In this article we will be looking at the effect of terminating a registered commercial agency and the relevance of "sham" agency arrangements
What is a registered commercial agency?
An attractive option for many foreign companies wishing to trade ‘onshore’ in the UAE is through the appointment of a local distributor or agent as it requires minimal investment and should, in theory, carry less risk. Such arrangements are known as commercial agency or distribution arrangements. Commercial agency and distribution agreements in the UAE are regulated by the UAE Agency Law (Federal Law 18 of 1981, as amended).
The Agency Law only applies if the agency agreement is 'registered' with the UAE Ministry of Economy. Unregistered agreements do not attract the protection of the Agency Law.
It is important to bear in mind that in certain industries and market sectors, in order to obtain a license for certain types of activities, such as the sale of pharmaceuticals and fire alarm systems, it is a mandatory requirement that the commercial agent is registered with the Ministry of Economy.
What are the mandatory requirements for registration?
In order for an agent to benefit from the protection afforded under the Agency Law, the following criteria must be satisfied:
- the agent must be a UAE national or a company wholly owned by UAE nationals (Article 2 of the Agency Law)
- the arrangements must be exclusive (Article 5 of the Agency Law)
- The arrangements must be in respect of a defined territory (which can be one of, several of, or all of the Emirates) (Article 5 of the Agency Law)
- the commercial agency agreement must be registered with the Ministry of Economy (Article 3 of the Agency Law)
What is the impact of a registered agency?
Once registered, the UAE law is protective of commercial agents. A registered agent is entitled to significant statutory protections, including:
- the right to commission on all sales made within the UAE regardless of whether or not the agent makes or contributes to those sales (Article 7 of the Agency Law)
- protection against termination or non-renewal of agreement (even where the agreement is for a fixed term which has expired) (Article 8 of the Agency Law)
- the right to prevent the principal from appointing a new agent (Article 8 of the Agency Law)
- the right to compensation on withdrawal of agency rights (Article 9 of the Agency Law)
- the right to prevent the import of the principal’s products into the UAE (Article 23 of the Agency Law)
Perhaps, most important, is the agent's right to protection against termination. Under Article 8 of the Agency Law, termination of a registered agency is only permitted for a "material reason". There are, however, limited UAE Court cases that have been decided on the issue of agency termination and there is little guidance on what will constitute a "material reason" to terminate. There are two reasons for this. First, there are not many decided cases on the termination of agency agreements as the majority of cases settle out of court. Secondly, each case is decided on its own facts and there is no system of binding judicial precedent in the UAE.
Whilst the Agency Law does not define what constitutes a "material reason", in our experience, a "material reason" could include:
- non-performance by the agent, including the agent's failure to meet sales targets or minimum purchase requirements;
- any breach of the Agency Law by the agent;
- the agent undertaking activities which compete with the foreign company's products or services; and
- the agent failing to maintain the image of the foreign company or acting in a manner that damages the reputation of the foreign company or its products or services.
What is a Sham Agency Registration?
Due to the mandatory requirement of a registered agent being Emirati, there are instances when contracting parties attempt to circumvent the Agency Law. This happens when a foreign company wishes to appoint a non-Emirati individual or company to act as its agent in the UAE, but for the purposes of the Agency registration, an Emirati individual or company will "front" as the agent and will be the contractual party to the agency agreement. The contractual agent however will not undertake any of the agency activities and will instead assign its rights and obligations under the agency agreement to a third party, usually in return for a "service fee".
In such a case, the usual contracting model is that the Emirati agent enters into the agency agreement with the foreign company and then immediately assigns the management of the entire agency agreement to a third party (non-Emirati).
Court decisions dealing with termination of 'sham' arrangements
Disputes relating to sham arrangements usually arise when the registered Emirati agent decides that it wishes to avail of the right to compensation on termination of the arrangement. In such instances the foreign company will attempt to argue that no compensation is payable due to the registered agent not being the 'real' agent.
In a Court of Cassation judgment issued in 1997, the Court held that an agent that had assigned its rights to a third party was not entitled to dispute the termination of the agency agreement and claim compensation from the foreign company. In this case, the foreign company and the agent had entered into an agency agreement for the distribution of products. The agent subsequently entered into a management agreement with a third party and assigned all its rights under the agency agreement to the third party, including its right to receive commission from the foreign company. The Court concluded that by entering into the management agreement, the agent waived its rights to receive compensation under the agency agreement and that this was a justifiable reason to terminate the agreement.
More recently, there has been a conflicting decision of the Court of Appeal where the Court upheld a registered agency agreement despite the fact that the agent assigned the management of the agency to a third party. This decision was however appealed to the Court of Cassation and the Court of Cassation has referred the case back to the Court of Appeal for reconsideration. It remains to be seen what the outcome will be and if there will be conflicting judgments on the issue.
In any case, these decisions highlight the complexity and uncertainty of only one area of commercial agency laws and the practical impact for businesses.