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Commercial Agency Disputes Under the New Law – Insider Information

  • Introduction

On June 30, 2023, the United Arab Emirates (UAE) published the new Agency Law (“Law“), which introduced a substantive amendment to the previous law established in 1981. While numerous legal practitioners have commented on the Law since its implementation, there remains a lack of firsthand experiential insights into critical aspects such as: (i) the implications of a principal’s termination of an agency agreement based on the conditions, (ii) the legal entitlements/protection of agents following termination, particularly those engaged in agreements exceeding a decade with their principals, and (iii) strategies for principals to sustain distribution channels without interruption in the event of agents invoking their rights under the Law, particularly concerning the cessation of parallel importation.

This article aims to offer a comprehensive understanding of the termination procedures of agency agreements under the provisions of the new Law, outlining the process, associated risks, and the rights/protection afforded to agents, with a specific focus on those whose agency relationships span over ten years.

  • Termination of Agency Agreement

Although the Law has streamlined the process for terminating agency agreements, it establishes a distinct framework for terminating agreements lasting over 10 years compared to those lasting less than 10 years. Article 30 of the Law outlines this distinction:

  1. The provisions of expiration of the Commercial Agency stipulated in Clauses (a) and (b) of Article (9/1) of this Law shall not apply to Commercial Agency contracts in force at the time of its issuance, except after the lapse of two years from the date of its entry into force.
  2. As an exception to the previous clause, the provisions for expiration of the Commercial Agency stipulated in Clauses (a) and (b) of Article (9/1) of this Law shall not apply to Commercial Agency contracts in force at the time of its issuance except after the lapse of ten years from the date of its entry into force, in the event of Commercial Agencies that have been registered for the same Agent for more than ten years or Commercial Agencies in which the volume of the Agent’s investment exceeds one hundred million (100,000,000) dirhams. The volume of the Agent’s investments shall be evaluated according to the standards and controls to be issued by the Minister.

The above article outlines exceptions to the expiration provisions of commercial agency contracts in the UAE. Initially, for contracts already in force at the Law’s enactment, expiration rules won’t apply until two years have passed from the Law’s implementation. However, there’s a specific exception to this rule: for contracts existing at the Law’s enactment, expiration provisions won’t apply until ten years have elapsed from the Law’s implementation if (i) the commercial agency has been registered for over ten years with the same agent; or (ii) the agent’s investment exceeds one hundred million dirhams. The assessment of the agent’s investment follows guidelines set forth by the Minister. These exceptions offer a transition period for existing contracts and provide additional protection for longstanding agency relationships or substantial investments.

Additionally, article – of the Law acknowledges the agent’s entitlement to seek damages if the principal’s termination, as per the agreement terms, results in harm to the agent. Should the agent demonstrate that their efforts have (i) enhanced the principal’s brand recognition, (ii) boosted sales and distribution figures over the agency period, and (iii) amplified revenues and reputation within the designated distribution area, they reserve the right to claim compensation for loss of future profits. This compensation follows the guidelines outlined in the UAE civil code. This provision underscores the Law’s commitment to fair treatment of agents and recognizes their significant contributions to the success of the principal’s business.

  • Agent Reaction to Termination

In cases where termination of the agency agreement isn’t mutually agreed upon beforehand, the Law safeguards the rights of the agent, granting them certain privileges.

  1. Stop Parallel importation of All Goods Subject to the Agency Agreement

Upon termination, agents with registered agreements and valid certificates from the Ministry of Economy (MOE) can initiate an online request through the MOE portal  (https://www.moec.gov.ae/en/services) to direct customs authorities in relevant emirates (through independent letters) to halt any shipments of agency products imported by entities other than the designated agent listed on the MOE certificate.

Following the issuance of MOE letter to the customs, the agent normally should submit another complaint to customs through an online process to (https://www.dubaitrade.ae/en/submit-trade-intellectual-property-enquiry ) including pertinent documents such as:

  • the agent agency certificate registered at the MOE;
  • copy of the agent trade license;
  • copy of the opponent’s trade license;
  • copy of the MOE letter to customs; and
  • a written complaint outlining the circumstances.

A crucial aspect to consider is the necessity of including the Harmonized System (H.S.) code of the products in the complaint to customs. The H.S. code serves as a unique identifier for different types or segments of goods, such as fast-moving consumer goods (FMCG), cars, cigarettes, clothing, or electronics. Each product category is distinguished by its specific H.S. code, which is utilized by customs authorities for identification and classification purposes. Therefore, when submitting a complaint to customs, it is essential to include the corresponding H.S. code for the products subject to the agency agreement, ensuring accurate and efficient processing of the complaint and facilitating customs identification.

Under the new Law, a notable change permits principals to apply for temporary import permits during disputes with agents, allowing them to import products through alternative distributors. However, this option is subject to specific conditions set by the MOE. In the event of a dispute resolution favoring the agent, the principal becomes liable to pay commissions to the agent for all goods imported during the dispute period—a circumstance that presents strategic considerations for principals.

  1. MOE Complaint for Inspection for Illegal Distribution of Protected Goods

Another lesser-known tactic available to agents involves filing a complaint with the Ministry of Economy (MOE) to request the appointment of a government inspector. This inspector would then conduct a visit to the warehouse of a particular company known to be selling goods covered by the agency agreement. This process is entirely conducted online and can be initiated through a complaint to the MOE and another through (https://ipp.dubaided.gov.ae/Files/CreateAgency). NB: You would need to sign up and create a user first to submit a complaint.

By leveraging this avenue, agents can ensure regulatory oversight and potentially uncover evidence to support their claims regarding the unauthorized distribution of agency products.

This step adds an additional layer of practical protection for the agent. Once the inspection is concluded and the government inspector verifies the presence of agency products at the warehouse of an unauthorized distributor, significant repercussions may result. The inspector possesses judicial authority to:

  • Direct the unauthorized distributor to cease distribution of the goods and re-export them outside the UAE (or the specific emirate where the agency is registered).
  • Document the inspection findings in minutes, establishing the precise quantity of goods discovered. This documentation serves as crucial evidence for the agent in any subsequent legal proceedings, particularly for claiming commissions as per the Law.
  • If subsequent inspections reveal non-compliance by the unauthorized distributor regarding the exportation directive, the Ministry of Economy (MOE) may impose fines on the distributor according to its internal regulations. Persistent non-compliance could lead to suspension or revocation of the distributor’s trade license and cessation of operations.
  1. Legal Action Against New Distributor

The final recourse available to an agent to safeguard its rights is to initiate a separate legal case for compensation and commission payment, in accordance with Article 9(3) of the Law and the findings of the aforementioned inspection report. This legal action serves to protect the agent’s interests and monitor any unauthorized or parallel importation of goods covered by its registered agency. In this case, the agent seeks commission for any quantity of products distributed by the new distributor during the dispute period, calculated based on the agreed-upon profit margins outlined in the agency agreement with the principal.

Typically, the court appoints an expert whose responsibilities include determining the quantity of products distributed by the new distributor during the dispute period between the agent and the principal, as well as calculating the commission owed to the agent. This step ensures a fair assessment and adjudication of the agent’s compensation claims in accordance with the provisions of the Law.

  • Conclusion

Despite the procedural leniencies introduced by the New Law concerning termination, the rights of agents in the UAE remain robustly protected. Agents retain significant leverage to disrupt principal operations and safeguard their market position if termination proceedings are not conducted amicably and equitably compensated. Notably, the agency committee’s pro-agent stance, coupled with the continued application of termination rules from the old law for agreements exceeding 10 years, underscores the principal’s heightened burden of justification. In light of these complexities, prudent engagement and exploration of amicable separation avenues are advised for all stakeholders, emphasizing the imperative of proactive conflict resolution in preserving commercial relationships and mitigating legal risks.

 

Author:

Mohamed Abdelrehiem l Partner l Dispute Resolution

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