05 Dec 2022
Introduction
The legal framework for foreign ownership of corporations in Middle Eastern nations is complicated. While there are more options today for foreign companies to conduct business in the Middle East (such as the chance to establish wholly owned subsidiaries in free zones), one well-liked option is to appoint a local agent to sell goods or services, or to appoint a distributor for the region. This is especially true because they will be familiar with the local market, able to take advantage of their contacts, and able to navigate the bureaucratic obstacles to doing business in the region. For the delivery of goods outside the free zone, an agent will still be needed, even if a foreign corporation has a presence in the area through a free zone entity. Most commercial agency regulations define agent to be a commercial agent who negotiates contracts on your behalf in the classic western sense. However, in some cases, the term agent may also apply to franchise agreements and distribution agreements. As a result, we have used the term agent to refer to common problems that could occur in both traditional agency partnerships and distribution or franchise agreements.
In the United Arab Emirates (UAE), what is the actual difference between working with a commercial agency and a commercial distributor, to do this, principals (in this example, international corporations and brands) must make difficult judgments every day. Businesses often simply use the tools at their disposal to aid in decision-making; nevertheless, in uncharted territory, new tools can significantly speed up business growth and put you ahead of any rivals. Every business leader will concur that knowledge is power, thus this article's goal is to provide companies of all sizes with information about how to launch their goods into the United Arab Emirates with the assistance of a commercial agent or distributor, if appropriate.
The creation of commercial agreements with local, authorized agents or distributors is a common way to conduct business in the United Arab Emirates (UAE). For businesses headquartered outside of the nation that wants to sell their goods in the UAE without setting up local subsidiaries, this is one of the main methods of doing business. Instead, businesses with international headquarters opt to engage with local partners who may already have a strong sales network in the target market. In the United Arab Emirates, such partnerships may involve local agents or distributors.
Theoretically, these agreements, known as commercial agency agreements, involve much less risk and demand little capital from the primary party, a foreign corporate party wishing to conduct on-shore business in the UAE (as compared to establishing local subsidiary companies). Commercial agency relationships enable international companies to take advantage of the crucial local expertise and connections that come with having local agents, allowing the principal party to profit from the agent's existing networks. Commercial agency agreements may appear to be very advantageous to the major party, but the parties to agency agreements would avoid any misunderstandings or issues if they were aware of the nuances governing local norms and legislation in this area.
Agency Law in the UAE
The Federal Law Number 18 of 1981 about Organizing Trade Agencies governs commercial agencies in the UAE (as amended by Federal Law Number 14 of 1988, Federal Law Number 13 of 2006, and Federal Law Number 2 of 2010). The UAE Agency Statute is the most common name for this law.
The terms trade agency and principal (the principal parties to an agency arrangement) are defined as follows in Article 1 of the UAE Agency Law:
- Trade agency: This is when an agent represents the principal in order to distribute, show, sell, or provide a service or a good in the State (the UAE) in exchange for a fee or commission.
- The principal: The term refers to the entity that creates the good or service, with the clarification that in the United Arab Emirates, the producer is not also responsible for marketing.
Commercial agencies must abide by the following rules about their character and the nature of the agreement in accordance with the provisions of the UAE Agency Law:
Articles 2 and 3 require the commercial agent and agency agreement to be registered in the Ministry of Economy's (MoE) Commercial Agency Register, respectively. Article 4 states that the agency agreement will only be effective if it is in writing and notarized, and Article 5 specifies the agency's defined territory. Article 6 requires the commercial agent and agency agreement to be registered in the Ministry of Economy's (MoE) Commercial Agency Register, respectively (under Article 5).
The trade agent is granted a variety of benefits and legal safeguards under UAE Agency Law. Trade agents in the UAE are largely protected once registered. The following key statutory protections for trade agents are provided by the UAE Agency Law:
- the exclusive right (under Article 7) to demand commission on all sales made in the aforementioned designated territory of the UAE, regardless of whether the agent contributed to such sales;
- the right to prevent the major party from replacing the current agent with a new agent (under Article 8); the protection against termination or non-renewal of the agreement (i.e., even though the agreement was for a defined duration and may have expired, it automatically gets renewed in perpetuity).
- as well as the authority to bar any unauthorized parties from bringing the major party's goods inside the specified zone (under Article 23).
Article 8 of the statute, which protects the agent from termination, is arguably the most significant and divisive of the aforementioned provisions. The law only permits termination under material reasons according to this article. However, the meaning of material causes is ambiguous and broad given the small number of UAE judgments that have addressed this issue. The reasons for this are twofold: (a) the majority of contract termination cases in the UAE are settled outside of court; and (b) each case is decided separately from the others and based on its own facts (the court typically appoints an expert to determine the facts), creating a system where there is essentially Number judicial precedent.
However, a material cause can typically be used to explain any of the following: -
- the agent's failure to perform; the agent's violation of UAE Agency Law; the agent's failure to maintain the principal party's reputation in the defined territory;
- the agent's actions in such a way that they damage the reputation of the principal party in the defined territory;
- or the agent's participation in any activity that aims to compete with the goods or services offered by the principal party.
As previously said, these defined material reasons won't always be unquestionably applicable because each case is decided on differently.
UAE Agency Law Dispute Resolution: A Special Process
The Commercial Agency Committee, created by Decree Number 3 of 2011, must be contacted first in the event of any issue arising out of a commercial agency arrangement under the UAE Agency Law. The Committee's main responsibility is to investigate any issue involving any commercial agency registered with the MoE. Parties are free to appeal a committee decision to the appropriate court once it has been made. Given the abundance of such agreements in the UAE, the Committee was created with the intention of establishing a specially designed judicial body to handle agency law disputes.
It is significant to highlight that conflicts involving unregistered commercial agency agreements are not given any specific legal protection under the UAE Agency Law. Such conflicts would therefore be exempt from the UAE Agency Law and most likely fall under the Commercial Transactions Law (Federal Law Number 18 of 1993), which governs commercial transactions (for example, in the cases of distributors).
A Distribution Agreement Will Typically Have the Following
- constraints on the distributor's ability to conduct business restrictions on the products the distributor is allowed to sell
- limits on the sale of rival products
- a distributor's minimum purchase requirements
- clauses relating to pricing
- clauses relating to liability's termination and cap
An Agency Agreement's Main Characteristics are
- The contracts that an agent enters into on behalf of the supplier (his principal);
- for which he is paid a commission;
- are governed by regulations that grant agents certain rights, such as the right to reimbursement upon termination of an agency arrangement.
Agency Agreement and Distribution Agreement
The topic of whether an agency is a more preferable method of doing business for international companies in the UAE or are distribution agreements more common now that a clear separation between distributors and agents has been made arises. These companies frequently have a solid reputation with their clients and tend to be capital-intensive in nature. These businesses have been very successful because they have taken advantage of the strong connections that their agents have in the area. Therefore, the creation of agency contracts is advantageous for foreign companies looking to expand their customer base within the UAE and who have the necessary capital to do so. Although agency agreements make up the majority of these commercial agreements, distribution agreements are also very useful for smaller businesses looking to enter the UAE market. Consider businesses that operate in niche markets and product categories abroad but have limited resources and funding. Employing distributors outside the UAE would be in the best interests of these businesses as it would cause their agreements to fall outside the purview of the UAE Agency Law, allaying worries about the stringent regulations and statutory protections provided to agents under the law. As a result, distribution agreements in the UAE give the major party more power, whereas agency arrangements have the opposite effect.
Although this may be a purely subjective matter, agency agreements have long been the most common way for international companies to expand in the UAE. Agent agreements are advantageous for foreign companies that have had success and a good reputation abroad. These companies frequently have a solid reputation with their clients and tend to be capital-intensive in nature.
Conclusion
The potential impact of local legislation on an agreement should always be taken into account by a principal on a foreign basis. Specific commercial agency regulations in the UAE and the larger GCC might provide local distributors with important legal safeguards. When a local distributor is a UAE national or a business that is entirely owned by UAE nationals and the local distributor was appointed on an exclusive basis, the Federal Law Number 18 of 1981 on commercial agencies, as amended by Federal Law Number 14 of 1988, Federal Law Number 13 of 2006, and Federal Law Number 2 of 2010 (Agency Law), applies (in respect of one or more of the Emirates). Certainly, the effects of this need to be taken into account. Before beginning an agency partnership, it's crucial to recognize all the dangers, which is why you should always seek legal guidance from experts. This advice could be needed for more than one jurisdiction because many agreements are applicable over larger regional areas. The success of any agency relationship will largely depend on choosing an agent the principal feels comfortable working with and making sure the parties continue to communicate clearly and fully throughout the life of the relationship. In the end, agency law in the region follows similar principles to those you will find in western jurisdictions. A clear, understandable agreement that outlines exactly what is expected of both parties during the relationship and the repercussions will be entered into as part of that communication if either party fails to meet its obligations.