Doing business in the UAE: appointing a distributor

This enables them to benefit from local knowledge and a local distribution network, but navigating the agency laws is important to maintaining a successful and profitable relationship with local distributors.

Type of agency – registered or unregistered

Generally, agreements for the distribution of products are considered to be “agency agreements”. There are two types of agency agreements recognised in the UAE:

• those “registered” with the Ministry of Economy; and
• “unregistered” agency agreements.

Registered agency

The rules governing commercial agency agreements are set out in UAE Federal Law 18 of 1981 (as amended) (the Agency Law). The Agency Law does not tend to differentiate between agents and distributors, but applies only in respect of arrangements that are registered.

The Agency Law has traditionally been very protective of local registered agents in that:

• an agent has the exclusive right to sell the goods which are the subject of that agency in at least one emirate;
• an agent is entitled to commission on all sales in the territory they are appointed for, even if that agent is not involved in making those sales;
• if an agency agreement is for a fixed term, the agency can still continue even after the expiry of the term;
• upon the death of an agent, the commercial agency passes onto heirs automatically;
• an agent can block the import into the UAE of goods which are the subject of their agency arrangements, even if it is the principal – the business that appoints the agent – that seeks to import; and
• a principal can generally only exit from an agency arrangement where the parties mutually agree to terminate that agency; or where the principal obtains a court order that it has terminated the arrangement for a justified reason.

To register an agency agreement, certain criteria must be met. For example, a registered agency agreement must be an exclusive arrangement with:

• a UAE national;
• a company wholly-owned by a UAE national;
• a UAE public joint stock company (PJSC) that is at least 51% owned by UAE nationals; or
• a private UAE company owned by such a PJSC.

The agreement must also be notarised and translated and be governed by UAE law – the governance can be inferred if all of the former criteria are met.

Termination of a registered agency agreement can be incredibly difficult and in most cases a principal's attempts to terminate a relationship with an agent will result in compensation for loss and damages being awarded to the local agent.

However, the changes made to the Agency Law allow companies more control over how long registered agency agreements will last and when an agency agreement can be terminated. These changes will apply to new registered commercial agency arrangements from 15 June 2023. The law will not apply to existing agency contracts until two years after that if the contract is less than 10 years old. For contracts that are more than 10 years old, the new rules will apply 10 years after the law has come into force.

Whilst the changes to the Agency Law help to increase attractiveness and competitiveness, registered agency agreements are often avoided by foreign principals. Except for in certain circumstances, such as in respect of certain goods that can only be distributed by a registered distributor in the UAE, carefully drafted provisions can be included in agency and distribution contracts to avoid “registered” status.

Unregistered agency

It is possible for parties to enter in to an "unregistered” agency agreement. From a UAE law perspective, these agreements would be enforced as a matter of contract law under the UAE Federal Civil Transactions Law (the Civil Code) and the UAE Federal Commercial Transactions Law (the Commercial Code).

Although the Civil Code and the Commercial Code are generally offer local agents much less protection than the Agency Law, the Civil Code and the Commercial Code still contain certain protections in relation to the termination of commercial agency relationships. Therefore, it is important to ensure that the right provisions are included in agency and distribution contracts from the outset.

Core considerations

Forward planning and careful contractual drafting are vital to a successful and profitable relationship between distributor and principal. Important considerations for foreign principals in the planning stage include:

• the extent to which you know and understand your agent/distributor’s business, corporate model, licensed activities, track record and policies – including anti-bribery policies;
• the scope and territory of the arrangement;
• the type of products and responsibility for special registration requirements, which are of particular importance in sectors such as pharmaceuticals, medical devices and defence;
• minimum order standards and targets;
• limitations on liability for breach;
• exclusivity;
• ·ownership of intellectual property;
• the impact of a change of control of the agency/distributor company;
• consequences of termination;
• import and export costs;
• taxation;
• the impact of competition laws, particularly where distribution arrangements include direct or indirect price fixing or limit distribution channels;
• dispute resolution mechanisms; and
• any requirements for such arrangements to be registered – as is the case in certain sectors.