A foreign manufacturer that appoints a distributor in the United Arab Emirates is not only signing a contract. It is entering a regulated relationship. Federal Law No. 3 of 2022 Concerning Regulating Commercial Agencies, issued on 13 December 2022 and in force since 15 June 2023, replaced Federal Law No. 18 of 1981 and now decides who may act as an agent, what makes an agency valid, how it can end and what the agent may claim afterwards. Many of its rules apply whatever the contract says. This article explains, from our office in Kuwait and in cooperation with our partners in the UAE, what the law means for a principal appointing an agent or distributor and for an agent defending an existing appointment. Article numbers refer to Federal Law No. 3 of 2022.
What the law covers
Article 1 defines a commercial agency as the representation of a principal by an agent under a contract of agency, distribution, sale, offer or concession, or the provision of goods or services inside the State, in exchange for a commission or profit. The principal is the producer or manufacturer that owns the goods or services, inside or outside the State, and the agent is the natural or legal person for whom the representation is established under the contract. The definition is broad. A relationship described as a "distribution agreement" or a "reseller agreement" can fall within it if it meets the elements of the definition, so the label in the contract is not what decides the question.
Who may be an agent
Under Article 2, the commercial agency activity is limited to UAE national individuals and to companies and establishments wholly owned by UAE nationals, by public legal persons or by private legal persons owned by public legal persons. The Cabinet, on the recommendation of the Minister, may allow an international company that is not owned by UAE nationals to practice the commercial agency activity for the products it owns, under conditions it considers appropriate, but only if there is no commercial agent for that agency inside the State and the agency is new and has not previously been registered in the State. Public joint-stock companies established in the State in which UAE nationals hold at least 51 percent of the capital are excluded from the ownership requirement, subject to Cabinet resolutions on the procedures and conditions.
For a foreign principal, the first question is therefore who the counterparty is. A distributor owned in part by a foreign investor does not meet the ownership requirement of Article 2(1) unless it falls within one of the exceptions.
Validity and registration
Article 3 allows the activity to be practiced only by persons registered in the Commercial Agencies Register at the Ministry of Economy, and an agency that is not registered is not valid as a commercial agency under this law (this does not decide what ordinary contract remedies the parties may have). Article 4 adds that, for validity, the agent must be engaged by the original principal under a written and notarized contract and the agency must be registered. These are conditions of validity, not formalities that can be completed later without consequence. An unregistered agency is not valid under Article 3, so a principal and an agent that sign and begin trading without registering are working without the protections of the law.
The application is submitted to the Ministry with supporting documents, in particular a copy of a valid business license and a copy of the agency contract certified and notarized by the official authorities (Article 12). The Ministry decides within ten working days from completion of the requirements (Article 13). The practical advice is to sequence the work: settle the commercial terms, have the contract notarized, then register before shipping goods under it.
The law is mandatory
Article 5 provides that a commercial agency contract is deemed to be in the common interest of the contracting parties, that the provisions of the law apply to it, and that any agreement to the contrary is not valid. The courts of the State are competent to hear disputes arising from the contract. A foreign governing law clause, or a clause that waives the agent's statutory rights, should therefore be reviewed carefully, because it may not prevent the application of the law to a registered agency in the UAE. Article 26 preserves agreements to refer disputes to arbitration, with the arbitration taking place inside the State unless the parties agree otherwise, which gives a principal a route out of court proceedings if the clause is well drafted.
Exclusivity and territory
Article 7 allows the principal to use one agent for the whole State, or one agent in each emirate or group of emirates, provided that the distribution of the goods and services under the agency is exclusive to that agent within its territory. The agent may in turn use a distributor in one or more of the emirates covered by its agency. Article 8 entitles the agent to commission on transactions concluded by the principal itself, or through others, in the agent's territory, even if the agent's efforts did not produce them. A principal that wants to sell directly into the territory, for example through a large customer that buys centrally, should assume it will owe the commission unless the contract provides differently within the limits of the law.
Article 20 backs exclusivity at the border: goods that are the subject of a registered agency may not be brought in for trading by anyone other than the agent, customs departments may not release imports brought by others except with the approval of the Ministry or the agent, and the agent may, through the Ministry, ask that such imports be attached until the dispute is decided. Article 6 sets a default contract term of five years where the contract provides that the agent will build display buildings, goods stores or maintenance or repair facilities, unless the parties agree otherwise.
Ending the agency
How an agency expires
Article 9 lists the ways an agency can expire: expiry of the term unless renewed by agreement, the will of either party subject to the terms and conditions of the contract, agreement of the parties before the term ends, a final judgment ending the agency, or another case set out in the law. When it ends, unless the parties agree otherwise, the old agent's assets pass to the principal or the new agent at fair value, if they are related to the agency, agreed upon, in the old agent's possession at the time of termination and free of any restriction on the transfer of ownership. Either party may sue before the court where the agency's head office is located to compel the other to pay the value of the assets as estimated by the court.
One year of notice
Article 10 sets the procedure for early termination and non-renewal. A party that wants to terminate early, on the basis of the contract's terms and conditions, must serve notice of not less than one year before the date set for termination or before half of the contract term has elapsed, whichever is less, unless the parties agree otherwise. Either party may submit a detailed report from a specialized professional body on the settlement of dues, guarantees that after-sales services will not be interrupted in the State's markets, the valuation of assets and the expected damage. A party that does not want to renew must give notice of non-renewal one year before the term expires, or before half of the term has elapsed, whichever is less, again unless the parties agree otherwise.
The Committee comes before the court
A party that does not consent to termination on the basis of the contract's terms may challenge it before the Commercial Agencies Committee. The Committee decides within 120 days of registering the challenge, and if the period passes without a decision the challenge is treated as rejected. The agency remains in force until the end of the notice period or the Committee's decision, whichever is later (Article 10(2)). Under Article 24, the Committee is competent to hear any dispute between the parties to an agency registered with the Ministry, and no action may be admitted before the courts before the dispute is referred to it. It begins hearing a dispute within twenty-two working days of the application, or of completing the documents, and the committee decision must be challenged, and the dispute brought before the court, within 60 days of notification; after that the decision has the force of a writ of execution. Under the general dispute procedure, the Committee must decide within 120 days of the application. If it does not, either party may go to court within 60 days from the end of that period. This differs from the challenge to a termination under Article 10(2), which has its own 120-day period and treats silence as rejection. A party that goes to court first, without going through the Committee, risks the case being inadmissible.
Article 9(3) allows goods or services to be brought into the State temporarily during the dispute, with the approval of the Ministry, from exclusive sources, provided the principal remains liable to the old agent for compensation awarded in a final judgment.
Compensation
Article 11 deals with the money. Unless there is an express agreement to the contrary, if the agency expires by the end of its term, the agent may claim compensation from the principal for the damage caused by the expiry. If termination by the will of a party causes harm to either party, the injured party may claim compensation for that damage. In addition, the agent is entitled to compensation if it proves that its legitimate activity contributed to apparent and great success of the principal's products, either by increasing the number of customers or by promoting the products, and that termination deprived it of the profit of that success.
Two practical consequences follow. A principal that lets a fixed term run out is not free of a compensation claim under paragraph 1, unless the contract expressly excludes it. And an agent that built a market has a documented route to claim value for that work, which makes it important to keep records of marketing spending, customer growth and sales results throughout the relationship.
Existing agencies and the transition
Article 30 protects agencies that already existed when the law was issued. The expiry rules in Article 9(1)(a) and (b), meaning expiry of the term and the will of a party, do not apply to such contracts until two years after the law came into force. For agencies that have been registered for the same agent for more than ten years, or where the agent's investment in the agency exceeds AED 100 million, as assessed under the criteria and controls issued by the Minister, the period is ten years from the date of entry into force. Article 28 repealed Federal Law No. 18 of 1981, and kept resolutions and regulations in force to the extent they do not conflict with the new law until they are replaced.
What we review before you sign or terminate
For a new appointment, we check the counterparty's eligibility under Article 2, the form of the contract for notarization, the registration steps and timing, the territory and exclusivity structure against Articles 7, 8 and 20, the term, and the arbitration clause against Article 26. For an existing agency, we check the registration status, the notice periods under Article 10, the asset and compensation consequences under Articles 9 and 11, and whether the dispute must first go to the Committee under Article 24. We provide this service from our office in Kuwait, in cooperation with our partners in the UAE.
Read also: Entering the UAE: Company Forms, Ownership and Free Zones | Saudi Commercial Contracts: Civil Transactions Law Guide
Frequently asked questions
Does a UAE agency need to be registered?
Yes. An agency that is not registered in the Commercial Agencies Register is not valid as a commercial agency under this law (Article 3), and for validity the agent must also be engaged by the original principal under a written and notarized contract (Article 4).
Can a foreign company be the agent?
Generally no. Article 2 limits the activity to UAE nationals and entities wholly owned by UAE nationals or public bodies. The Cabinet may make exceptions for certain international companies for products they own, where the agency is new, has never been registered in the State and has no agent there (Article 2(2)).
Can the parties choose foreign law or waive the agent's rights?
The law says it applies to the agency contract and any agreement to the contrary is not valid (Article 5). A waiver or a foreign law clause should be reviewed before you rely on it.
How much notice is needed to end an agency early?
At least one year, or the period before half of the term elapses if that is shorter, unless the parties agree otherwise (Article 10).
Where do disputes go first?
To the Commercial Agencies Committee, for agencies registered with the Ministry. No action is admitted before the courts before referral to it (Article 24). Agreements to arbitrate are preserved (Article 26).
Is the agent entitled to compensation when the agency ends?
It may be. At the end of the term the agent may claim for damage caused by the expiry unless the parties expressly agreed otherwise, and on termination the injured party may claim compensation (Article 11).
Do you help with agency and distribution contracts in the UAE?
Yes. From our office in Kuwait, in cooperation with our partners in the UAE, we draft, review and advise on agency and distribution contracts.