Published July 2015
The UAE continues to be the premier trading hub of the Middle East; its economy is rebounding from the property market crash experienced a few years ago and there has been renewed foreign interest, specifically in the Emirate of Dubai, building up towards EXPO 2020.
When deciding to enter the pro-business UAE market, foreign businesses should be aware of the benefits and limitations of the business structure they are seeking to adopt in the UAE. For instance, under the UAE Commercial Companies Law (Federal Law No. (8) of 1984) (“CAL”), every limited liability company (“LLC”), which is the most common legal entity formed in the UAE, must generally have at least 51% local emirati equity participation if operating in mainland UAE (as opposed to the free zones).
Often, foreign companies will opt to establish their commercial presence through a franchise or distributorship relationship (exclusive or otherwise) with local companies. Such arrangements have their benefits; for instance, franchising can generate instant cash flow without requiring supplementary real property or equipment. However, regardless of how the commercial arrangement is structured, if it is registered in the Commercial Agencies Register and is considered an “Agency” relationship by the CAL, the consequences for the foreign entity can be significant.
The UAE Commercial Agencies Law
The CAL is fairly wide ranging and applies not only to strict principal-agency agreements, but also to franchise, distributorship, commission arrangement, and dealership agreements, to name others. It is seen at large to be a framework that limits or weakens the position of the Principal (this reference includes franchisors and suppliers), while favouring the rights of the Agent (this reference includes franchisees and distributors). It is important to note that only contracts registered in the Commercial Agencies Register with the UAE Federal Ministry of Economy are governed by the CAL, However relationships with implied terms may also become subject to the conditions present in the CAL.
Salient features of the Commercial Agencies Law are below:
(i) Nationality: Only a UAE national or a company owned fully by UAE nationals can act as an agent.
(ii) Registration: The CAL requires every agency arrangement to be registered in the Commercial Agencies Register with the Ministry of Economy, UAE (“the Ministry”). A contract may not be registered with the Ministry if more than six (6) months have elapsed since its execution or effective date. A lawsuit will not be heard with respect to disputes arising out of such arrangements if it was never registered at the outset with the Ministry. Note, however, that unregistered arrangements are still treated as valid commercial arrangements and may be governed by other federal laws, such as the UAE Civil Code and the UAE Commercial Transactions Law. From a remedies perspective, unregistered agreements leave parties with limited remedial recourse as UAE courts are technically not permitted to hear cases relating to un-registered agency agreements. However, in practice, UAE courts have recognised unregistered contracts and dealt with them effectively.
(iii) Exclusivity: Once a commercial contract is registered on the Commercial Agency Register, the Agent receives exclusive rights in the relevant goods or services for a specified Emirate, irrespective of any provisions of the contract to the contrary. Exclusivity can also apply to multiple Emirates or the whole UAE. The Principal cannot then appoint any Agent for such goods and services in the same territory in which it has granted exclusivity. If it does, the original Agent can claim commission payments with respect to the transactions concluded by the subsequent Agent or the Principal itself.
(iv) Termination: The Principal can only terminate an Agency contract governed by the CAL or refuse to renew such contract if:
The CAL also bars the Principal from appointing and registering a replacement Agent if the registered contract has not been terminated in the prescribed manner. Furthermore, upon termination of an agency agreement, the Principal is prevented from registering a new agency for a period of one (1) year. This may include the sale of the goods in question through other means.
(v) Compensation: Unless any of the conditions for termination or non-renewal are met, the Agent is entitled to receive appropriate compensation from the Principal. There is no statutory prescribed quantum of compensation, thus making it a matter of the Committee’s discretion, although factors that are considered when calculating compensation include: duration of the agency agreement; demonstrable efforts of the agent in promoting the products or services of the principal; and the net profit generated by the agent (ie. the value of the contract);
(vi) Import Limitations: The Agent is entitled to prevent the import of products included in the agency agreement if the Agent is not the consignee.
(vii) Commercial Agencies Committee: Arbitration clauses under a registered agency contract have been held to be unenforceable. Rather, the Commercial Agencies Committee, established under the CAL, shall have exclusive jurisdiction over disputes arising between the Principal and the Agent. However, the Committee’s decision can be appealed in the UAE courts.
Under the present law, the Principal cannot terminate the registered agency contract or refuse to renew the contract, even if there is a clear contractual right to terminate in the agreement itself, unless there is a material reason for termination or non-renewal. Given that the legislation is silent on what constitutes a material reason for purpose of termination or non-renewal, and the fact that the CAL is, by its general application, pro-Agent, it would be very difficult for a Principal to establish the existence of a material reason. However, accepted reasons in past judgments have included failure of the Agent to comply with material elements of the agency agreement such as pricing, sales targets, or competition provisions, and breach of the CAL by the agent.
Although the idea of accessing the market through the appointment of a local agent sounds matter-of-fact and relatively straightforward, foreign companies are often surprised to learn – usually too late – that the establishment of a formal, registered principal-agent relationship in the UAE can have significant consequences with little or no protection for the Principal. As such, foreign investors should seek legal counsel prior to entering the UAE market in order to understand the commercial relationship they will be establishing and how to structure the arrangement in a way that balances the distribution of power between the Principal and the Agent.
If your business is considering entering the UAE market, or already has an existing operation in the UAE involving local agents or distributors, please contact: Ziad Choueiri, Partner (email@example.com or +9714-4529091). You may also visit: www.ach-legal.com