In this edition of Middle East exchange, we take a look at commercial agency in the UAE in light of the recent announcement on the formation of the Commercial Agency Committee. We also highlight the recent launch of the "Tawtheeq" tenancy registration system in Abu Dhabi.
- Commercial agency in the UAE - disputes and how to avoid them
- Recent legal developments
Commercial agency in the UAE - disputes and how to avoid them
Overseas manufacturers who wish to create a market for their goods in the UAE, or in the wider Middle East, often turn to commercial agents to sell their products, rather than commit to the establishment of their own operations in the region.
As reported in the September 2010 edition of this newsletter, the Commercial Agencies Law (UAE Law No. 18 of 1981) was amended within the last year. One of the amendments was to re-introduce a Commercial Agency Committee. The Commercial Agency Committee is designed to be the first port of call for disputes arising between principals and agents under the Commercial Agencies Law. Appeal to the courts will only be permitted in limited circumstances. It has recently been reported that the composition and organisation of the Commercial Agency Committee has now been agreed by the UAE government in Cabinet Resolution No. 3 of 2011.
Disputes under commercial agency arrangements are not uncommon, partly due to the fact that the principal may not end its relationship with the agent unless it can show just cause for doing so. Therefore, the requirement for the parties to apply a more informal dispute resolution process is a welcome one, if it will lead to quicker, cheaper resolution of conflicts in commercial agency arrangements.
However, it will always be better to avoid disputes where possible. This article explains the background to the UAE Commercial Agencies Law and explores some of the ways to avoid a formal dispute arising.
Commercial Agencies Law - protection for UAE agents
In general terms, a commercial agent is a distributor or sales agent for an overseas entity. A commercial agent is often used in Middle East countries, where there are restrictions on who may import goods into the country and in markets where specialist local knowledge is helpful to grow a customer base
The Commercial Agencies Law provides protection from termination for commercial agents who are registered with the Ministry of Economy. A registered commercial agent can only be a UAE national or a corporate entity which is wholly owned by UAE nationals.
The Law provides protection in a number of ways:
- Prohibition on Early termination - A foreign principal is not entitled to terminate the commercial agency relationship with a registered agent unless there is a material reason for such a termination (satisfactory to the Commercial Agency Committee), the agent consents, or a final judgment for termination is obtained.
- Prohibition on Non-renewal - A foreign principal is also not permitted to refuse to renew a commercial agency agreement on its expiry, unless the one of conditions listed above applies.
- Right for Compensation - In the event that either party suffers loss on termination of a commercial agency agreement (irrespective of whether there are material reasons for the termination), compensation is payable. In practice, it is the agent who is more likely to suffer loss (of future income) on early termination of the arrangement, particularly where expenditure and effort has been made to make a market in the foreign principal's products. If the principal terminated for material reasons, this may count as a contributory factor to prevent damages becoming payable, or reduce the overall amount.
- Blocking a replacement - The nature of the commercial agency arrangement must be exclusive (either to the UAE or to a specific emirate) for it to be registered under the Commercial Agencies Law. In the event of a breakdown in the relationship between the agent and principal, the agent can prevent the principal from appointing a new agent until the dispute is resolved.
- No imports during a dispute - The products of the foreign principal may be impounded at UAE customs because no other person may bring the products into the country without the consent of the Ministry of Economy or the registered commercial agent (not even the foreign principal itself).
Avoiding a dispute
Understanding the legal framework of the Commercial Agencies Law and its application is important in order to appreciate the issues involved in using a commercial agent in the UAE, compared to establishing an "on the ground" presence. If a principal is considering appointing a non-UAE national (or a company which is not wholly owned by UAE nationals), or agreeing the non-registration of a commercial agency agreement with a UAE agent, specific legal advice should be sought on the legal risks involved.
If opting for a registered commercial agent, an overseas principal may wish to consider :
- setting out clear and measurable milestones for the agent to reach and providing for breach of these to be a material reason for termination or non-renewal of the agreement;
- specifying other grounds for termination or non-renewal for "material reasons" which could include any breach of the agreement if it remains unrectified for 30 days after notification, insolvency and change of control;
- describing the basis for calculating a fair compensation for the agent on early termination or non-renewal;
- capping the amount of compensation payable in the event that the termination or non-renewal right is exercised.
Ultimately, it is for the Commercial Agency Committee (or the court) to take its own view of whether a termination or non-renewal was justified, or if compensation provided for is adequate, but having an agreement in writing between the parties is likely to be a better starting point for foreign principals than leaving it unstated and for future determination. Recent legal developments
Abu Dhabi introduces the "Tawtheeq" registration system for short term tenancies
Landlords in the emirate of Abu Dhabi have until 31 July 2011 to register existing lettable properties and short term tenancies in a new registration system known as "Tawtheeq". A short term tenancy is a tenancy with a term of up to four years.