The United Arab Emirates (“UAE”) has long been a global hub for trade, attracting Commercial Agency (“CA”) businesses from around the globe. To navigate the CAs future in this hub we borrow the saying of George Santayana: “To know your future, you must know your past”.
The '70s and '80s were a strong turning point for CAs and the UAE market as a whole. During which, the UAE shifted away from the Gulf’s prevailing concept of heavy reliance on oil, opting instead to diversify the economy, setting its heart on international trade, logistics, and shipping. Impressively, the kick-off outcome of this shift raised the CAs and generally took the Gross Domestic Product (“GDP”) from $14.72 billion in 1975 to $40.6 billion in 1985!
One of the sparks of this vision was encapsulated from the saying of the late H.E. Sheikh Zayed: “We must not rely on oil alone as the main source of our national income. We have to diversify our revenue sources and construct economic projects that will ensure a free, stable, and dignified life for the people”.
Legal frameworks lay the foundation for a smooth and sustainable CA business operation, mitigates risks, and helps maintain a positive relationship between local authorities and stakeholders. Therefore, from the outset, the UAE recognized the need for legislation to shape and regulate various aspects of the CAs.
1. The legislation evolution of the CAs in the UAE
The CA regulation journey began with Federal Law No. 18 of 1981 (the “1981 Law”) which underwent amendments over the years in 1988, 2006, 2010, and 2020, then entirely repealed by Federal Law No. 3 of 2022 Regulating CA (the “2022 Law”).
Upon review of the 2022 Law, it is obvious that the UAE has learned lessons from the past laws while setting sight on the future, as it is finely tuned for contemporary and future demands, enhancing market flexibility and progress.
Our exploration of the 2022 Law unfolds two sides of each subject by dissecting the innovations within the 2022 Law and briefly examining the relevant history of changes in the 1981 Law.
This dual perspective not only illuminates historical lessons and development in the CA regulation but also aids in forecasting the CA future in the dynamic and sophisticated business landscape of the UAE. In that sense, we will discuss five substantial subjects as follows.
A. Arbitration
No arbitration was allowed under the 1981 Law, but a limited jurisdiction for state courts –following a determination by the Commercial Agency Committee (“CAC”). (as stated expressly by Article 6 of Law No. 14 of 1988 amending the 1981 Law).
The 2022 Law allowed the CA’s parties, for the first time, to resort to arbitration, (Article 26). The arbitration shall take place within the UAE unless the CA’s parties agree otherwise. This ensures a degree of flexibility for the CA parties to choose the seat of the arbitration proceedings, adding an element of autonomy to the process.
The CA’s parties must resort to arbitration during the appeal period of the decision of the Commercial Agency Committee (“CAC”), i.e. 60 days. If this appeal period lapses without neither party resorting to arbitration or proceeding to appeal the CAC decision before the competent court, then the CAC decision becomes final.
If any of the CA parties resorts to the arbitration within the said appeal period, the CAC’s decision will have no effect and does not entail any consequences. This underscores the priority given to the arbitration process once invoked within the stipulated timeframe.
The introduction of arbitration as an alternative dispute resolution mechanism signifies a shift towards more flexible and potentially expedited methods of resolving the CAs' disputes. Arbitration often offers advantages such as confidentiality and specialized expertise.
Parties involved in CA relationships should carefully consider an assessment of the implications of resorting to arbitration or litigation before the court.
B. Termination and Renewal of the CA & Right to Compensation
The 1981 Law granted broad discretion to the CAC with regards to the termination of CAs. The 1988 Law included protective provisions for agents, requiring termination or non-renewal to meet specific conditions justifiable to the CAC (Article 8). The determinations rested on the concept of whether there were “justifiable” grounds for termination however there was no uniform definition for what constitutes a justifiable ground.
The 2022 Law provides entirely new approach with a comprehensive guideline on expiration, termination, renewal, agency assets, imports during disputes, and compensation. This provides transparency and interim relief for the CA's parties and limits the discretionary powers of the CAC and courts in resolving disputes around these circumstances (Articles 6, 9, 10, and 11).
The 2022 Law thus provides (5) five pathways for CA termination
i. Expiry Date: The CA expires on the agreed-upon date, unless mutually renewed.
ii. Unilateral Termination: Allows termination at the discretion of the principal or agent, per the terms and conditions of the CA contract.
iii. Mutual Consent: Permits pre-expiry termination through mutual consent.
iv. Judicial Ruling: Facilitates termination through a judicial or alternative dispute resolution ruling.
v. Legal Provisions: Allows termination under any other circumstances specified in the law.
In addition, the question of the assets subject to the CA is covered by the 2022 Law. It provides that upon termination, the assets transfer from the terminated agent to the principal or new agent should be carried out at a fair value.
The 2022 Law provides further that importing the CA's goods and services during the duration of a dispute between the principal and the agent is contingent on the Ministry’s approval. The principal is liable for compensating the terminated agent for any court-awarded compensation during this interim period.
The 2022 Law outlines controls and provisions on the termination and non-renewal notifications. It provides that the CA party shall notify the other party of the intent to terminate or not renew at least one year before the specified termination date or before the end of half the contract term, whichever is shorter unless otherwise agreed.
The 2022 Law introduces compensation claims after termination. This includes situations where the agent's legitimate activities significantly contributed to the success of the principal’s products, and termination led to the loss of earnings from that success. (Article 11).
Therefore, this nuanced framework ensures a smooth transition post-termination, safeguarding the interests of both principal and agent, while providing clear guidelines for conflict management and resolution with a balanced approach that fosters fair business practices.
C. Commercial Agency Committee (“CAC”)
The 1981 Law established the CAC with broad discretion powers in terms of dispute resolution. Amendments by Law No. 14 of 1988 enhanced this by reinstating the CAC (Article 27) and introducing a 60-day deadline for the CAC to hear disputes. (Article 28).
Law No. 13 of 2006 abolished the CAC, altering the dispute resolution mechanism and directing parties towards direct litigation (abrogation of Articles 27 and 28).
The resurgence of the CAC came with Law No. 2 of 2010, empowering the Cabinet to determine its regulations, powers, and competencies (Articles 27 and 28). These changes reintroduced the 60-day dispute hearing deadline and introduced a 30-day appeal period to the court for challenges to CAC decisions.
The 2022 Law established the CAC differently, given that a decree shall be issued by the Cabinet to determine its formation, procedures, member remuneration, and fees for hearing disputes. This was issued by way of Cabinet Resolution No. 82 of 2023 issued on 18/07/2023.
Whilst the 2022 Law mandates the CA parties to apply to have their disputes resolved by the CAC, prior to any other avenue, it also obliges the CAC to commence the dispute hearing within 22 working days from the date of the application and to issue its determination within 120 days from the same date. The CA parties may challenge the CAC’s decision by appeal before the courts within 60 days. In the event that the 120 days’ lapses without a decision from the CAC, the appeal period commences from such elapse. These rules ensure expeditious resolutions and simultaneously a longer period for the parties to appeal the CAC decision. (Article 24).
As such the 2022 Law, underlines a developed commitment to more efficient dispute resolution, providing CA parties with expedited resolutions by the CAC and shielding them from prolonged disputes, as well as providing the CA parties a longer period of appeal before the courts (60 days).
D. Who Can Be Registered as a CA Agent in the UAE
In the 1981 Law, registration as a CA agent was restricted to:
(i) A Natural Person who is a UAE national; and
(ii) Private Legal Persons wholly owned by natural persons who are UAE nationals.
Then the amendments of law No. 11 of 2020 added three new entities:
(iii) Public entities;
(iv) Private entities wholly owned by Public entities; and
(v) Public Joint Stock Companies established in UAE, in which the percentage of ownership of UAE nationals in the share capital not less than 51%
The 2022 Law preserved the five permitted categories in the 1981 Law but opened the door for new players as a sixth permitted category was added. Under certain conditions, that the Cabinet may, based on a recommendation of the Minister, allow (vi) any international company, even if it is not owned by natural persons who are UAE nationals, to be registered as agents for the products it owns, under the conditions and within the limits it deems appropriate.
This provides a nuanced balance between attracting more global businesses to enter the CA practice in the UAE market, and the government's commitment to a controlled landscape.
E. Position of Existing CAs Registered Before The 2022 Law
The 2022 Law considered a high level of stability and protection for parties of existing CAs already registered before the issuance of the 2022 Law. Parties of those existing CAs are exempted from certain provisions of the 2022 Law based on the duration and investment volume of the CA.
The termination of an existing CA contract, either due to its expiry without mutual agreement of renewal or for convenience by either party as per the CA’s terms & conditions (pursuant to sections (a) and (b) of Article 9.1 of the 2022 Law) is subject to specific conditions restricting such ability to terminate until either:
(i) Two years have passed from the date the 2022 Law becomes effective (15/06/2025); or
(ii) Ten years have elapsed from the same date (15/06/2025) where the CA has been registered for over ten years with the same agent or where the agent's investment surpasses AED 100M. The value of the agent’s investment is to be evaluated per the standards and controls issued by the Minister. (Article 30).
2. Conclusion: The Future of the CAs in the UAE
Forecasting the future trajectory of CA businesses in the UAE requires acknowledging the profound impact of legislative evolution on the nation's economic landscape. The progressive series of amendments, culminating in the enactment of the 2022 Law, underscores the UAE's dedication to cultivating a business-friendly environment.
The 2022 Law signifies a pivotal advancement in reshaping the dynamics of CAs within the UAE. Among its noteworthy innovations:
i. The incorporation of arbitration as a robust alternative dispute resolution mechanism.
ii. Notably, international companies now possess the opportunity to establish agencies for their products, subject to specified conditions.
iii. The legislation introduces defined contract periods for specific areas, contributing to heightened predictability.
iv. Explicit guidelines are now in place for various aspects such as CA termination, non-renewal, and compensation claims.
v. The law also addresses crucial aspects such as asset transfers, importation protocols during conflicts, and valuation procedures.
vi. Rigorous controls have been implemented on termination notifications and reports, reinforcing a commitment to transparency.
vii. Simultaneously, the CAC processes underwent a comprehensive overhaul, featuring stricter timelines.
Ibrahim Salaheldin
Associate
NHB LEGAL