Public policy challenges to arbitration awards in the United Arab Emirates
Significant reforms to the UAE Commercial Agency Law
Legal Development 31 January 2023 31 January 2023
On 15 December 2022, Federal Law No.3 of 2022 Regulating Commercial Agencies (the New Commercial Agency Law), was published in the UAE Federal Gazette, repealing and replacing UAE Federal Law No.18 of 1981 Regulating Commercial Agencies (the Old Commercial Agency Law). The New Commercial Agency Law comes into force on 15 June 2023.
The New Commercial Agency Law introduces significant and, for principals, welcome reforms to the commercial agencies regime under the Old Commercial Agency Law. The New Commercial Agency Law adopts a more balanced approach between principal and agent. How the UAE courts will apply the reforms introduced by the New Commercial Agency Law remains to be seen, after having applied the prior regime for over 40 years.
We highlight in this article some of the key changes being introduced by the New Commercial Agency Law, which, in summary, are as follows:
- the type of companies which can act as a registered commercial agent has been expanded;
- the reasons for which a principal can terminate a registered commercial agency agreement have been expanded in certain circumstances; and
- parties can agree to resolve agency disputes through arbitration, an option which was not permissible under the Old Commercial Agency Law.
Types of Agents
The New Commercial Agency Law reinforces the position that only UAE nationals (or companies wholly owned by them) can act as commercial agents (as was the case under the Old Commercial Agency Law). The New Commercial Agency Law also allows for public joint-stock companies with at least 51% UAE National shareholding to act as a commercial agent. This reflects recent legislative developments brought about pursuant to Federal Law No.11 of 2022, which amended certain provisions of the Old Commercial Agency Law.
In addition, the New Commercial Agency Law provides that the Cabinet (based on the recommendation of the Minister of Economy), may allow a foreign principal (not owned in whole or part by a UAE national) to sell its own products directly in the UAE without an agent, provided that there is no agent already appointed in the UAE and the principal has not had any agreement previously registered within the UAE. It will be interesting to see how this aspect of the New Commercial Agency Law develops in practice.
Under the Old Commercial Agency Law, a principal was unable to terminate or refuse the renewal of a registered commercial agency agreement unless it had a “material reason” to do so, and the bar to satisfy this request set by the judiciary was high. Article 9 of the New Commercial Agency Law provides that a registered commercial agency agreement can be terminated in any of the five following ways:
- upon the expiry of the agreement, unless the term is renewed by the parties. Unless agreed otherwise, notice of at least one year or one half of a contract’s term (whichever is less), needs to be provided to terminate;
- by the will of either the principal or agent based on the terms and conditions agreed in the registered commercial agency agreement (i.e. exercising contractually agreed termination rights). Unless agreed otherwise, notice of at least one year or one half of a contract’s term (whichever is less) needs to be provided to terminate;
- by the mutual agreement of the parties to terminate a registered agreement before the end of its term;
- by Court order; or
- pursuant to any other provision of the New Commercial Agency Law.
The New Commercial Agency Law does not refer to the requirement of a “material reason” to terminate, expands termination rights and provides broader grounds on which lawful termination may occur.
The New Commercial Agency Law contains some restrictions on the circumstances in which its termination provisions apply, in respect of which we comment further below.
Claim for compensation
Whilst the Old Commercial Agency Law permitted either party to claim compensation for any damages suffered as a result of termination, Article 11 of the New Commercial Agency Law takes these principles further and provides that:
- if the parties agree not to renew a fixed term agreement, then unless there is an agreement to the contrary, the agent is entitled to claim compensation for any damages suffered as a result of the expiry of the agreement; and
- if the agreement is terminated by either party in accordance with the termination rights contained within the agreement, either party can claim compensation from the other for any damage suffered. In addition, the agent is entitled to claim compensation if it can prove that its activities have contributed to the success of the principal in the territory and that the termination is depriving the agent from profiting from the success it has helped the principal achieve.
Under the Old Commercial Agency Law, the Commercial Agencies Committee (the Committee) had exclusive jurisdiction to determine any disputes between the parties in the first instance, with the right of any appeal being referred to the UAE Courts.
While the New Commercial Agency Law provides that the Committee is still responsible for hearing disputes between the parties in the first instance (including providing a procedure for determining disputes where one party terminates in accordance with the terms and conditions of the agreement that is challenged by the other), it allows parties to arbitrate a dispute after the Committee’s decision.
It is envisaged that all disputes are to be referred to the Committee, in the first instance, but that the parties are free to then arbitrate the matter if not satisfied with the decision raised by the Committee. In such circumstances, the Committee’s decision will not be binding on the parties or the arbitrator(s).
This is a significant step forward by the law makers by providing parties with more freedom to have their disputes resolved by their preferred dispute resolution forum, rather than being limited to following the procedures set out by the law and having any alternative dispute resolution mechanism agreed in a contract ignored.
In addition, the New Commercial Agencies Law introduces the ability for a principal to seek permission to continue to import its goods which are subject to its registered commercial agency agreement in the case of a dispute between the principal and agent, on a temporary basis (for example, until the dispute is resolved).
Impact on Existing Agencies
Registered commercial agencies which existed before the issuance of the New Commercial Agency Law will not be subject to the new termination rights introduced by the New Commercial Agency Law for a period of two years from the date on which the New Commercial Agency Law comes into force.
The revised termination provisions in the New Commercial Agency Law will not apply to commercial agency agreements:
- which have been registered with the same commercial agent for more than 10 years, or
- under which the agent has invested more than AED 100,000,000, for a period of 10 years from the date on which the New Commercial Agency Law comes into force. The way in which the commercial agent’s investment will be calculated is yet to be confirmed by the Ministry of Economy.
The New Commercial Agency Law contains a number of provisions which will provide welcome relief to foreign principals, albeit that many principals will not be able to take advantage of those provisions (especially in the context of termination) for some time. The new legislation provides more of an even keel for contracting between principal and agent than was the case under the Old Commercial Agency Law, albeit that robust protections in favour of the agent continue to apply.
Clyde & Co has extensive experience of advising on commercial agency arrangements in the region. If you have any enquires relating to commercial agency arrangements in the UAE, please contact one of the authors.