Things you need to know about Agency Law in the UAE

Jurists and economists have discussed the different waves of globalization over the past few decades. This gradual change in global economics has led to a ripple effect. And this effect requires legislative backing and a robust regulatory framework.

The lawmakers of each jurisdiction consult with their economists before implementing certain statutes. These statutes are meant to regulate or to permit the entry of international conglomerates and foreign investments into the local market or domestic economy.

While certain jurisdictions initially imposed restrictions to test the waters, some others permitted the entry of foreign companies. These entries are permitted when they meet the domestic legal framework and structure for their operations. This article aims to discuss Federal Law Number 18 of 1981 about the Regulation of Commercial Agencies, as amended in the United Arab Emirates (the UAE).

The subject of discussion in this article is a vast topic considering the developments in this legal sphere over time. Thus, it is all time recommend to consult the advice of international law firms in Dubai, where an exclusive department of commercial lawyers is available. This is to understand the solutions available to them.

 

Overview on Agency Law:

The Agency Law is the primary piece of legislation that governs the business arrangements. The setups whereby foreign (or international) companies can distribute their goods in the UAE. The law identifies the relationship between principals and agents. And has set out the legal framework for regulating their operations.

The Agency Law sets out the procedure for foreign companies (the Principal). That may include your favourite Swiss watchmaker or Italian clothing line, selling their products in the UAE. These Principals are mandated to appoint an agent who is a UAE national or a company wholly owned by UAE nationals (the Agent).

And they are abiding to follow a commercial agency agreement for

(i) representing;

(ii) distributing;

(iii) displaying;

(iv) offering;

(v) servicing the products of the Principal for a particular profit.

These commercial agency agreements are registered at the commercial agents’ registry with the Ministry of Economy (the Ministry). The Principal is required to appoint an agent exclusively for a particular area or Emirate. They are provided with the option of engaging one agent for the entire UAE for their range of goods or different agents.

 

The Agency Law in UAE provides a higher degree of protection to the agents in the country, such as:

• Article 7 entitles the Agent to claim for commissions of all sales in the particular jurisdiction. The jurisdiction where he was appointed, even if the sale(s) did not take place with such agents’ efforts.
• Article 8 places restrictions on the Principal prohibiting them from terminating the agency agreement or non-renewal with a ‘fundamental reason’. The fundamental reasons such as registering the name of another agent (without the mutual consent of the previous agent and Principal), etc. However, the term ‘fundamental reason’ has not been defined in the Agency Law and the reasons for termination are, therefore, decided by the competent authorities based on the facts of each matter. From a generic point of view, ‘fundamental reasons’ is likely to include the failure of the agent to follow the provisions of the Agency Law, actions wherein the Agent works in direct competition of the Principal within the same jurisdiction (or territory), failure to safeguard the goodwill or brand image of the Principal, among others.
• Article 9 provides parties to an agency agreement with the right to demand compensation due to damages incurred in cases where the contractual obligations are terminated.
• Under Article 23, the Principal (or any other person) is also prohibited from importing the products that are registered to an Agent for commercial purposes other than through the Agent, unless otherwise the Ministry or the Agent explicitly permits such imports. This restricts the recourses that are available to the Principal from resorting to trading their products within local jurisdictions without the consent of the Agent.

 

Adjudication of Contractual Disputes:

According to the provisions laid down by Federal Law Number 2 dated 22 March 2010, a Commercial Agencies Committee (the Committee) has been established to resolve and adjudicate various issues between an Agent and a Principal in the UAE.

The Committee is the primary forum for dispute resolution of agency, withholding the agency agreement that has been registered with the Ministry. The Committee is conferred with the authority to review all disputes and so, the parties may not approach the courts. The Committee may review and pass decisions on the disputes – and such decisions can be appealed before the court with competent jurisdiction within thirty (30) days.

In the event the agency agreement or the specific arrangement in similar matters are not registered with the Ministry or does not meet the criteria set out in the Agency Law, then disputes arising from such matters would be heard by the court of competent jurisdiction. The court must be in that territory guided by Federal Law Number 5 of 1985 on Civil Transactions. Thus, an Agent can resort to the safeguards provided under the Agency Law in the UAE only if such agreement is registered. In the case of an appeal of Cassation Case Number 128 of 2018 (Administrative) before the Court of Cassation, the court identified different aspects of a principal’s authority to terminate an agency agreement. 

The Respondent in the case had filed case number 335 of 2014 (Administrative Plenary Federal Abu Dhabi) against the agent and the Ministry requesting the following: –

• termination of agency agreement with the agent;
• removal of agent’s name as the exclusive distributor of the principal’s products in the UAE from the Ministry’s records; and
• termination of all registrations.

The dispute was initially filed before the Committee and the Committee rejected the request of the Respondent. The Respondent filed an appeal (Appeal Case Number 26 of 2015) at the Court of Appeal in Emirate of Abu Dhabi which upheld the decision of the Committee.

Then the aggrieved Respondent files the case at the Court of Cassation (Case Number 157 of 2017) which ruled to reverse the judgment of the Court of Appeal and further redirected the matter back to the Court of Appeal.

Subsequently, the learned Court of Appeal ruled to revoke the earlier judgment, cancel the decision of the Committee, remove the commercial agency registered with the Ministry, end the exclusivity of the Second Respondent as an exclusive agent of the Appellant, and reject the other requests. Due to the judgment of the Court of Appeal, the Appellant filed the case with the Court of Cassation. The Respondent contended that the appeal filed at the Court of Cassation was inadmissible since the same subject matter was already settled in the judgment of Case Number 157 of 2017. 

However, the Court of Cassation held that the judgment in Case Number 157 of 2017 did not adjudicate on the subject matter of the case for the case to be inadmissible as per article 49 of the Federal Law Number 10 of 1992 on Evidence in Civil and Commercial Transactions (Law of Evidence). 

The Appellant had filed the case at the Court of Cassation on six (6) grounds, wherein they have objected and contested that the earlier judgment is not in line with the provisions of the law and has errors in the application and interpretation of the laws. The earlier judgment had taken a Memorandum of Understanding dated 31 February 2018 into consideration as a supplementary document to the agency agreement. 

However, such a Memorandum of Understanding was neither registered with the Ministry nor presented to the Committee. Therefore, the Appellant contended and requested the Court of Cassation to not consider such documentation. However, the court rejected this objection since article 8 of the Agency Law stipulates that the Principal cannot terminate or not renew the agency agreement unless there is a ‘fundamental reason’ for such action. The court observed that the judgment in Case Number 157 of 2017 to terminate the agency agreement and the registration at the Ministry violates article 5 of the initial agreement (dated 11 December 2001) submitted by the Appellant to the Court of Cassation. 

The Court of Cassation ruled that the Appellant had not cleared overdraft balances in favour of the Respondent for the period (29 May 2012 to 28 January 2014) and failed to meet the sales milestones set out in the initial agreement. Therefore, the court held that the Appellant violated articles 4 and 5 of the initial agreement and noted that the court in Case Number 157 of 2017 had not considered the Memorandum of Understanding as the grounds for the earlier judgment. The failure of the Appellant to adhere to articles 4 and 5 of the initial agreement is a substantial (valid) reason for the principal to terminate the agency agreement and therefore the earlier judgment is upheld.

 

Distinguishing Agency Agreements and Distributorship Agreements.

The structuring of a commercial and corporate transaction under an Agency Agreement and Distributorship Agreement are different; and therefore, the implications of each of these agreements also vary substantially. The ‘agency agreements’ mentioned in this section of the article only include those agreements that meet the requirements of the Agency Law and registered with the Ministry, for purpose of clarity. 

Our Corporate Lawyers in Dubai have tried to explain the primary differences between both the structures below: –

1. Agency agreements are guided and governed by the Agency Law; whereas, distributorship agreements are governed by the Federal Law Number 5 of 1985 on Civil Transactions.
2. Agents are conferred with a higher degree of protection from termination in agency agreements and distributors are not afforded the same level of protection.
3. Agency agreements should be registered and meet the criteria set out under the Agency Law. On the other hand, distributorship agreements do not have to meet the requirements in the Agency Law.
4. Agency agreements are registered with the Ministry and distributorship agreements are not registered.
5. Agents are required to be UAE nationals or companies wholly owned by UAE nationals; whereas, there is no such restriction placed on distributors.
6. Agents are granted exclusive territories. On the contrary, Principals may assign more than one distributor for the same territory.
7. Parties in an agency agreement need to refer their disputes to the Committee; whereas, parties to a distributorship agreement may directly file a case before the court with jurisdiction on the matter.

Both the agreements fall under different legal purviews and therefore, have different principles and implications.