The United Arab Emirates is a beneficial business environment and, in order to improve the same, a new law will be released concerning commercial agency contracts that will replace Federal Law No.11 of 2020 concerning UAE commercial agency law.
As the UAE is a country that attracts investment, the new law will grant local markets entry to the worldwide market. Moreover, attracting foreign investments directly is one of the significant purposes of the new proposed law.
The new law will grant commercial agents numerous statuary rights. These rights are intended to protect an agent who has spent a considerable amount of effort and cost in building a profitable market profile for products or services. One of the main changes is concerning the conditions to end a fixed-term contract. The new conditions under which a commercial agency contract may be expired are as follows:
1. Expiry of the commercial agency contract:
- Expiry of the contract term unless that period is renewed by agreement of the contracting parties.
- By the will of either party based on the terms and conditions of the commercial agency contract.
- By agreement of the contracting parties before the end of the contract term.
- Issuance of a court ruling to terminate the commercial agency based on the provisions of this law or the commercial agency contract.
- Any other case mentioned in this law.
2. In an instance in which a commercial agency arrangement is being transferred to a new agent, unless the two parties to the original commercial agency contract agree otherwise or upon the termination of the commercial agency and when any of the cases set forth above are realized, the assets of the old agent shall be transferred to the new agent at the book value or market value, whichever is lower at the time of transfer. In addition the old agent is entitled to 10% commission when the following conditions are met:
- That the aforementioned assets of goods, merchandise, materials, spare parts, machinery, and others are related to the commercial agency contract.
- The assets referred to are agreed upon and in the possession of the old agent at the time of the expiry of the commercial agency contract.
There is no restriction on the transfer of ownership to the new agent.
3. Observing the above, it is permissible for a temporary period to re-register the commercial agency for a new agent, in respect of which the new commercial agent shall be jointly liable solidary with the principal towards the old agent for the compensation that may be awarded to him by the competent courts in a final decision.
4. Subject to Clause (2) of Article 8 of the new proposed law and for the purposes of estimating the book or market value of assets and the amount of the aforementioned commission when no agreement has been reached in this regard, either the principal or the agent may file a lawsuit before the court in whose jurisdiction the agency’s head office is located to obligate the other party to pay the value of those assets or the amount of the aforementioned commission, as determined by the court.
As per the new proposed law, all matters or disputes shall be submitted to a special committee prior to commencing any legal proceedings. Under the existing law, either party must provide the committee/court sufficient/ fundamental reasons to justify the termination and it cannot rely on the expiry of the fixed term agreement. However, the new law does not stipulate that any sufficient/fundamental reasons may lead to the end of the contract at any time during the duration of the contract.
Therefore, the extent of application of the fundamental defect is not defined by law as it will be for the discretion of the committee/court to determine on a case-by-case basis which might lead to the termination or ending of the contract. In addition, since the law is vague as to the definition of a defect, the parties to the contract have no reference to a definition or indication as to the applicability of the defect. The wide scope of meaning of what a fundamental defect is and what actions are available will affect the parties.
A clear definition or example of what a fundamental defect is should be clearly defined in the proposed law. In the UAE, determining fundamental defects are at the sole discretion of the court. It is important for investors to protect their business and not to terminate contracts and agreements after the end of the contract period without legal grounds to do so as most of the contracts provide unique or specialized services which will affect the investor’s business.
This will indeed raise the number of cases that will be registered with the committee and Dubai Courts to settle and to provide each party with their rights. The agent will not be in a position to settle any dispute amicably due to the wide scope of the definition of the defect.
By Sara Falaknaz , Group Legal Manager, Al Ghandi Auto
Sara is currently working as the Group Legal Manager of Al Ghandi Auto. She has more than 8 years of experience in litigation and corporate legal matters. Sara has previously worked in both international and local law firm and has appeared before the United Arab Courts.
* This article was first published in April 2022 issue of the IHC Magazine. You can read/download the magazine here.