The New Law came into effect on 15 June 2023. This article explores the key changes brought about by the New Law and their impact on commercial agency arrangements in the UAE.
What are the key changes?
Some of the key changes introduced by the New Law are:
- Commercial agents: The scope of who can act as a commercial agent has widened. The New Law reaffirms the general rule that only UAE national individuals, 100% UAE owned companies or public joint-stock companies (which are at least 51% UAE owned) can act as commercial agents. However, for the first time, the Cabinet may now permit international companies not owed by UAE nationals to act as agents for products they own and sell directly into the UAE market, provided certain criteria are met.
- Contract term: The New Law now requires a minimum contract term of five years (unless the parties agree otherwise) if an agent is required to establish buildings for display, goods stores, or facilities for maintenance or repair.
- Termination / Notice: A principal's termination rights have expanded. Under the Old Law, a principal could not terminate or refuse renewal of a registered commercial agency without a “material reason”. In practice, evidencing a "material reason" was difficult, with attempts often resulting in compensation for loss/damages awarded to the registered agent. This was largely the reason why principals avoided having their commercial agencies registered. This restriction has now been removed, and termination can occur in the following circumstances:
- upon expiry of the contract term (unless renewed);*
- by the will of either party, in accordance with the terms of the commercial agency contract;*
- by the agreement of the parties before the expiry of the contract term;* and
- via a court order.
* Provided a termination notice (or non-renewal notice) is served to the other party at least one year prior to the proposed termination date, or before the lapse of half of the contract term, whichever is less (unless the parties agree otherwise).
Although there are now broader grounds for lawful termination, the provisions discussed above in relation to expiry and early termination will not immediately apply to:
any agreements already in force at the time of issuance of the New Law – until 15 June 2025 (being two years from the date of the New Law's entry into force); and
any agreements: (i) that have been registered with the same agent for more than ten years; or (ii) in which the volume of the agent's investment exceeds AED 100,000,000 – until 15 June 2033 (being ten years from the date of the New Law's entry into force).
Dispute resolution: Under the Old Law, only the Commercial Agencies Committee and UAE courts had jurisdiction over disputes, and any agreement to the contrary was void. The New Law provides new flexibility by allowing parties to refer disputes to arbitration (noting that the Commercial Agencies Committee is still responsible for hearing disputes in the first instance).
Goods during a dispute: During a dispute, and with the Ministry of Economy's approval, principals may continue to bring goods and services into the UAE via exclusive sources other than the agent on a temporary basis (provided the principal remains liable to the former agent for any compensation that may be due).
- Compensation: An agent can claim compensation for the damage it has incurred: (i) as a result of the expiration of the contract which has not been renewed (unless the contract expressly states otherwise); or (ii) as a result of early termination (if the agent can prove that its efforts have contributed to the success of the principal's products and have led to the increase of customers for such products whereby early termination would have led to depriving the agent of the profit for its work in promoting such success).
What impact will these changes have?
International businesses looking to expand or grow in the UAE market often work with commercial agents to benefit from their local knowledge and well-established distribution networks. These changes are aimed at making the agency market more accessible and attractive to foreign principals. Of particular note, the New Law provides principals with greater termination rights, the ability to elect familiar international dispute resolution forums, and even the ability to register as a commercial agent should they meet the requirements.
However, the impact of such measures in practice, and how they will be interpreted and applied by UAE courts, remains to be seen. The necessary regulations for implementing the New Law are also yet to be issued. Nonetheless, careful analysis of the changes and clear drafting of new agency agreements going forward is imperative, particularly given the New Law's emphasis on freedom of contract.
How can we help?
Hogan Lovells is well-versed in these important changes and their impact. We have extensive experience advising on commercial agency arrangements in the region, and can provide practical guidance on implementation for your organisation. Please contact us for more information on how we can help.
Authored by Janelle Moussa.