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Like the rest of the world, Africa is still re-building from the impact of COVID-19, however, there continues to be an optimistic view of the opportunities the continent presents. An example of the appetite for investment into Africa was captured in a report we commissioned, titled Legal Leaders in MENA. Our survey of legal leaders revealed a resounding desire to expand into new territories, with 81% naming Africa as their investment destination of choice.Read the full edition
The UAE Government, recognizing and believing that the development and modernization of legal systems in keeping pace with social change and development will position the UAE at the forefront of nations seeking to develop and modernize and proceeding from this spirit of social progress, has proposed a new draft law aimed at developing a new and advanced legislative framework for regulating commercial agencies that will replace Commercial Agencies Law No. 18 of 1981.
To ensure effective public participation when the new draft law is circulated for public comment with a view to proposing the best legislative solutions according to the law’s purpose and objectives, I present below a brief analytical overview of the provisions of the draft law, based on my legal experience, with the hope of contributing to the development and modernization goals envisioned by the UAE Government.
The current law regulating commercial agencies was enacted in 1981 when economic conditions were fundamentally different from the economic conditions which currently prevail in the UAE. Hence the need arose for a new law that is well attuned to economic and global trade developments and the conducive investment climate of the UAE. As a result, the new draft law includes new articles that are clearly worded to convey the substance and purpose of the law’s enactment on the back of the economic changes and global trade growth witnessed in the UAE and the need to harness sustainable streams of large scale investment.
The key features of the new draft law are as follows:
1. The draft law still reserves the practice of commercial agency activities for UAE nationals, although the Cabinet has been granted authority, based on a recommendation from the Minister, to allow international companies, including those not owned by UAE nationals, to engage in commercial agency activities related to their products without the need for a commercial agent in the UAE.
2. The registration requirement for commercial agencies under the current law of 1981 has been retained. The draft law provides that a commercial agency shall not be recognized unless it is registered in the UAE Ministry of Economy and Commerce’s Commercial Agencies Register while agents and principals have been allowed to negotiate their own contractual arrangements with respect to commercial agencies outside the ambit of the law.
3. The draft law confirms that only UAE nationals can act as commercial agents, which is similar to the position under the old law, but gives the right for public joint-stock companies and public legal entities with at least 51% national capital contribution to register commercial agencies.
4. The new draft law contains clear legal provisions that promote balance and fairness between the rights and obligations of both parties to the commercial agency contract. Accordingly, the draft law provides that the commercial agency contract is a contract that operates for the mutual, rather than unilateral, benefit of its parties i.e. both the foreign principal and the UAE national commercial agent. With a new law designed to promote bilateral, rather than unilateral, interests, the criticism of the current law of 1981 as biased in favour of UAE national commercial agents over foreign principals will be put to rest.
5. The draft law further stipulates that the principal shall have the right to appoint one agent for the entire UAE or for a particular Emirate but that the agent’s right to sell shall be limited to the agency’s territory i.e. the particular Emirate in question, where multiple agents are involved, with no rights of distribution elsewhere. The law reaffirms the agent’s right, as brand representative under the old law, to have internal distributors within the UAE.
6. The draft law includes an explicit provision granting agents the right to claim commission on all transactions that take place in connection with the distribution of agency products within the territory, even on transactions not concluded by the agent, such that for every transaction which the principal completes in the agency’s territory, the agent would be entitled to commission. This old but critical provision safeguards the rights of registered commercial agents and is hence reinforced by the new law.
7. Another key feature of the new draft law which resolves a critical issue that was and remains a point of contention between the agent and the principal relates to the termination of the agency. The issue is addressed in Article 8 which confirms that a commercial agency is terminated by mutual agreement of the parties or on the expiry of its term.
The issue of when a commercial agency should be regarded as terminated has been widely contested before the courts and the Ministry of Economy. The UAE has faced international criticism on account of commercial agencies that could not be cancelled even after the expiry of the contract term. Hence the dire need for a legal solution that settles the question through a clear article, in the new draft law, stating that absent an explicit agreement between the parties to terminate the agency or a court order to terminate, the agency contract terminates on the expiry of the contractually agreed term. In other words, the agency contract may be terminated after the end of its agreed term.
Whilst the provisions of the above article are both realistic and reasonable, they could, in some respects, entail practical difficulties, where, for example, the agent is to be paid compensation for the cancellation of his agency, especially if spare parts are involved and assets are to be transferred to a new agent. These difficulties relate to the calculation of the value of spare parts and materials and the assessment of the compensation payable to the agent whose agency has terminated or has been cancelled for the agency’s stock of products, spare parts etc., as provided for in the draft law.
The new draft law further provides, under said article, for the option of re-registering the agency in the name of a new agent while the agent-principal dispute in relation to the commercial agency is in pending status. However, the new agent and the principal would be jointly liable to pay compensation to the old agent for the agency spare parts and products.
This speaks to the importance of providing an option under the new draft law, not available under the current law of 1981, for an agency to be re-registered to a new agent, notwithstanding any pending dispute, once the current agent’s registration has been cancelled, while the agent-principal dispute continues to be heard.
The issue has been the subject of much confusion and controversy before the courts and the Ministry and may even create difficulties down the road, even with the relevant provision in place. Significantly, an agent with a registered agency will not agree to deregistration before his entitlements or claims, if any, are settled. However, it appears that the draft law grants the principal the right to cancel registration and appoint another agent while reserving the agent’s rights by stipulating joint liability between the new agent and the principal for any claims of the deregistered agent. This provision, of course, does not offer a definitive solution to any dispute that may arise over the principal’s right to cancel the agency. In other words, where a dispute involves not only financial compensation but also a question as to the validity of the deregistration itself, the matter, while expected, in due course, to be decided according to judicial principles, will undoubtedly lead to major issues between the agent and the principal down the line, where some commercial agencies are concerned, especially if the agency contract is for an unlimited period or the reason for cancellation is disputed.
Notably, the concept of joint liability between the new agent and the principal in paying compensation to the old agent exists in the Commercial Transactions Law, under its general provisions on commercial agencies, although liability is subject to proof of complicity between the new agent with the principal in appropriating the agency rights of the old agent. The above provision, however, does not link the liability of the new agent to any collusion, and, as noted, the conditions and application of this article will become settled in the practice of the Court of Cassation as it comes to define the basis of liability of the new agent.
8. The draft law includes express provisions supporting the new provision on the option of cancelling an agency at the end of the contract term. Article 9 of the draft law states that the agent has the right to claim compensation, where appropriate. Specifically, an agent that has promoted the agency, developed its business, and built the brand in the UAE may claim compensation from the principal for termination of the agency, even if termination is due to expiry of the agency term.
From a contractual point of view then, if a commercial agency between a principal and an agent has terminated and the agent had expended significant effort in promoting the product in the UAE, the law grants the agent the right, notwithstanding that the contract may have terminated, to claim compensation for the damages the agent has sustained as a result of the termination and the effort he expended in promoting the agency, unless the parties agree otherwise. As such, the article in question grants the parties the right to exclude agent compensation by express agreement in writing.
This new provision in the draft law has no counterpart in the current law of 1981, noting that the UAE Courts took this approach in most of the contested cases involving the termination of commercial agency agreements. It appears that, in the interests of settling those issues, such provision has now been included to give the agent the right, notwithstanding an explicit agreement that the agency contract would terminate at the expiry of its term, to claim compensation if he has contributed to promoting the product in the UAE. The law is silent on the rate and amount of such compensation, which, as it appears, will be a matter of subjective assessment against the circumstances surrounding the relationship, the product, and the extent of the agent’s contribution to promoting the agency, to be made by the courts in accordance with the relevant laws, on a subjective, case-by-case basis. This will undoubtedly be a major point of discussion between the principal and agent at both the pre and post agency agreement stages, given its critical impact in terms of the effects of agency cancellation, including a cancellation due to expiry of the agreed term of contract.
9. The draft law grants the principal the right to request that the agency be struck-off if it has terminated or any of the agreed conditions for strike-off are met. The law further grants the Ministry the right to strike off the agency of its own accord if any of the applicable statutory conditions are met or are no longer met. Notably, the new law repeals the provision under the old law making the exercise of this right of the Ministry conditional on summoning the parties to the agency to give their opinion on the cause of strike-off. The old provision led to many administrative cases in which the courts cancelled decisions of the Ministry for contravening this requirement. It thus appears that the intention of the drafters was to avoid such situations by repealing the requirement in order to shield the Ministry’s decision from cancellation. This is a commendable development that will lead to consistency and stability in the Ministry’s administrative decisions, considering that the summoning of parties is a purely formal matter.
10. The draft law includes various articles on the right of agents to prevent the agency products from being imported into the UAE and the right of agents to request the Customs Department for restrictions on imports of their goods into the UAE in order to protect their agency rights. The law also provides for the Ministry’s right to seize and store these goods until the dispute is settled. This is an old, renewed provision which has apparently been retained to protect original products, taking into account the interests of commercial agents as far as ensuring that their products will be protected through swift and effective administrative decisions.
11. The draft law provides that the Cabinet may waive the requirement of registration under the Commercial Agencies Law for certain goods as to make them unregisterable thereunder. This is indeed a laudable provision. The measure, while it exists in principle under the current law, is not codified within, and is inoperative unless the Cabinet first takes a decision to ban monopolies over certain products or reduce the cost of basic consumer foodstuffs for which, by law, registration cannot be procured or renewed according to the previous procedures in force. However, as mentioned in the draft law, the Cabinet will issue a list of these goods which will be updated from time to time. The law will also allow the Ministry to de-register any currently registered agency to which the waiver applies under a Cabinet decision, as and when it enters into force.
12. On the formation of the Commercial Agencies Committee, the draft law again provides that the Committee shall be formed by a decision from the Cabinet and shall be competent to look into any dispute that arises between parties by reason of a registered commercial agency, which must be referred to the Commercial Agencies Committee before being referred to court. The Committee will then consider the dispute within 30 days and issue a decision within 120 days. Any party adversely affected by the Committee’s decision may appeal it within 60 days before the courts, bearing in mind that the law has conferred jurisdiction over commercial agency disputes to the state courts. Failure to appeal within 60 days will render the Committee’s decision enforceable and final.
13. The draft law includes a provision repealing Law No. 18 of 1981 on Commercial Agencies and replacing it with the new law. The draft law further provides that internal regulations and ministerial decisions shall be enforceable to the extent that they do not conflict with the new law.
14. Importantly, the draft law includes a key provision that recognizes and upholds parties’ agreements to refer their disputes to arbitration.
It should be noted that, under the current law of 1981, arbitration clauses were not being upheld in the context of agency agreement disputes. The exclusive jurisdiction of the courts in commercial agency disputes is a strict interpretation of Article 6 of the law which states that disputes arising out of commercial agency agreements shall be heard by UAE Courts and that any agreement to the contrary is not valid. The new draft law, on the other hand, supports autonomy and, as such, upholds the right of parties to include, in their commercial agency agreement, an arbitration clause covering any dispute that may arise over its terms and provisions following the issuance of the Commercial Agencies Committee’s decision. Upon proceeding to arbitration, the arbitral award, rather than the Commercial Agencies Committee’s decision, becomes the final decision for the parties, as to their dispute, once the Commercial Agencies Committee’s decision has been appealed within 60 days. Notably, the new provision omits the words “and any agreement to the contrary is not valid” from the text addressing the UAE Courts’ jurisdiction to consider any dispute related to a commercial agency, thereby granting the parties the right to agree to bring their dispute before a forum (arbitration) other than the UAE Courts. Having retained that text in the context of the applicability of the Commercial Agencies Law to disputes involving commercial agencies, the new law allows parties to agree on arbitration, but with a single choice of law option for arbitration of the Commercial Agencies Law. This approach is in line with the Court of Cassation’s holdings that the provisions of the Commercial Agencies Law are public policy such that no agreement may be made to apply any other law to any dispute related to a commercial agency. The issue has thus been settled through a new express provision in the law itself.
15. To protect existing commercial agencies and promote a stable rule of law in the UAE while allowing agents to regularize their status with respect to commercial agencies as per the new provisions of the draft law, the law makes relevant provision in deferring the entry into application of its provisions, notably those of certain articles, including the article addressing the timely termination of commercial agency contracts, to two years from the effective date of the law. Through this provision, agents and principals whose contracts have expired or are about to expire and need to be renewed are urged to regularize their status by renewing their contracts and reorganizing their rights and contractual relations within the two year grace period.
16. The draft law provides that pending disputes over commercial agency contracts before the Commercial Agencies Committee or the courts render arbitration clauses within such contracts inoperative.
The law will, if adopted in its proposed form, have a significant impact on commercial agency relationships between principals and agents, especially those relationships in respect of which disputes have arisen between the parties but have not yet been resolved through the courts under the new law. The status of such relationships will have to be regularized, to avoid falling foul of the law. As to new, unregistered agencies that will have to be registered in due course, the law will apply immediately. Notably, the draft law does not strictly mandate the registration of commercial agencies or stipulate that a commercial agency must be registered. However, to benefit from the law’s provisions, agencies must be registered in accordance therewith.
The draft law has in fact introduced robust legal provisions and new concepts in response to the UAE’s rapidly evolving economic environment and the global economic changes induced by the growth of intrastate commerce, the transition towards multi-distributor arrangements, and policies that encourage and attract inward investment.
It is however important to revise the wording of some of the provisions of the draft law and recirculate it for public comment, discussion and consideration. While some articles can be amended, others would need to be replaced, in order to reflect the economic developments in the UAE, for example:
1. I do not believe it is important or necessary that jurisdiction over commercial agency disputes be vested in the Commercial Agencies Committee.
As noted from previous experience with deliberations of the Commercial Agencies Committee, their efforts have not brought any fresh perspective to principal-agent disputes. Most of the Committee’s decisions end up being challenged before the courts. Additionally, a considerable delay in the decision-making process and even in issuing and signing decisions, has been observed in recent years, which gives all the more relevance to the fact that jurisdiction, under the draft law, shall be to the courts or an arbitral tribunal and an administrative ministerial committee will be put in place to settle disputes. More importantly, principal-agent disputes should be removed from the realm of the Ministry and government authorities.
2. Naturally, the law was drafted to ensure compensation to the Agent in the event of cancellation of his agency, whether the cancellation is by agreement or due to termination of the agency contract.
The draft law aims to strike a balance between the interests of both the agent and the principal and provides for the agent’s entitlement to compensation for his considerable investments, especially in the case of mega-agencies with long standing relationships with their principals. Granting the agent compensation as of right for the cancellation or termination of the agency contract is untenable, however. The provision appears, at first sight, to guarantee the agent a right to compensation upon cancellation or termination of the commercial agency contract, even if it is for a definite period. A practical problem involving application is bound to arise as many principals will be reluctant to award commercial agencies and appoint agents if they anticipate that this could entail significant compensation upon the cancellation or termination of the agency. Indeed, the measure of compensation and the damages that will result from such appointments cannot be determined or capped.
3. A provision stating that a commercial agency contract terminates upon the expiry of its term was previously tested in 2006 and led to practical problems, especially with long standing family agencies with which certain products became associated as part of the family legacy of prominent family-owned businesses that have over generations, since the seventies and eighties of the previous century, persevered in building a secure and stable brand and establishing brand loyalty. Thus, a provision stating that the contracts of such agencies would automatically terminate upon the expiry of the contract term may cause unavoidable practical issues and imbalance in the business of large and influential Emirati families within the UAE business community. A different wording should be introduced to guarantee their rights and balance the legislated interests of principals in terminating their agencies, without undermining the rights of agents. Surely, a stipulation that the law will come into force two years after its publication cannot be considered sufficient to protect the interests of agents in such businesses. The solution may be to extend the effective date of the law to, say, seven or ten years to allow legacy agencies to regularize their status.
4. I am of the view that UAE national ownership should be reduced to 51% for companies owned by UAE nationals, where commercial agencies are involved, thereby opening the door for commercial agencies to be registered as companies with a 51%-49% equity ratio between UAE and foreign partners respectively. This will encourage investment in mixed projects between UAE nationals and residents and help attract foreign capital while creating incentive against the establishment of agencies exclusive to foreign investors without UAE national participation. In this way, foreign investors, whether individuals or businesses, will have incentives, going forward, to appoint UAE national companies as their agent or partner rather than not appoint agents altogether. However, any provision to this effect must stipulate an actual 51%-49% partnership that does not allow for any sham or sponsorship arrangements.
5. The draft law will bring about long-awaited reform and finally address the practical issues that have been at the centre of criticism directed at the current law, including its non-recognition of party agreements and their provisions which runs contrary to the principle of autonomy of will. The draft law underscores the importance of the pacta sunt servanda principle, a key development for the functioning of contractual relations, including registered agencies, and even more so for the recognition of contracts as law.
6. The final point for consideration and review is the importance of registration of commercial agencies. Since registration, at the Ministry, does not give the principal and agent additional rights and benefits, principals may opt, variously, for or against registration with their agents. Either way, the only key difference appears to be in the following:
– With a registered agency, the agent or principal may prevent the entry of goods into the country if he so requests from the Ministry or the Customs Department.
– The agent’s commitment to provide spare parts for the product.
– If the agency is cancelled or terminates, the agent may be awarded compensation for the expenses incurred in developing the agency or promoting the product.
7. The draft law includes a clear, express, and key provision whereby goods may be imported into the UAE or a new agent appointed with a dispute pending between the principal and the agent, although new agent and the principal would be jointly liable to pay compensation to the previous agent if awarded a judgment for compensation. This represents a significant legal development given the impact on the country, its economy, and various key products that used to face import bans while disputes ran their course. Under this new article, the Ministry can now permit goods to enter and another agent to be appointed, with the previous agent being entitled to claim compensation.
The draft law is presently under discussion and review by the Federal National Council and will be submitted, as a matter of course, to the Ministry of Justice for review. The Federal National Council’s comments will be considered in preparing a final draft to reflect the amendments and changes being made to the current Commercial Agencies Law. There are, of course, differences of opinion over this law as well as conflicts of interest between agents, principals, and various consumers and the proposed amendments are currently the subject of considerable discussion and intense debate.