Following rounds of consultation, the United Arab Emirates (UAE) has issued the new and much anticipated Federal Law No. 3 of 2022 regulating Commercial Agencies (“New Law“), repealing and replacing the longstanding Federal Law No. 18 of 1981, which has been amended many times including most recently in May 2020.
The New Law introduces various changes and grants for the first time, the right for international companies that are not owned by UAE nationals to act as agents for products they own, provided that such agency is new, has never been registered and does not have a commercial agent registered for it in the UAE.
The New Law also opens the door for the early termination or non-renewal of commercial agency agreements subject to the conditions provided for in the New Law being met. It is equally important to point out that longstanding significant agency relationships have been excluded from the application of the termination and non-renewal clauses introduced by the New Law.
In more detail
The following summarizes the major characteristics of the New Law:
- Who can act as an agent: Commercial agency activities can be carried out by national natural persons, public legal persons, private legal persons owned by public legal persons, private legal persons fully owned by national natural persons, or public joint-stock companies incorporated in the UAE with at least 51% of national capital contribution. In addition, the New Law allows for the first time, international companies that are not owned by UAE nationals to act as commercial agents for their products provided that such products are not the subject of a commercial agency.
- Contract term: The New Law provides for a minimum contract term of five years if the agent is required under the contract to establish showrooms or buildings, commodity stores or maintenance or repair facilities, unless the parties agree otherwise.
- Expiration of an agency: The New Law introduces the possibility for a commercial agency agreement to expire at the end of its term. However, the agent may claim from the principal a compensation for the damage it has incurred as a result of the expiration of the agreement, unless the agreement expressly stipulates otherwise.
- Early termination of an agency: The New Law allows either the agent or the principal to terminate the commercial agency agreement prior to its term based on the terms of the agreement, provided a termination notice is served to the other party at least one year prior to the termination date or prior to the lapse of half of the agreement term, whichever is less, unless the parties agree otherwise. The early termination can be challenged before the Commercial Agency Committee and the agent can claim a compensation for the damage it has incurred if the agent proves that its efforts have contributed to the success of the products and have led to the increase of customers for such products which would have then led to the loss of profit as a result of the early termination.
- Non-renewal notice: The New Law allows the non-renewal of the commercial agency agreement provided a non-renewal notice is served to the other party at least one year prior to the termination date or prior to the lapse of half of the agreement term, whichever is less, unless the parties agree otherwise.
- Dispute resolution: The New Law confirms the exclusive jurisdiction of the Commercial Agency Committee to hear any dispute arising between the parties to a commercial agency. The New Law has introduced a timeframe of 120 days for the Committee to resolve a dispute, otherwise the parties become eligible to resort to the court within 60 days from the deadline date. The New Law has also allowed for the first time parties to agree to resort to arbitration to resolve disputes in relation to a registered commercial agency agreement. The default seat for such arbitration is the UAE, unless otherwise agreed by the parties. An arbitration agreement will not apply to a commercial agency in relation to which a dispute has arisen or is already being heard by the Commercial Agency Committee or a UAE court before the New Law has entered into force.
- Sale of products during a dispute: The New Law regulates for the first time the sale of products during a dispute process by allowing such sales to be conducted through exclusive sources other than the agent provided that the principal remains liable for such sales towards the disputed agent.
- Exclusion and timeframe for application: The provisions of the New Law relating to the expiry and early termination of commercial agency agreements do not apply to agreements in force at the time of issuance of the New Law except after the lapse of two years from the date of its entry into force (which falls after six months from the publication of the New Law). The timeframe for the application of such provisions is extended to ten 10 years in the case of commercial agencies that have been registered under the same agent for more than 10 years or for commercial agencies in which the volume of the agent’s investment exceeds one hundred million dirhams (AED 100,000,000), to be assessed in accordance with standards and controls to be established by the Ministry of Economy.
The necessary regulations and resolutions for implementing the New Law are yet to be issued by the Minister of Economy.
It is worth noting that the New Law reaffirmed some of the protections conferred upon the registered agent, which can be summarized as follows:
- Statutory exclusivity right for the agent within its territory to represent the principal and sell the principal’s products
- Statutory entitlement for commission including on transactions directly concluded by the principal or by a third party within the agent’s territory (regardless of the efforts taken by the agent to conclude such transactions)
- Statutory protections allowing the enforcement of exclusivity rights and the ability to block parallel imports to the territory, as long as the agency is registered
- Early termination could be subject to discretionary compensation to be assessed and determined by the UAE courts based on various factors. The New Law does not provide any clarification or criteria for the assessment of such compensation.
- Exclusive jurisdiction to the Commercial Agency Committee and the UAE courts to resolve disputes between the parties to a registered commercial agency, except where the parties have agreed to resolve such disputes by arbitration
In conclusion, the New Law represents a major development to the applicable regime to the commercial agencies particularly in terms of allowing the early termination of a commercial agency and the non-renewal of its term (thus departing from the automatic renewal rule). The New Law however defers the application of such major change to a specific timeframe and maintains the right of the commercial agent to claim damages as a result of an early termination or expiration of an agreement at its term, unless the agreement provides otherwise.
To speak to us in relation to the new Commercial Agencies Law, any corporate and commercial matters and issues more generally, please reach out to the Baker McKenzie contacts below.