Country focus: Commercial Agencies Law

Long awaited changes to the UAE Commercial Agencies Law have now been enacted. However, how has the new law modified the old provisions and how likely are the new changes to have a significant impact on those entering into agency agreements in the UAE?

By Phil O’Riordan, partner, Clyde & Co, and Antony Turton, casehandler, Clyde & Co

The Commercial Agencies Law

Under UAE law there is no clear distinction between an agency and a distribution agreement. This has meant that the Commercial Agencies Law has applied to both agency and distribution agreements despite attempts by cautious principals to avoid such provisions through the insertion of clauses defining the arrangement as a “distribution agreement” and explicitly stating that under no circumstances should the arrangement be regarded as an agency relationship.

While there is no distinction between an agency agreement and a distribution agreement, UAE law does make a distinction between registered and unregistered agency agreements. UAE law imposes an obligation on agents to register agency agreements insofar as they are capable of registration. There have also been cases where the authorities have been willing to register agreements even in instances where they do not seem to satisfy all of the requirements for registration (e.g. such as by having a foreign law and jurisdiction clause). Coupled with the fact that agents are subject to fines of AED5,000 or more if they fail to register their agreements with the Ministry, the likelihood is that parties entering into agency arrangements in the UAE will have to consider the prospect and consequences of registration.

The most significant consequence of registration is that until such time as the agency agreement is terminated in accordance with its terms, by Ministry decree or until an appropriate order of a court of competent jurisdiction is obtained, the agent’s registration with the Ministry will not be deleted. In practice this means that until the registration is deleted, the principal will not be able to terminate the agency agreement without paying statutory compensation upon termination or non-renewal. Often such compensation will be high, particularly where the agent can show that the principal has been successful in obtaining customers (regardless of the efforts of the agent), or if the agent’s appointment has been for a considerable period of time.

Furthermore, until the registration is deleted, the agent can effectively prevent the principal from appointing a new agent in relation to the sale or promotion of their own products or services in the relevant territory and can even take steps to prevent the import of the relevant products into the UAE.

In the case of unregistered agreements, these provisions relating to termination, compensation, and restrictions on the import of products technically will not apply. However, avoiding registration should not be regarded as a means of bypassing the onerous provisions of the Commercial Agencies Law as this may bring with it other very significant disadvantages. The lack of (or avoidance of) registration may prevent a party to an agency agreement from being able to enforce its contractual rights in the event of breach, as the agreement per se may not be recognised as valid before the UAE courts. In addition, experience suggests that the lack of registration is no guarantee that a Court would construe it as such. The Court may decide to apply the provisions of the Commercial Agencies law regardless to unregistered agency agreements.

The impact of the new law

The new law (Federal Law No 13 of 2006) has certainly brought with it a welcome change – it now allows a commercial agency agreement which has a fixed term to automatically expire at the end of the term (unless otherwise agreed by the parties). However, it still prohibits a new commercial agent from being appointed unless the registered commercial agency agreement under which the agent was appointed has expired without renewal, terminated by mutual agreement, or been terminated pursuant to a final judgement de-registering it.

Whereas this gives principals an opportunity to get ‘off-the-hook’ more easily than under the old regime, the new law has still not altered the compensation provisions. These will still apply, bringing with them the same consequences as upon termination of a registered agency agreement under the previous regime.

The new law does not have a retroactive effect – principals under existing registered agreements will not have the new protections. As no implementing regulations have yet been published we are still waiting to see what the practical impact of the new law will be, and how the authorities and the UAE courts will adapt to the new procedures, documentation requirements and likely complaints stemming from the new law.

While the impact of the new agency law may be limited, it may well provide some assistance to principals who to date have been locked into ongoing agency agreements and have been reluctant to explore other avenues given the compensation provisions on termination. At least the new law may be a positive indicator of future changes to come.

In the meantime we recommend that UAE agency agreements be drafted with care in order to avoid or mitigate the onerous consequences of the Commercial Agencies Law.