Distributing Products in the UAE – beware the sting in the tail

For international businesses that manufacture commercial and consumer products, the UAE is an understandably attractive, growing market. One of the simplest and easiest ways for manufacturers to access that market is to appoint a local agent to import and sell products under a distribution agreement.

However, whilst appointing a local agent in the UAE can be a simple and relatively straightforward procedure, clients should always take proper legal advice, as there is often a nasty sting in the tail.

It all hinges on whether or not the relevant agreement is registered, or is capable of registration, in the Commercial Agencies Register (the “Register”).

UAE Federal Laws relating to agency (namely UAE Federal Law 18/1981, as amended by Law 14/1988, Law 13/2006 and Law 2/2010, together the “Agency Laws”), set out the requirements for an agency agreement to be capable of registration in the Register. In summary, these requirements include:

• the agreement must be in writing, notarized by a local notary (meaning by implication, it must be in Arabic language, or dual Arabic/English language); and
• the relevant forms must be submitted including name, nationality and address of the agent and principal, the goods which are the subject of the agreement, the territory within which the agent has exclusivity to distribute the goods, and the term of the agreement.

Although we refer in this briefing to “agents” and “agency agreements”, it should be borne in mind that the Agency Laws can apply to a wide range of agency, distribution and reseller arrangements.

If the relevant agreement meets the requirements for registration and is entered into the Register, the Agency Laws will apply, as a result of which the local agent is granted a surprisingly high level of protection. The Commercial Agencies Committee - the first instance committee charges with hearing disputes in respect of registered agency arrangements - and, on appeal, local courts, have proven keen to support this protected position local agents hold.

In reality, manufacturers should bear in mind that this dynamic will also apply to any agreement which is capable of being entered on the Register, even if it is not in fact registered, as it is likely that the first thing an agent would seek to do in the event of any dispute is to register the arrangement.

Clients are often unaware of this surprising imbalance until they seek to terminate the arrangements, for example to move to an alternative agent/agent or to cut out the “middle man” and sell directly into the region. At this point, it is often too late.

Consequences of Registration

The perhaps surprising consequences of an agency agreement being entered onto the Register include:

• the agent will have exclusivity to import and distribute the relevant products throughout the territory defined in the agreement, regardless of what the contract states;
• the agent can obtain an order prohibiting third parties from importing the relevant products into the UAE whilst it is the registered agent of those products;
• even if the agreement is specified to expire/terminate on a particular date, the principal is legally obliged to renew the agreement, other than in exceptional circumstances;
• the agent will be entitled to receive commission for the sale of the relevant products in the defined territory, even if the sale had nothing to do with the agent; and
• regardless of what the agreement states, the agent can only be terminated by the principal for “essential reasons”. The local courts have interpreted “essential reasons” extremely narrowly, such that in the vast majority of cases, the manufacturer/principal has no unilateral right to terminate, even if normal termination provisions are included in the contract.

This dynamic is not always fully appreciated by international businesses entering these arrangements, and can cause significant issues for companies looking to reorganize their supply chains in the UAE.

So what can manufacturers do to protect their position?

Of course, there are ways to terminate these arrangements. If mutual consent/settlement fails, the principal can seek an order from the Commercial Agencies Committee (or on appeal, the local courts) to remove the offending agreement from the Register. However, in practice, this often comes at a hefty price – compensation for loss and damages which can often amount to a significant multiple of the agent’s annual earnings from the agreement. The local agents in the UAE will be well versed in this, and are unlikely to settle cheaply.

The key point to bear in mind for manufacturers seeking to avoid this “sting in the tail”, is that all of this can be prevented (or at least mitigated) from the outset.

As noted above, the relevant Agency Laws specify requirements for an agreement to be capable of registration. If manufacturers can avoid the agreement being registered in the first instance, by drafting the contract such that it does not comply with the registration requirements of the Agency Laws, it is deemed to be unenforceable.

The local authorities have been known to interpret the requirements for registration in the Agency Laws rather loosely to the benefit of local agents. Nonetheless, steps can be taken when drafting agency agreements to ensure that they fall outside of the Agency Law requirements, or at least, to give the principal a stronger bargaining position when it comes to terminating the agreement. These can include, for example:

• stating clearly that the contract is not capable of registration with the Register, and that the Agency Laws do not apply;
• avoiding having the contract translated into Arabic or notarised by a local notary;
• avoiding use of words such as “agent”, “distributor” or “reseller”;
• including enhanced termination rights, for example defined milestones related to the number of products sold, or revenue generated, that the agent must achieve or the contract will terminate automatically for material failure; and
• restricting the territory of distribution to a specific Emirate or territory of the UAE.

These steps are no guarantee that the local agents cannot, or will not, register the agreement (noting the protection the local authorities afford agents/agents). However, steps such as these can help give the manufacturer a stronger position to argue that the contract should not be registered, or at least to mitigate payment of high levels of compensation.

If your business has operations in the UAE involving local agents or distributors, or if your business is considering entering the UAE market, please contact one of our team in Dubai who would be happy to offer further advice.