Foreign principals who wish to conduct business in the UAE or in the wider Middle East, but want to do so with a minimal investment, often turn to commercial agents to sell their goods. The main piece of legislation that governs agency arrangements in the UAE is Federal Law No. 18 of 1981, what is commonly referred to as the “Agency Law”. The Agency law is extremely wide and captures all forms of agreements for sale through third parties. The Agency Law however tends to favor agents rather than foreign principals. Therefore, in the context of foreign principals looking to expand into the UAE market, obtaining legal advice before making any commitments regarding an arrangement with a prospective agent is of paramount importance. There are important considerations that foreign principals should bear in mind before entering into or terminating agency agreements. These include:
- Nationality. Only UAE national individuals or companies wholly-owned by UAE nationals can act as commercial agents in the UAE. This is a mandatory provision of the UAE Agency Law.
- Exclusivity. A commercial agency must be granted for a specified exclusive territory within the UAE, namely one of the seven Emirates. Exclusivity can also apply to multiple Emirates or the whole of the UAE.
- Registration. A commercial agent must be registered in the Commercial Agencies Register maintained by the Ministry of Economy in the relevant Emirate. If the agency agreement is registered, the agent is provided with protections and privileges, such as the ability to block parallel imports and to claim damages on behalf of the principal.
- Termination. Once agency is granted and registered with the Ministry of Economy, the termination of an agency relationship by a principal can be extremely difficult to effect and in most cases such terminations result in significant compensation awards in favor of the local agent.
- Compensation. Agents are entitled to statutory compensation on termination of their agency agreements. Compensation can be substantial and is in addition to any existing contractual rights. However, the exact calculation of a compensation payment is not set out in the Agency Law and several factors, such as duration of the agency, efforts of the agent in promoting the goods and net profit generated by the agent are taken into consideration in establishing compensation awards.
For the right type of business, the appointment of an agent remains an attractive way of entering in the UAE. However, it is extremely important to conduct thorough due diligence on prospective commercial agents and to draft agreements carefully to ensure compliance with the provisions of the Agency Law.