The United Arab Emirates (“UAE“) continue to be an important sales market for German enterprises. Just as well, the Emirates' excellent infrastructure serves as a major logistic hub for re-exportation of German products bound for the Middle East, Asia and Africa. The applicable legal parameters in the UAE offer several methods of handling both sales through local marketplaces and transactions spanning the circumjacent regions. The available procedural and legal design options include direct export, the incorporation of a local company and the appointment of a local commercial agent tasked with handling the distribution of foreign products.
Hence, this article will give a brief overview of the specifics of the Emirates' legal framework on matters of cooperation with local commercial agents and distributors.
The legal basics regarding the most relevant aspects of cooperation with a local commercial agent or distributor can be derived from the Emirates' Law Concerning Organizing Trade Agency (“Commercial Agency Law”). The law covers both commercial agents – in the sense as defined by German commercial law – as well as independent authorized dealers, franchisees and licensees (altogether hereinafter referred to as “commercial agents“).
The provisions of the Commercial Agency Law will only be applicable if the contract concluded by the respective principal and commercial agent is registered with the Emirates' Ministry of Economy. The Commercial Agency Law determines this registration to be mandatory for all commercial agency contracts and hence for all of the activities described above. However, in practice the operation of distribution under non-registered contracts is tolerated by the local authorities. Still, registration may be necessary in order to participate in public invitations to tender or in order to enter into cooperation with publicly held companies.
Registered commercial agency is exclusively reserved to citizens of the UAE and legal persons that are held exclusively by nationals of the UAE. The successful registration will result in the full and binding applicability of the Commercial Agency Law, including its substantial protective rights for commercial agents. Individual contractual arrangements deviating from the provisions of the Commercial Agency Law to the disadvantage of the respective agent will hence be void.
Furthermore, the following paragraphs will outline the legal implications of a successful registration:
Registration will provide the respective commercial agent with an exclusive merchandise and distribution right with regard to the products covered by the registered contract and the distribution area stipulated within the registered contract. Ensuing from this exclusivity, the commercial agent may obstruct such parallel imports of products that are conducted without consent of the agent and file for confiscation of such imported products with the customs authority. Furthermore, the agent will keep a claim for remuneration against the principal throughout the entire term of the commercial agency contract. This even applies for all shipments of products covered by the contract that take place without any intermediating activity of the agent, for example on behalf of third parties or even when initiated by the principal himself.
Registered contracts may only be terminated under strict conditions. Even a legitimate termination or the completion of a predetermined agency term will not result in the automatic ending of the commercial agency. A termination or completion will merely become effective by deletion of the contract from the register at the Ministry of Economy. However, the Ministry requires a court order or the relevant agent's consent in order to carry out the deletion. Any principal will be unable to file for registration of another agent with the Ministry or import products into the UAE by different means as long as the deletion of the former contract is still pending. On the other hand, the agent may still make use of his right to obstruct parallel imports, as described above, until the deletion and termination has been effected. Hence, in most cases the termination and deletion of commercial agency contracts involves payment of a substantial compensation to the agent in practice.
By contrast, the Commercial Agency Law is inapplicable to non-registered commercial agency contracts. This typically proves to be disadvantageous for the respective agent because the agent will then be entirely unable to invoke any protective rights under the Commercial Agency Law. For the most part, the legal status and handling of non-registered contracts is controversial. According to the provisions of the Commercial Agency Law such non-registered contracts are void. However, this does not necessarily mean that all agents under non-registered are rendered unprotected by the law. Instead, the latest case law in the UAE indicates that common civil law and commercial law may be called upon and applied in order to evaluate non-registered contracts from a legal perspective. Still, UAE courts seem to be in default with establishing a sustainable and constant judicature regarding the question of the legal efficacy of non-registered contracts. Parties to such non-registered contracts may be advised to take this legal uncertainty into account, especially since the enforcement of claims by lawsuit and litigation tends to be time- and cost-intensive of nature. For example, parties may agree on advance payment or securing of claims for payment by a confirmed and irrevocable letter of credit.
The appointment of a commercial agent, taking care of merchandising and distribution of products on site, becomes increasingly attractive for entrepreneurs who are seeking for a solution to distribute goods in the UAE more than just occasionally. Keeping in mind the local laws and the especially protected legal position of commercial agents derived therefrom, great care and poise is required when drafting a commercial agency contract. Here it may, for example, be advisable to limit the exclusivity of the contract to a predetermined and clearly defined set of products. This list may then be supplemented by further classes of products, provided that the respective agent has proven to be reliable. Additionally, it is possible to limit the distribution area under the contract e.g. to one Emirate.
Furthermore it is highly advisable to include detailed descriptions of possible causes for termination of the contract as well as a specified formula governing the calculation of any compensation claims resulting from a potential termination of the contract.
Mr. Philip Engels is a senior legal consultant with over 10 years’ experience. He has over his career practiced corporate law in-house and at international law firms in five different countries: United Arab Emirates, Germany, China, USA and Spain. Philip is fluent in English, German and Spanish.