To Register or Not? – Considerations for a Taiwan Business Contemplating Entering into a Commercial Agency Agreement in the UAE

In an era of globalization, many companies are seeking global expansion and entry into new booming markets, including the United Arab Emirates (the “UAE”) market.  Foreign companies desiring to gain a toehold in the UAE market without establishing a permanent physical presence may consider entering into a commercial agency agreement with a UAE agent.[1]  Appointing a UAE agent allows a foreign company (a “foreign-based principal”) to quickly access the UAE market and valuable local resources without too much upfront investment.[2]  However, a foreign-based principal using a UAE agent may face the registration issue and the impact of the applicable UAE commercial agency regime.[3]  For instance, when negotiating with a UAE agent over a contemplated commercial agency agreement, a foreign-based principal likely receives a request from a UAE agent to register the contemplated commercial agency agreement with the UAE Ministry of Economy (the “Ministry”)[4] for the reason an unregistered commercial agency agreement is legally invalid.[5]  Moreover, a UAE agent likely asserts that the UAE law does not permit commercial agency activities carried out by agents without registering the commercial agency agreement with the Ministry first.[6]  Does any of these leave a foreign-based principal with no choice but to register the contemplated commercial agency agreement in the UAE?  What law governs a commercial agency agreement in the UAE?  What are the requisites for the registration of a commercial agency agreement in the UAE?  What consequences follow?  What if a commercial agency agreement in the UAE is not registered? Is an unregistered agreement invalid under the UAE law?
 
This article addresses some issues for a foreign business to consider whether to have its agency agreement registered in the UAE when contemplating entering into a commercial agency agreement with a UAE agent.  Foreign investors wishing to make any distribution or franchising agreements in the UAE may also consider the various legal implications discussed herein if they wish to register their distribution or franchise agreements as per the requirements of the applicable UAE commercial agency laws.  For the purpose of this article, a reference to an agency herein may include distributorship, franchise, or any other representative arrangements.
 
I.  Commercial Agency and Applicable Laws
 
In the UAE, the Federal Law No. 18 of 1981 on the Organization of Commercial Agencies (as amended by the Federal Law No. 14 of 1988, the Federal Law No. 13 of 2006, and the Federal Law No. 2 of 2010) (the “Agency Law”) is the primary piece of legislation to consider in the context of agency agreement.[7]  Under the Agency Law, the meaning of a commercial agency is broadly defined[8] and may cover not only an agency, but also a wide range of distributorship, franchise, dealership, and other forms of representative arrangement.[9] Some commentators noted that UAE law tends to treat the arrangement of commercial agency, distribution, and franchise in the same way without any significant distinction.[10]  Therefore, foreign investors contemplating entering into a distribution or franchising agreement in the UAE shall not lose sight of taking into consideration the potential application of the Agency Law.[11] 
 
The Agency Law only applies to commercial agency agreements which have been registered with the Ministry.[12]  On the other hand, the UAE Commercial Transactions Law, the UAE Civil Code, or other UAE laws generally applicable to commercial agreements will likely govern those unregistered commercial agency agreements.[13]  Under very limited circumstances will a foreign governing law apply to a commercial agency agreement in the UAE.[14] 
 
II.  Registration Criteria
 
When negotiating with a foreign-based principal over a contemplated commercial agency agreement, the UAE agent will likely insist on inserting certain terms in the commercial agency agreement for the reason that only with these terms may the agreement at issue qualifies for registration with the Ministry.  In general, it is the UAE agent, rather than the foreign-based principal, who should be primarily responsible for the registration (and also the deregistration[15]) process of the commercial agency agreement.[16]  However, not all commercial agency agreements in the UAE are qualified for registration with the Ministry.[17]  Under the Agency Law, a commercial agency agreement may be registered with the Ministry only if meeting certain criteria, including, but not limited to, the followings:
 
A.  Agent’s Nationality
 
Under the Agency Law, only UAE national individuals or entities wholly (100%) owned by UAE nationals qualify for carrying out commercial agent activities in the UAE.[18]  It is not likely to register a commercial agency agreement which appoints someone who is neither a UAR national nor an entity wholly owned by UAE nationals to be a foreign-based principal’s agent in the UAE.  Furthermore, only agents who have been registered with the Ministry are permitted to carry out commercial agency activities described under the Agency Law.[19]  In addition, there is no single blanket license for the entire territory of the UAE.[20]  Thus, prior to appointing a UAE agent, a foreign-based principal should check with its UAE agent whether the agent has been licensed to carry out the contemplated business activities in the targeted geographic territory (emirate(s)).[21]
 
B.  Exclusivity
 
The commercial agency agreement shall state an exclusive relationship where a foreign-based principal grants exclusivity to its UAE agent for a specific good (or product)[22] and geographic territory (i.e., in one emirate or several emirates).[23]
 
C.  Notarized Agreement
 
The Agency Law requires that, at the time of registration, a commercial agency agreement between a foreign-based principal and its UAE agent must be in writing and notarized.[24]  A commercial agency agreement signed outside the UAE must have been attested.[25]  Moreover, a commercial agency agreement drafted in any language other than the Arabic language must be translated into Arabic to be notarized in the UAE.[26]  Therefore, a foreign-based principal and its UAE agent desiring to have their agency agreement registered with the Ministry should have their agency agreement translated into Arabic and notarized before applying for registration.[27]  On the other hand, if a foreign-based principal and its UAE agent decide not to have their commercial agency agreement registered, they do not need to translate their agreement into the Arabic language or notarize their agreement as having their agreement translated into Arabic or notarized is not necessary for their agreement to be valid.[28]
 
III.  Legal Implications of Registration under the Agency Law
 
Once a commercial agency agreement between a foreign-based principal and its UAE agent is registered with the Ministry, the Agency Law will apply to the registered agreement and offer substantial protection to the registered UAE agent.[29]  The following highlights a few legal implications worth consideration of a foreign-based principal.[30]
 
A.  Commission
 
The UAE agent is entitled to commissions on any sale of specific goods made within the relevant identified territory under the registered agreement, regardless of whether the sale is made by the UAE agent.[31] A UAE agent making no contribution to a sale directly made by a foreign-based principal may nonetheless collect commissions on that sale as long as it is a sale made in the UAE agent’s area of exclusivity.[32]
 
B.  Appointment of a New Agent
 
Unless the parties rescind or terminate their registered commercial agency agreement, a foreign-based principal will not likely be able to appoint a new agent (for replacement purpose or to add more agents) in the registered agent’s area of exclusivity.[33]
 
C.  Parallel Imports
 
A registered UAE agent has the right to prevent any products in its area of exclusivity from importing in the UAE without its consent and may request the concerned custom authority to detain such imports.[34] A foreign-based principal conducting a parallel import without the registered UAE agent’s consent will likely have to pay commissions earned to its UAE agent as compensation.[35]  Also, a change in the name, design or color of a product covered by a registered agreement does not make such product different from the registered product.[36] Instead, it will likely be viewed as an upgrade and thus be deemed as the same product covered by a registered agreement.[37] Therefore, a parallel import of such upgraded product(s) without the registered UAE agent’s consent will likely be blocked under the Agency Law.[38]
 
D.  Termination
 
As long as a commercial agency agreement is registered, it will be quite difficult for a foreign-based principal to terminate the agency without showing a material reason for termination under the Agency Law.[39]  This remains true even if a foreign-based principal has a contractual right to terminate a commercial agency agreement under the terms therein.[40]  The Agency Law provides no definition of a material reason for termination.[41]  Some commentators point out that, based on past rulings of courts, matters constituting material reasons for termination may include, but not limited to, that the registered agent (1) is no longer licensed to carry out the contemplated agency activities in the UAE; (2) fails to reach the sale targets; (3) intentionally or gross negligently breaches the terms of the registered agreement; (4) deals with competitive goods or products explicitly prohibited by the registered agreement; and (5) damages the reputation, service, or goods or products of the foreign-based principal.[42]  Nonetheless, it is likely very challenging for a foreign-based principal to show a material reason for termination of the registered agency agreement.[43] 
 
E.  Compensation
 
Under the Agency Law, if a foreign-based principal terminates a registered agency agreement causing damages to its UAE agent, it is possible that the foreign-based principal has to pay compensation to its UAE agent.[44]  If a foreign-based principal successfully shows a material reason for termination of the registered agency agreement, there may be a chance for the foreign-based principal not to pay compensation to its UAE agent.[45]  A few commentators noted that, in practice, a dispute involving the termination of a registered commercial agency agreement would likely be considered in view of an assessment of the appropriate compensation for the registered agent upon the termination of the agreement.[46]  The Agency Law does not provide or define the amount of the appropriate compensation.[47]  In the assessment of the appropriate compensation to be awarded to the registered agent upon the termination of the agreement, factors that will be taken into account may include, but not limited to, (1) the registered agent’s performance; (2) the duration of the registered agency relation (i.e., how long has the registered agreement been in place); (3) the registered agent’s efforts and/or expenditures in establishing and/or promoting the business, service, goods or products of its foreign-based principal; and (4) the net profit generated by the registered agent.[48]
 
IV.  Unregistered Agreement
 
The Agency Law does not permit commercial agency activities carried out by agents without registration with the Ministry.[49]  Nevertheless, the Agency Law does not apply to those commercial agency agreements which have not been registered with the Ministry.[50]  A commercial agency agreement without being registered with the Ministry will not be considered and the parties thereto will not be eligible for receiving any protection or taking any legal action under the Agency Law.[51]  In other words, a foreign-based principal and a UAE agent of an unregistered commercial agency agreement in the UAE shall bear in mind that none of their claims related to their unregistered agreement will be heard or considered under the Agency Law.[52]
 
Several commentators note that not registering a commercial agency agreement with the Ministry does not automatically render such agreement invalid.[53]  Unregistered commercial agency agreements will likely be governed by the UAE Commercial Transactions Law, the UAE Civil Code, or other UAE laws generally applicable to commercial agreements.[54]  There are some commercial agency agreements in the UAE that remain valid without being registered with the Ministry.[55]  Some of these unregistered agreements do not meet the registration criteria whereas the others have been placed to remain unregistered.[56]  Furthermore, as noted by a commentator, it is not extremely rare that a UAE agent undertakes the agency activities without being registered.[57] 
 
If a foreign-based principal wishes not to have its commercial agency agreement registered in the UAE, the foreign-based principal may consider the followings when negotiating with a UAE agent over their contemplated commercial agency agreement:
(1) including a statement explicitly expressing that the parties intend not to have the agreement registered with the Ministry in the UAE;[58]
(2) choosing a foreign governing law for the agreement, excluding the application of the Agency Law and other applicable UAE laws, and simultaneously referring to arbitration, rather than a foreign court,[59] as the exclusive dispute resolution method for any dispute arising out of, related to, or in connection with the agreement;[60]
(3) setting a sales target for the UAE agent, and noting that the UAE agent’s failure of reaching that sales target constitutes a material breach of the agreement and also a material reason, granting the foreign-based principal a right to terminate the agreement at the sole discretion of the foreign-based principal.[61]
(4) inserting a clause offering a foreign-based principal a right to terminate the agency agreement without providing any further notice or seeking a court order;[62]
(5) avoiding inclusion of any terms granting exclusivity to the UAE agent for a specific good (or product) or geographic territory;[63]
(6) resisting from using any words referring to “agent,” “distributor,” “franchisee,” “reseller” or any other alike sharing the same meaning;[64] and
(7) refraining from notarizing the agreement or translating the agreement into the Arabic language.[65]
 
VI.  Conclusion
 
In sum, a foreign-based principal contemplating entering into a commercial agency agreement with a UAE agent should bear in mind that the UAE agent will receive substantial protection and gain a relatively strong position under the Agency Law once their commercial agency agreement is registered with the Ministry.[66]  Under a registered agency agreement, it is not likely an easy task for a foreign-based principal, regardless of whether the foreign-based principal has a contractual right to do so, to decline to pay commission to its UAE agent for any transaction made without the agent’s contribution,[67] appoint a replacement agent or a new agent,[68] import goods into the UAE without the agent’s consent,[69] or terminate the agency without cause[70] or paying appropriate compensation.[71]  Given the foregoing, it is no surprise that UAE agents generally consider it preferable to have their commercial agency agreement registered with the Ministry,[72] while foreign-based principals tend to prefer not doing so.[73] 
 
People do not know what they do not know.  Considering the constantly evolving rules and procedures for doing business in the UAE, foreign investors should seek local legal advice and take into consideration the various legal implications before making any commercial agency agreement in the UAE to avoid or significantly reduce, if not eliminated, any legal risk.[74]

This article, including the information contained herein, is offered only for general information purposes.  It is not offered as and does not constitute legal advice, legal opinion, or other professional advice of any kind on any of the topics or subject matters covered herein.  It does not necessarily reflect the opinion of any of our attorneys, counsels, consultants or clients, and is not guaranteed to be correct, complete, or up-to-date.  It is not intended to create and does not constitute an attorney-client relationship with any reader or recipient.  Specific legal advice should be obtained and taken before acting on any of the topics or subject matters covered herein.