10 Jan 2012

HOW COMMERCIAL AGENCY LAWS IMPACT FRANCHISE RELATIONSHIPS IN THE UAE

Authored by: Michael Lunjevich

HOW COMMERCIAL AGENCY LAWS IMPACT FRANCHISE RELATIONSHIPS IN THE UAE


In brief

  • Registered franchise agreements are governed by the Agency Law and non-registered agreements may be recognised under both the UAE Civil Code and UAE Commercial Code.
  • The advantage of registration is that the agent has an enhanced ability to prevent parallel trading of goods and a clear evidential basis upon which to proceed with any actions for trade mark infringement (such as dealing with counterfeit goods).
  • The Agency Law has the effect of overriding any foreign law/foreign jurisdiction provision, in view of Article 6 of the Agency Law.

In the UAE, the concept of franchising can fall within the context of the UAE Agency Law if the franchise agreement is ‘registered’ as per the requirements of Federal Law No. 18 of 1981 on the Organisation of Commercial Agencies as amended (hereinafter referred to as the “Agency Law”). The Agency Law does not make any distinction between agency, franchise or distribution agreements.
 
A Commercial Agency is defined under the Agency Law as “the representation of a Principal by an Agent on the distribution, sale offer or presentation of commodity or service within the State” (being the UAE). The English translation of the Agency Law at Article (3) goes on further to state “Trade agency activities are not permitted to be practiced inside the state except by such commercial agents registered in the specified register maintained for this purpose by the ministry. Any trade agency not registered in the above register shall not be considered, nor legal cases therefore shall be heard.”
 
In order for the Agency Law to apply, the:

  1. agent must be a UAE national or a company wholly owned by UAE nationals;
  2. relationship must be exclusive (either as to a specific product(s) and/or the territory); and
  3. relationship between the agent and principal must be registered.

Given the above criteria, not all franchise, agency and/or distribution type agreements can be registered. Where the relevant agreement does not fall within the Agency Law, either because the Agency Law cannot apply or the parties choose not to apply it, the rights and obligations of the parties may be recognised under the UAE Civil Code and the UAE Commercial Code, both as discussed further below.

Registration allows the agent an enhanced ability to prevent parallel trading of goods and a clear evidential basis upon which to proceed with any actions for trade mark infringement (such as dealing with counterfeit goods). The UAE Ministry of Economy, Dubai Customs Department and Dubai Police can be approached by a registered agent for assistance in such cases whereas an unregistered agent/franchisee would encounter difficulties in seeking such assistance.

The Agency Law does, however, have a number of disadvantages to be considered along with its benefits. Amendments made to the Agency Law in 2010 can make it difficult for principals to terminate a registered agency agreement. In summary, the implications for agency agreement terminations under the amendments are:

  1. The Commercial Agency Committee (the “Committee”) has now been reinstated to deal with disputes between a principal and agent arising out of a registered commercial agency.
  2. In order for a foreign principal to terminate or refuse the renewal of the agency, it must establish to the Committee a “material reason justifying its termination or non-renewal” (which can be very difficult to establish); and
  3. A principal may not simply rely on the expiry of the term of the Agreement in order to end the agency relationship.

The Agency Law also has the effect of overriding any foreign law/foreign jurisdiction provision, given Article 6 of the Agency Law which states in its English translation:
 
“A Commercial Agency Agreement shall be considered concluded for the mutual interest of both signatories thereto. It is within the jurisdiction of the UAE Courts of Law to hear any dispute arising between the Principal and Agent, from the execution of the Agreement. Any agreement in contravention thereto shall not be entertained.”

In addition to the above disadvantages, where a dispute occurs with a registered agent, it is common for the agent to block the importation of the goods given their status as a registered “exclusive” agent. Given that the dispute resolution process can take a long time, any dispute regarding a registered agency agreement must first be referred to the Committee and then can be appealed through the three levels of UAE.

The Committee started hearing agency dispute matters in October of 2011. In that session, three cases were heard. The first case confirmed the Agency, the second case was forwarded to the UAE courts for determination and in the third case an expert was appointed and the Committee is currently awaiting the expert’s report.

For a discussion regarding dispute resolution clauses for distribution agreements, the concepts of which are also relevant for franchising matters, please read our article on the implications of foreign law and arbitration clauses in distribution or agency agreements.