Commercial Agency Contracts in the United Arab Emirates

In the United Arab Emirates (hereinafter the “UAE”), an agent is defined as an individual or a company that represents a foreign principal for distributing, selling, or promoting goods or services within the UAE in exchange for a commission or profit.

Agency contracts are governed by Federal Law No. 3/2022 Regulating Commercial Agencies, which has replaced Federal Law No. 18/1981 as amended (hereinafter referred to as the “New Law” and the “Old Law,” together known as the “Commercial Agency Law”) in cases involving commercial agency agreements that are subject to registration with the Agency Department of the Ministry of Economy.

Existing registered contracts made under the Old Law will continue to be governed by that law unless specific provisions of the New Law apply, which will do so under certain terms and conditions.

Importantly, under the Old Law, the principal is not entitled to terminate or refuse renewal of a contract unless there is an agreement with the agent or there are fundamental reasons justifying such actions, which must be proven by the principal. Additionally, the party harmed by the termination or non-renewal is entitled to compensation.

However, due to the lack of specific guidance in the law, terms such as “fundamental reasons” and the criteria for awarding and calculating compensation have been clarified over time by the competent authorities in dispute cases.

The New Law introduces provisions stating that, for example, the contract will be considered expired upon the expiry of the term unless renewed by mutual agreement or can be terminated by either party according to the terms laid out in the agreement.

Moreover, the New Law clarifies that (i) the agent may seek compensation for damages resulting from termination or non-renewal unless the parties agreed otherwise, and (ii) if the principal terminates the contract in accordance with its terms, the agent may claim and is entitled to compensation if certain conditions are met.

The New Law specifies that these new provisions concerning termination and compensation will only apply to existing contracts if certain terms and conditions are satisfied.

Additional provisions related to these matters are also found in Federal Decree Law No. 50/2022, Issuing the Commercial Transactions Law (the “Commercial Code”), and Federal Law No. 5/1985, on the Civil Transactions Law, as amended (the “Civil Code”), which may apply in cases of non-registered contracts.

In cases of non-registered contracts, foreign law may also be applicable.

It is noteworthy that agents have agreed to act as agents or distributors for foreign investors when the related contracts are registered, in order to benefit from the protections provided by the Old Law. Registration may also be required for contracts involving certain sectors, such as oil & gas.

It depends on whether the contract is subject to registration—and therefore to the Old Law and the New Law—or not. If it is registered under the Old Law, agents must be UAE nationals or, in the case of companies, fully owned by UAE nationals. Additionally, they must be registered with the Ministry of Economy’s Commercial Agency Register. The New Law allows foreign companies the possibility to operate without appointing an agent or distributor, provided certain terms and conditions are met, such as the foreign company not already having an appointed registered agent or distributor in the territory. However, it remains to be seen how this new provision will be implemented in practice.

Also, contracts subject to registration shall be in writing, duly legalized and attested as well as translated into Arabic.

In the case of a registered contract, the agent is appointed on an exclusive basis. However, it is possible to appoint the agent, for example, for a single Emirate instead of for the entire territory of the UAE.

In the case of a non-registered contract, the matter can be determined by the parties (usually, agents request appointment on an exclusivity basis, at least for part of the territory).

In the case of a registered contract, both the Old Law and the New Law state that the agent is entitled to a commission on sales made by the principal, whether directly or through other parties in the designated territory, even if such sales occur without the agent’s involvement.

Under the Commercial Agency Law, the agent is appointed on an exclusive basis. However, the laws do not provide guidelines regarding non-competition. Therefore, the parties can include provisions related to this in their contracts, and it is common for the principal to include non-competition clauses for the agent.

It should be noted that the UAE Federal Competition Law prohibits ‘restrictive agreements,’ such as those that limit the flow of commodities and services to the market or flood the market with such items. Additionally, agreements that divide markets, assign clients based on geographical areas, or hinder new businesses from entering the market are banned.

However, the Competition Law explicitly states that this issue is subject to the provisions of Federal Law No. 18 of 1981 (as amended). Therefore, registered agency agreements are outside the scope of the prohibition on restrictive agreements.

In the case of a registered contract, the Old Law states that the principal is not entitled to terminate or refuse the renewal of a contract unless there is an agreement with the agent or fundamental reasons justify such termination or refusal. Additionally, the agent suffering damages due to the termination or non-renewal is entitled to compensation. However, in the absence of specific indications by the law regarding this matter, the criteria for “fundamental reasons” as well as the elements and conditions for granting and calculating compensation have been provided from time to time by the relevant authority in case of disputes. For example, it has been considered a “fundamental reason” justifying contract termination if there is a breach of minimum sales targets, and the criteria for determining compensation include the duration of the relationship and the success achieved by the agent due to their activity in the territory.

The New Law has instead inserted provisions according to which, for example, the contract shall be considered expired upon the expiry of the term (unless renewed by the agreement between the parties) and can be terminated by the decision of each of the parties according to the terms and conditions set forth in the contract.

Therefore, a provision allowing the right to terminate for convenience can now be added for the principal. However, it cannot be excluded that the agent may claim—and thus be entitled to—compensation. See below for more details.

In the case of non-registered contracts, the Commercial Code provides each party the right to terminate the contract at any time. It is also specified that no compensation shall be due unless the termination occurs without prior notice or at an unreasonable time. Additionally, when the agreement is for a fixed term, it may only be terminated for a serious and justifiable reason; otherwise, compensation will be owed.

As stated above, in the case of a registered contract, the Old Law specifies that the principal is not entitled to terminate or refuse renewal of a contract unless there is an agreement with the agent or there are fundamental reasons justifying such action. Under the New Law, contracts can be terminated by either party according to the terms and conditions set forth in the contract.

Therefore, it is advisable to include provisions in the contract that allow the principal to terminate in the event of certain breaches by the agent and to specify which events are considered material breaches.

However, it should be noted that, particularly in the case of a registered contract, the agent may claim—and be recognized as entitled to—compensation for reasons such as investments made or the increase in business generated by the principal thanks to the agent's activities.

Under the New Law, the parties can explicitly provide for the termination of the contract at the end of its term with no right to compensation for the agent in such cases. In the case of unlimited contracts, there is a risk that the agent may be entitled to compensation.

For non-registered contracts, see the point above.

Non-registered contracts can also be governed by foreign law, and therefore, no compensation might be owed to the agent. However, it should be noted that (i) agents have been awarded compensation by local courts even in cases of non-registered contracts, (ii) the foreign law must comply with Shari’a and the public policy or morals of the UAE, (iii) in some cases, foreign jurisdiction clauses have been disregarded by UAE courts, (iv) foreign judgments or awards are enforceable in the UAE only if they do not conflict with matters considered as public policy in the UAE and, in any case, following the mandatory procedures for enforcement.

The New Law states that agents shall return the products in their possession, unless the parties agree otherwise.

In the case of registered contracts, under the Old Law, parties refer disputes to the Commercial Agency Committee, and thereafter, if necessary, to the local courts. It was specified that the local courts shall have jurisdiction to adjudicate any dispute arising from the execution of contracts, and any agreement to the contrary is null. In particular, it is not allowed to include an arbitration clause in such agreements. The New Law allows the parties to agree to resolve disputes through arbitration (and in the UAE unless they agree otherwise). In this regard, it should be noted that the requirement to submit the dispute to the Commercial Agencies Committee before resorting to courts also appears to apply when the parties have agreed on arbitration as the dispute resolution method. Additionally, the option to specify arbitration as the resolution mechanism is recent, and it will be necessary to verify how arbitration clauses are applied, especially in cases where awards are issued abroad. Regarding non-registered contracts, the parties may provide for the application of foreign law and for the competence of foreign courts or arbitration as methods of dispute resolution.

However, it should be noted that (i) foreign law must comply with Shari’a and the public policy or morals of the UAE, (ii) foreign jurisdiction clauses have been disregarded by UAE courts, and (iii) foreign judgments or awards are enforceable in the UAE only if they are not related to matters considered as public policy in the UAE, and in any case, following the mandatory procedures (for example, for the recognition and execution of foreign judgments, it is checked whether bilateral treaties for the enforcement of judgments exist between the UAE and the country where the judgment was made, and UAE courts must not have jurisdiction over the substantive dispute related to the foreign judgment).

Based on the above, a general consideration is that, in evaluating whether to apply foreign law and accept the competence of foreign courts instead of applying UAE laws and courts, factors such as the entitlements provided by the foreign law to an agent upon contract termination or the location of the agent's assets can be taken into account.