agreement to terminate the agency or otherwise, the party wishing to terminate the agency was to convince the Agency Committee of material reasons for termination of the agreement.
The term “material reasons” was not defined under the Old Law, which has caused confusion and resulted into lengthy litigation before the Committee.
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.
Registered commercial agencies which existed before the issuance of the New Law will not be subject to the new termination rights for a period of two years from the date on which the New Law comes into force.
In addition and significantly, pursuant to Article 30(2) of the New Law, the revised termination provisions in the New Law will not apply to commercial agency agreements:
The changes introduced to the commercial agencies law significantly modernises the laws governing the appointment of agents in the UAE and is expected to provide more support and flexibility to foreign investors in the UAE as part of its international expansion.
It is noteworthy, however, that the existence of Article 30(2) under the New Law means that for the majority of significant longstanding agency relationships in the UAE (which covers a significant number of important economic sectors in the region) their current status will not be affected by the New Law. The pending publication of the New Law’s Executive Regulations will likely clarify this and several other points regarding the application of the New Law.
Moreover, the New Law is heavily reliant on provisions agreed by the parties to the commercial agency agreement. Companies are therefore advised to pay close attention to drafting clear and unequivocal terms in the agency contracts.
Omnium Resolve delivers a complete range of contract advisory, claims avoidance, claims management and dispute resolution services throughout the GCC and further afield.
For more information on the application of exemption clauses, or for any contractual advice, please contact Omnium Resolve.
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Jawaher Yousuf
Omnium Resolve
All opinions expressed in this article are solely those of the author's for informational purposes only. The content should not be construed as legal advice.
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