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What's New
October 15, 2007
Recent Amendments to Commercial Agency/Distributorship Law in the United Arab Emirates
By Howard L. Stovall
The United Arab Emirates – despite its general reputation for free trade and limited government regulation of business – traditionally has had the most onerous ‘dealer protection’ law in the Arab Middle East.
In the past year, however, pro-competition (or anti-monopoly) sentiment within certain UAE government circles resulted in enactment of a new federal law and two Ministry of Commerce resolutions that collectively reflect a weakening of those ‘dealer protections’.
This memorandum summarizes some of the more significant aspects of current UAE commercial agency and distributorship law, with an emphasis on the changes occurring in 2006
1. Applicable Law
Commercial agencies are primarily governed in the United Arab Emirates (the “UAE”) by Federal Law No. 18 of 1981 as amended, the “Commercial Agency Law”. The UAE Federal Civil Transactions Code and Commercial Transactions Code also contain provisions relevant to commercial agency arrangements. (Under the UAE constitution, federal law supersedes inconsistent emirate law.)
2. Definitions
The Commercial Agency Law defines the term “commercial agency” as representation “for distribution, sale, display or provision of any commodity or service”, and therefore is applicable to distributors as well as commercial agents. (For purposes of this summary, the term “commercial agent” generally includes distributors, and the term “commercial agency” generally includes distributorships.)
Although franchises and commercial agencies share some common features, we believe that a franchise agreement should not be deemed subject to the provisions of the Commercial Agency Law. However, we are aware of at least one lower court decision in the UAE that has reached the contrary conclusion, i.e., that franchises fall within the definition of “commercial agency”.
3. Qualifications for Commercial Agents
Article 2 of the Commercial Agency Law states that commercial agency business shall be conducted only by UAE nationals, whether natural persons or companies wholly-owned by UAE natural persons. Nonetheless, we are aware of at least a limited number of foreign companies who sell their products in the UAE on the basis of commercial agency agreements with parties other than UAE nationals or companies wholly-owned by UAE nationals, although this is generally contrary to law.
In addition to the UAE nationality requirement, a commercial agent should have a valid and appropriate commercial license in each emirate intended to be within the commercial agent’s territory. The commercial agent should also be registered with the Chamber of Commerce in each relevant emirate.
4. Direct and Exclusive Relationship
Article 4 of the Commercial Agency Law requires a direct relationship between a UAE commercial agent and the foreign manufacturer, without any intervening regional or multi-country sales agent. An exception is made for an authorized exporter or sole distributor of a foreign manufacturer when the latter does not conduct its own marketing.
Article 5 of the Commercial Agency Law provides that a qualified commercial agent will be deemed exclusive in its territory, but allows a foreign company to appoint a separate commercial agent for each emirate or combination of emirates, or one commercial agent for the entire UAE. In practice, it has been possible for a foreign principal to appoint different commercial agents for different “product lines”, or even different brands or types/models of the same general product.
Article 7 of the Commercial Agency Law bolsters the exclusivity requirement by entitling a qualified commercial agent to compensation for all sales made within its territory, regardless of how these sales are made. In this light, Article 23 of the Commercial Agency Law generally prohibits the importation into the UAE of any products covered by a registered commercial agency, except with the approval of the commercial agent or the Ministry of Commerce and Industry.
However, a 2006 amendment to the Commercial Agency Law revised Article 23, taking away the right of a UAE commercial agent to block imports in certain categories of goods specified by UAE cabinet decision(s). One such cabinet decision had already been issued -- allowing traders to freely import 14 categories of basic foodstuffs.
5. Mandatory Use of Commercial Agents
For sales to the UAE private sector, there are no general prohibitions or limitations on a foreign company’s use of a local commercial agent.
For non-military sales to the UAE federal or any emirate government, there are no general legal prohibitions on the use of a commercial agent. In fact, some form of local “sponsorship” or commercial agency is often required in connection with sales to the UAE federal and emirate governments. (For example, Abu Dhabi Law No. 7 of 1973 provides that the Ministry of Interior may not purchase goods without going to tender, unless the products are available solely from a duly appointed agent.)
6. Restrictions on Use/Payment
Various UAE federal and emirate laws prohibit local government officials and employees from engaging in commercial agency activities, particularly for transactions involving the government department for which the official/employee serves.
For many years, the UAE Armed Forces have had an established policy prohibiting defense contractors from using any sales agent or intermediary in connection with certain UAE military procurement contracts. That policy prohibition in its present form arises from a directive issued by Sheikh Khalifa Bin Zayed Bin Sultan Al-Nahyan as Deputy Supreme Commander of the UAE Armed Forces in the early 1980s (the “Khalifa Directive”).
The UAE Armed Forces have described the Khalifa Directive as applicable to procurement of “military equipment, combat vehicles, weapons of various kinds and their ammunition, battleships, aircraft and all such other electronic equipment and appliances”. However, the UAE Armed Forces would not necessarily be the only UAE customer for procurement of military-type equipment -- other UAE customers might include the Ministry of Interior. Therefore, the Khalifa Directive and Standard Clause might not apply to a particular sales contract, depending on the identity of the purchaser.
There are no general prohibitions or limitations on the payment of sales commissions by a foreign company to a UAE commercial agent in connection with UAE private sector sales. Subject to one exception, discussed in the following paragraph, there are no general prohibitions or restrictions on the percentage or amount of commission paid to a commercial agent in the UAE in connection with non-military sales to the UAE federal or any emirate government.
Article 8 of Abu Dhabi Law No. 4 of 1977 imposes ceilings on the amount of commission an agent or intermediary may receive in connection with Abu Dhabi government contracts, ranging from two percent on transactions not exceeding ten million Dirhams, to one percent on transactions equal to or exceeding fifty million Dirhams. In practice, the Abu Dhabi commission limitation is narrowly construed, and a foreign company is probably permitted to pay additional compensation to a commercial agent for any services rendered by the latter which go beyond mere “sponsorship”.
The UAE has not enacted any general foreign exchange control restrictions, and UAE nationals are not subject to any local income tax. Thus, there is no general UAE legal restriction on the place or currency of commission payments.
7. Registration Requirements for Commercial Agents
The Commercial Agency Law requires all local commercial agents to register with the Ministry of Economy and Commerce (the “Ministry”). A number of supporting documents must accompany the application for registration, including a copy of the commercial agency agreement, legalized by the UAE embassy or consulate in the foreign principal’s country and translated into Arabic. If the commercial agent is to conduct commercial agency activity in more than one emirate, the registration application must be submitted to the Ministry’s office in the emirate where the commercial agent’s main commercial establishment is located.
In 2006, the Ministry issued a resolution permitting registration of a commercial agency agreement only if the agreement contains a clause evidencing the parties’ consent to such registration, or the commercial agent attaches a letter from the principal evidencing such consent. This Ministerial resolution seeks to remedy prior instances where a UAE commercial agent registered its agreement without the principal being aware of that registration or the UAE legal implications.
Although the Commercial Agency Law requires all commercial agencies to be registered, in practice many are not. A commercial agent conducting business under an unregistered commercial agency agreement is technically in breach of the Commercial Agency Law. In practice, however, an otherwise qualified commercial agent’s failure to register does not result in prosecution. In addition, the Commercial Agency Law does not impose any direct penalties on a principal who works through a local commercial agent under an unregistered agreement.
The Commercial Agency Law instructs the UAE courts not to hear any claims brought under an unregistered commercial agency. Assuming the foreign principal has carefully structured the arrangement, however, this rule may simply mean that the unregistered commercial agent will not enjoy the “dealer protections” otherwise available under the Commercial Agency Law.
8. Termination or Non-Renewal
The judicial and administrative protections granted to a qualified UAE commercial agent under the Commercial Agency Law are generally considered to reflect local public policy and, as such, may not be waived in advance through provisions in the commercial agency agreement or otherwise.
The UAE Commercial Transactions Law does not provide for any such dealer protections in the case of unregistered commercial agency agreements. In the latter case, the unregistered commercial agent must substantiate its claim for compensation in the event the relationship is terminated -- in other words, unlike the rule under the Commercial Agency Law, an unregistered commercial agent does not have a presumptive extra-contractual right to compensation under the Commercial Transactions Law.
(a) Compensation.
Article 8 of the Commercial Agency Law states that “[t]he principal may not terminate the commercial agency contract unless there are valid reasons justifying its termination.” Article 9 of the Commercial Agency Law provides that if termination of the commercial agency results in damage to either of the contractual parties, that party may claim compensation for the damages sustained. (Importantly, as a result of 2006 amendments to the Commercial Agency Law, a foreign principal is no longer liable to pay special compensation upon expiration of a UAE commercial agency.)
Although the Commercial Agency Law does not contain guidelines on the compensation payable to the commercial agent in the event of termination, experience has shown that the compensation is generally likely to include (i) either a requirement for a foreign principal to repurchase inventory, or damages to reflect the commercial agent’s outlay for such inventory; (ii) other investments, expenses or costs undertaken by the commercial agent in promoting the principal’s business; and (iii) a multiple of the annual profits from the commercial agency (usually a multiple of between three to five years), as a form of “lost profits” suffered by the commercial agent.
(b) Administrative Protections.
The Commercial Agency Law has historically restricted the circumstances in which the Ministry might de-register a commercial agent and allow the registration of a successor appointed by the principal. As a result of amendments to the Commercial Agency Law in 2006, as well as a Ministerial resolution that same year, the Ministry now has slightly broader permission to de-register a commercial agency, including not only the parties’ mutual agreement to terminate the relationship, or the issuance of a final court judgment cancelling the commercial agency, but also upon expiration of the registration without the parties’ consent to renew, or a letter from the principal stating that it is unwilling to re-new the relationship.
In practice, the Ministry now proceeds more readily than in the past with de-registration of agencies that have expired or that the principal does not wish to renew or to continue. However, the Ministry often proceeds slowly in response to requests for de-registration, and routinely allows the registered commercial agent to submit a statement in opposition to de-registration. It is also clear, at least as a formal matter, that de-registration does not extinguish the right of the commercial agent to claim damages for wrongful termination.
Under Article 23 of the Commercial Agency Law, UAE customs authorities should refuse to clear goods encompassed by a registered commercial agency (for example, attempts to import by a principal’s successor commercial agent), unless upon the agreement of the registered commercial agent or the Ministry. (As mentioned above, the UAE cabinet is authorized to issue exceptions to a commercial agent’s exclusive import rights, and the UAE cabinet has already opened some categories of products to be freely imported.)
9. Choice of Foreign Law and Dispute Resolution
UAE law generally will respect the parties’ contractual choice of foreign law to govern their commercial agreement, so long as that foreign law does not conflict with UAE rules of public policy. Thus, the UAE courts would not recognize a choice of foreign law clause in a commercial agency agreement to the extent special ‘dealer protection’ provisions of the Commercial Agency Law are applicable. For example, the UAE courts would not apply a foreign governing law clause if the principal would thereby avoid its obligation to compensate the UAE commercial agent upon termination or non-renewal of the agreement.
In many instances, UAE law would not respect the parties’ contractual choice of a foreign forum to resolve commercial agency disputes. Article 6 of the Commercial Agency Law empowers the UAE courts to resolve disputes arising under a UAE commercial agency agreement, and “no effect shall be given to any agreement contrary hereto.” Based upon this provision, we believe the UAE courts would exercise jurisdiction and apply at least local public policy (such as the ‘dealer protections’ in the Commercial Agency Law) to any UAE commercial agency dispute, regardless of a foreign forum selection clause in the agreement.
Nonetheless, provisions in a UAE commercial agency agreement referring to foreign governing law or foreign dispute resolution forum might be useful for “defensive” purposes, if disputes are litigated outside the UAE (for example, if a UAE commercial agent attempts to enforce a UAE judgment in the courts at the foreign principal’s home jurisdiction). The UAE has acceded to the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the 1958 New York Convention).
10. Boycott Matters
Over the years, foreign companies have faced various problems relating to the UAE’s participation in the Arab boycott of Israel. However, the difficulties faced when entering into a UAE commercial agency agreement have varied from time-to-time. The UAE continues to enforce a primary boycott of Israel, e.g., no goods of Israeli manufacture may be imported into such a boycotting country. A few years ago, however, the UAE (together with a number of other Arab Gulf countries) suspended its secondary and tertiary boycott of Israel.
In general, the commercial agency agreement should include a clause stating that the commercial agent is an independent contractor and does not have authority to act on behalf of the principal in any matter not expressly authorized in the agreement. Such a contractual provision will weaken any assertion that the commercial agent has authority to furnish boycott-related certifications to the local boycott office or otherwise comply with boycott requirements on the principal’s behalf.
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This summary is based on information currently available in our Chicago office, including correspondence with UAE counsel. This summary is intended to highlight selected aspects of UAE commercial agency law, but it is not intended to provide legal advice on any specific question of local law.
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