Agency and distributorship agreements in the UAE are one of the options for companies to access the UAE and Gulf Market. These agreements offer a relatively low risk, low cost and fast results route in the region when compared to setting up from scratch and building a new clientele network.
The relatively low knowledge about UAE law (and region’s applicable legislation) makes the negotiation of these agreements of little value when problems arise of foreign parties.
The purpose of this publication is to raise awareness about the most important aspects of the UAE legislation when negotiating and entering into an agency or distributorship agreement with a UAE based entity.
Agency vs. Distribution
Commercial agency is defined as ‘The representation of the Principal by an Agent pursuant to a contract of agency, distribution, sale, display, franchise or offer of a commodity or service inside the state in return for a commission or profit’.
The difference is not between agent vs distributor. What sets the difference in the UAE is whether the agency or distributorship is signed with a UAE National or entity owned by a UAE National or a public entity or not.
If the agent, distributor, franchisee is a UAE citizen or an entity owned by a UAE citizen/s or a public entity, the contracy will be governed by Federal Law No. 18/1981, Regulation of Commercial Agencies as amended by Federal Law No. 14/1988 dated 26/12/1988; Federal Law No. 13/2006 dated 03/06/2006; Federal Law No. 2/2010 dated 22/03/2010; and Federal Law No. 11/2020 dated 28/05/2020.
If the agent, distributor, franchisee is not a UAE citizen or an entity owned by a UAE citizen/s or a public entity, Federal Law No. 18/2933 also known as the Commercial Transactions Law serves as the suited framework, especially its Book 2 ‘Commercial Obligations and Contracts’ to govern the commercial relationship. In this second scenario the agent/distributor does not need to be a UAE national, or UAE fully controlled entity and the Parties will have greater equality of arms when negotiating the commercial terms.
Grades of Protection in Agency and Distributorship Agreements in the UAE
Based on the above and whether the relationship is governed by the Agency framework versus the framework of the Commercial Transactions Law, the UAE based entity will have a different grade of protection.
Contracts under the Agency framework must be registered with the Ministry of Economy to benefit from the highest protection (for agent) framework. This implies:
- Foreign Principal will not be able to terminate the agreement unless there’s a fundamental breach by the Agent.
- UAE party could block the entry of the goods to the UAE and prevent the new appointment of a new agent.
- Agent could be entitled to compensation following the non-fundamental termination of the agreement by the foreign principal.
It is very common to speak to clients who were very proud of having negotiated the application of a foreign law or the selection of a forum other than the UAE for the event that a dispute arises.
The sad news is that agency and distributorship agreements in the UAE that are registered with the Ministry of Economy can only be decided by the UAE Courts following a mediation attempt with the Commercial Agencies Committee.
Negotiating unregistered contract selecting a non-UAE forum may also raise difficulties at the time of executing a potential positive judgment in the UAE. This is because Article 20 of Federal Law 11/1992 gives the UAE has jurisdiction to examine actions against a UAE citizen or a foreigner with residence or domicile in the UAE and its Article 24 nullifies any agreement that contradicts Article 20.
It is as such very important to evaluate the facts of each transaction including its parties and locations and select the most suited and permitted terms to govern their relationship – particularly arbitration as an accepted dispute resolution mechanism. On this topic we do invite you to read recent posts about UAE based arbitral institutions and UAE Arbitration Law.
Registration, Formalities & Licensing – in Agency and Distributorship Agreements in the UAE
This publication is intended to raise a word of awareness and ensure that foreign principals invest in securing their first steps in the UAE and the region. Success for foreign principals should not be to make the UAE and region to play their foreign system game but rather they should protect their interests within the parameters of the UAE or region’s system.
This is what leads us to speak about common formalities in the UAE such as:
- Requesting the license of the Agent or the Distributor for record. No one in the UAE can undertake commercial activities without appropriate license. This is often overlooked and is easily fixable at the onset.
- Ensuring that the agreement signatory has sufficient powers to execute the agreement. This usually involves asking for the MOA/AOA in addition to the license. It also involves ensuring obtaining hard copies and stamps on the agreements.
- Being on top of the registrations, if they are applicable for agents to ensure that the terms to be registered are in line with the terms agreed. Participate and be active, learn about the UAE (or region’s) system and benefit from the protection options available to foreign principals.
We trust that this post is of assistance in understanding the basics of commercial agreements in the UAE and rest at absolute disposal for any question on this publication of general application.
**The present publication is not intended as legal advice. It is a general publication containing practical information.