16 May 2024

Import Restrictions and Commercial Agency Disputes: How the UAE is levelling the playing field

Authored by: Karim Mahmoud, Victoria Woods and Michael Farchakh

In Brief:

  • Revamped commercial agency landscape: Following the widely commented upon adoption of a new agency law, the UAE has continued the transformation of its commercial agency landscape with the issuance of Ministerial Decision No. 216 of 2023.
  • Purpose of Ministerial Decision No. 216/2023: The Decision introduces a procedure via which principals involved in a dispute with their commercial agent are able to apply for temporary permission to circumvent their registered agent for the importation of their goods and services into the UAE.
  • Uncertainty over practical implementation: While this development aims to seek to ensure business continuity during the course of commercial agency disputes, its benefits in practice will rest in the effectiveness of its implementation, which, at this early stage, remains to be tested.

By revamping its commercial agency law, the UAE has levelled the playing field when it comes to import restrictions and commercial agency disputes. This remodeling began with the adoption of Federal Law No. 3/2022 Regulating Commercial Agencies (“New Agency Law”) in December 2022, which replaced the more than forty year old previous agencies law, Federal Law No. 18 of 1981.

The New Agency Law applied immediately to all agency agreements concluded after its entry into force in June 2023; however, for then existing commercial agency arrangements, some key (albeit limited) of its provisions will not apply for a certain ‘transitional’ period. Namely, some of the newly introduced termination provisions of the New Agency Law will not apply where an agency agreement was concluded and registered:

  • anytime between 16 June 2013 and 16 June 2023, until 16 June 2025; and
  • anytime before 16 June 2013, until 16 June 2033.

The notable extended termination rights provided in the New Agency Law (which have been widely reported, no doubt, given their departure from the terms of the former law, and, therefore, their powerful impact on the UAE market’s commercial agencies) are an eminent feature of the New Agency Law; expanding the grounds under which a principal may legally terminate a commercial agency.

In addition, the ability, now provided under the New Agency Law, for parties to agree, under their agency contracts, to have disputes settled conclusively by arbitration (as opposed to by the Ministry’s Agency Committee and/or the UAE courts), suggests that, even in the case of existing commercial agency arrangements as at the date of entry into force of the New Agency Law, previously agreed to arbitration agreements/clauses within agency agreements/contracts would now be recognised under UAE law as valid and binding on the parties, having previously been held unenforceable under the former commercial agencies law.

These important developments in the UAE commercial agencies law, despite the transition period applicable to existing commercial agency arrangements as at 16 June 2023, will soon begin to apply to a significant number of UAE agencies, and consequently there is an expectation that a flurry of agency disputes will, before long, be initiated.

In anticipation of this, the UAE Government has introduced a number of supporting regulations to complement the terms of the New Agency Law. The most significant of these is Ministerial Decision No. 216/2023 on Regulating the Terms and Conditions for the Entry of Goods or Services Bound by Commercial Agencies for a Temporary Period During the Duration of the Dispute Between the Agent and the Principal (“Decree 216”).

The commercial agent’s ability under the UAE’s commercial agencies law to block the importation of its principal’s products into the market has historically presented principals with a troubling practical predicament; creating a dynamic whereby a principal could not afford to engage in a dispute with its commercial agent because of the potential, severely adverse, ramifications on supply chain during the course of litigation. Litigation would almost certainly be protracted and, even where successful, would likely also be costly and administratively time consuming for principals to engage in. Often, this has meant that a principal engaging in any litigation with its commercial agent would be tantamount to the principal’s exit from the UAE market.

Decree 216 alters this paradigm. It sets out a framework pursuant to which a principal can apply for temporary authorization for the entry of its products into the UAE market while a dispute with its agent is ongoing.

To achieve this, the principal must make an application to the Ministry of Economy (“Ministry”) requesting that its products be temporarily allowed to enter into the UAE through an “Exclusive Source”, thereby circumventing the registered agent’s exclusivity as to such products’ distribution in the UAE while a dispute is in existence.

An ‘Exclusive Source’ is defined by Decree 216 as “any merchant, according to the definition contained in the Commercial Transactions Law, or another person or entity specified by the Ministry.” The wording of Decree 216 appears therefore to imply that a principal could itself be such an Exclusive Source/temporary importer, provided the principal met the necessary legal requirements.

In deciding on the application, the Ministry will give consideration to:

  • the existence of a registered exclusive commercial agency;
  • the existence of a genuine dispute between the principal and the agent;
  • any detrimental effect to the UAE market which could result from the relevant product(s) not being able to enter the UAE; and
  • whether the principal and the Exclusive Source are able to meet their obligations under Decree 216.

The principal must also:

  • provide a written undertaking to compensate the agent for any damages awarded by the competent authorities in any final and binding judgment (or arbitral award) of the litigation in question which is ongoing;  and
  • maintain certain accounting and business records relating to all transactions with respect to the sale of the relevant product(s) occurring during the temporary import authorization period, i.e. which would otherwise have involved the registered agent.

The Exclusive Source must likewise keep records of its own regarding these transactions, and provide the Ministry with various corporate documentation before taking on its role as temporary UAE importer.

If the Ministry decides to issue the authorization, the relevant UAE customs authorities will be informed of such decision, including any further conditions the Ministry is at liberty to impose in terms of the duration of its authorization and/or quantities of relevant products to be allowed UAE entry.

The reality and full impact of the implementation of these new procedures is not yet fully known given the infancy of Decree 216. For instance, the timeline for the Ministry to make a decision on a principal’s application for temporary entry of products is, as of yet, unclear. There is also a question mark as to what will qualify as a “genuine dispute” that preconditions an application under Decree 216.

Conclusion

The key takeaways under the New Agency Law are that:

  • parties to commercial agency arrangements are now able to resort to arbitration for settlement of disputes; and
  • principals may be able to rely on more comprehensive grounds for termination than was the case pre-June 2023; and
  • Decree 216 complements the New Agency Law’s objective of increasing parity and fairness between foreign principals and local agents in order to foster economic growth through foreign direct investment. The potential for a principal to achieve the continued supply of its products into the UAE market, even while a dispute with its UAE commercial agent is ongoing, could bring meaningful comfort to foreign principals with respect to their ongoing UAE business operations, and inspire future growth of their businesses in the UAE.

Should you have any queries regarding the above or any related matter, please contact Karim Mahmoud and Victoria Woods.

 
 

This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances or facts. A writer's view may differ from views of colleagues and/or the firm. You should seek legal advice on each specific matter. Access to this article does not form an attorney-client relationship.