Suppliers and distributors face agency law milestone in the UAE

Dubai-based Alexandra Aikman of Pinsent Masons, a specialist in commercial contracts, was commenting ahead of the expiry of a grace period concerning the effect of changes made to the UAE’s commercial agency law in 2023. The milestone, which lands on 15 June 2025, will, among other things, enhance the termination rights of parties under certain existing agency agreements.

To distribute products in the UAE without a corporate presence, foreign businesses are typically required to engage a local agent. The distribution agreements which underpin these agency relationships must be registered with the Ministry of Economy where certain products are concerned. Limited exceptions apply. In 2023, the UAE’s commercial agency law was updated to give companies more control over how long registered agency agreements last and when an agency agreement can be terminated.

Under the old law, registered agency and distribution agreements were subject to automatic renewal. This made it very difficult for foreign principals – i.e. manufacturers and suppliers – to terminate those arrangements without paying the local registered agent compensation. This position has been mitigated under the new law. 

Article 9 of the new law states thata registered distribution or agency contract will expire as per the contract terms – unless such term is renewed by mutual agreement of the contracting parties – or at the will of either the principal or the agent, subject to the terms and conditions of the contract.

Under Article 30, registered commercial agencies which existed before the new law was issued are not subject to the Article 9 termination rights until two years have passed since the new law came into effect. The two years will expire on 15 June 2025.

However, there is an exception to this that applies to commercial agency agreements which have been registered with the same commercial agent for more than 10 years prior to the date the new law entered into force or under which the agent has invested more than AED 100 million ($27.2m). The new Article 9 termination rights under the new law will only begin to apply to those legacy agreements 10 years after the law came into effect – i.e. 15 June 2033. During the interim period, the old law will apply.

Aikman said that this means that, from 15 June, some foreign principals and local agents will have enhanced termination rights which did not exist previously and that properly drafted rights to terminate for convenience in the contract will now be backed by the law. However, she said both principals and agents should review existing contracts to understand the implications of the new termination rights and ensure compliance with the updated law.

“The new law had a grace period of two years whereby existing agreements registered before 15 June 2023 remained subject to the previous law where termination, and certain other matters, were concerned,” Aikman said. “That grace period expires next month – so parties will benefit from clearer and more balanced termination rights, potentially allowing them to exit agreements more easily if terms become unfavourable.”

“Despite the termination rights being bolstered by the new law, parties should still carefully plan and seek legal advice ahead of any termination as wrongful termination could result in compensation being payable. Any new contracts being entered into should be considered in light of the amended agency law,” she added.