18 Aug 2024
Federal Law Number 3 of 2022, known as the New Commercial Agency Law, marks a pivotal milestone in the United Arab Emirates' business landscape. Published on 15th December 2022 and set to take effect from 15th June 2023, this law supersedes the long-standing Federal Law Number 18 of 1981, signaling a significant shift in the regulation of commercial agencies within the UAE. For over 40 years, the preceding law drew critique for its perceived bias toward local agents, prompting the need for a more equitable and adaptable framework. The New Commercial Agency Law stands as a testament to the UAE's commitment to fostering a business-friendly environment, emphasizing fairness and openness between principals and agents. Notably, it introduces expanded provisions that grant both parties greater autonomy over the duration and termination of registered agency agreements. Moreover, this legislation broadens the scope for international companies to engage in commercial agency activities, subject to specific conditions set by the UAE cabinet. This article delineates the key reforms brought forth by the New Commercial Agency Law, underscoring its profound implications for businesses seeking to navigate the dynamic UAE commercial landscape. Under the New Commercial Agency Law, the landscape of authorized agents in the UAE undergoes notable evolution while preserving certain foundational principles. Similar to its predecessor, the law upholds the requirement for commercial agents to be UAE nationals or entities wholly owned by them. However, a significant stride emerges as the legislation now extends the eligibility to public joint-stock companies boasting a minimum of 51% UAE National shareholding. This expansion aligns with the amendments introduced via Federal Law Number 11 of 2022, further diversifying the pool of eligible entities authorized to act as commercial agents within the country. Moreover, a compelling provision within the New Commercial Agency Law grants the Cabinet, upon the Minister of Economy's recommendation, the authority to permit foreign principals—those not under any UAE national ownership—to directly vend their products within the UAE without necessitating an agent. This authorization comes with specific prerequisites, including the absence of an existing agent appointed in the UAE and no prior registration of agreements within the country by the principal. The practical implications of this provision remain a subject of intrigue, warranting observation as this aspect of the law unfolds in real-world applications.
Scope of Application: New Commercial Agency Law and Criteria for UAE Commercial Agent Designation
The scope of the New Commercial Agency Law extends beyond traditional definitions, encompassing a broader spectrum of agreements that appoint distributors, licensees, franchisees, or agents in various capacities. This inclusive approach, while subject to specific criteria, presents a wider framework, introducing potential risks for foreign entities seeking market entry through engagements with third parties within the UAE. Notably, the definition of a 'Commercial Agent' under the New CA Law undergoes an expansion, permitting, upon Cabinet approval, the inclusion of international companies, regardless of UAE national ownership. The conditions for this inclusion mandate that the international entity lacks an existing commercial agent in the UAE and that the commercial agency in question is novel, not previously registered within the country. This landmark provision represents a significant departure for foreign entities aiming to establish a presence in the UAE, exempting them from the mandatory appointment of a UAE commercial agent. The extent to which the Cabinet will approve entities under this new provision remains to be observed, yet this alteration marks a favorable advancement for foreign principals seeking market entry into the UAE.
Territorial Scope and Exclusivity under the New Commercial Agency Law
The New Commercial Agency Law stipulates the necessity of an exclusive arrangement for a commercial agency within one or more of the seven Emirates or for the entirety of the UAE (Article 7). Notably, any agreement lacking exclusivity fails to meet the criteria defined as a "Commercial Agency" under this updated law. It's crucial to acknowledge that certain scenarios may mandate registration, especially in cases involving the provision of specific goods or services to UAE government entities or for categories of products with restricted importation channels, such as pharmaceuticals, fire safety equipment, among others. In contrast to registered commercial agents, unregistered agents do not possess statutory rights to exclusivity, making this aspect subject to negotiation between involved parties.
Registration Obligations and Impact on Commercial Agency Agreements
Under the former Old CA Law, particularly concerning the limited termination rights for foreign principals, there existed a reluctance among principals to register qualifying agreements as a "Commercial Agency" with the Ministry of Economy. Extensive efforts were made to include contractual provisions preventing the agent from registering such agreements, stemming from concerns about termination rights and their impact. However, there are scenarios where registering the agreement could be advantageous to the principal, notably about the registered agent's authority to block parallel imports or grey market goods, as specified under Article 20. The amendments in termination provisions under the New CA Law might instill a greater sense of comfort among principals regarding the registration of new commercial agency agreements. Unlike the previous stringent requirement of termination only in instances of "mutual consent" or for a "material reason" (which had a considerably high threshold in practice), the New CA Law allows termination under several circumstances:
- Agreement before the contract term concludes.
- Notice by one party to the other party, provided the notice period is not less than one year prior to termination or before the lapse of half the contract term, whichever is shorter.
- Expiry of the contract term unless renewed by the other party, accompanied by a notice of non-renewal issued not less than one year before termination or before half the contract term elapses, whichever is shorter.
- Issuance of a final court order terminating the agreement.
- Termination under any other cases specified within the New CA Law.
While these new termination provisions are favorable, they do not apply retroactively to commercial agencies registered before the New CA Law's implementation. For existing registered commercial agencies, the provisions related to termination upon contract expiry or mutual agreement won't apply for two years from 15th June 2023. Moreover, these provisions won't apply to registered commercial agencies meeting specific criteria:
- with the same commercial agent for over 10 years; or
- where the commercial agent has invested more than AED 100,000,000 for a period of 10 years from 15th June 2023 (evaluated by the Minister of Economy).
Arbitration Provisions in the New Commercial Agency Law
Under the former Old Commercial Agency Law, the Commercial Agencies Committee (the Committee) held exclusive jurisdiction as the primary body for resolving disputes between involved parties, with subsequent appeal rights referred to the UAE Courts. The New Commercial Agency Law maintains the Committee's responsibility for initially adjudicating disputes between parties, outlining procedures for addressing challenges arising from one party's termination as per the agreement's terms and conditions. However, a pivotal shift emerges, allowing parties the liberty to arbitrate disputes after the Committee's decision.
The envisioned procedure necessitates initial referral of all disputes to the Committee. Nonetheless, parties retain the freedom to opt for arbitration should they remain dissatisfied with the Committee's decision. In such instances, the Committee's decision does not hold binding authority over the involved parties or the appointed arbitrator(s). This legislative progression signifies a substantive stride by lawmakers, affording parties greater autonomy in selecting their preferred dispute resolution mechanisms. This move contrasts with the prior constraint of adhering solely to legally prescribed procedures, thus acknowledging and honoring alternative dispute resolution mechanisms agreed upon in contracts. Furthermore, the New Commercial Agencies Law introduces an additional provision enabling a principal to request authorization to continue importing goods, subject to its registered commercial agency agreement, during disputes with the agent on a provisional basis (e.g., until the dispute reaches resolution).
Effect on Established Commercial Agencies
The implementation of the New Commercial Agency Law will not immediately affect existing registered commercial agencies, allowing a grace period of two years from its enactment date before the new termination rights take effect. Moreover, the revised termination provisions won't impact certain commercial agency agreements meeting specific criteria. These include agreements registered with the same commercial agent for over a decade or agreements where the agent's investments exceed AED 100,000,000. These exceptions will endure for a duration of 10 years following the enactment of the New Commercial Agency Law. The Ministry of Economy is yet to provide confirmation regarding the methodology for calculating the commercial agent's investment.
Conclusion
The introduction of the New Commercial Agency Law marks a pivotal shift towards a more balanced landscape for agents and foreign principals seeking to navigate the UAE market. While the law brings forth several transitional provisions, it necessitates a thorough review of existing agreements for entities already entrenched in operations within the UAE. This pivotal moment underscores the necessity for a comprehensive understanding of the nuances presented by the New CA Law.