Agent or distributor?
A key consideration for foreign businesses wishing to enter the UAE market is to examine whether they should set up a UAE trading company, or simply appoint an agent or distributor.
Appointing an agent or distributor can help foreign businesses avoid company set-up costs and other requirements necessary to access the UAE market. These costs and requirements can often deter foreign businesses from entering into a new market, especially at a time where most businesses are already feeling some sort of financial pressure as a result of reduced sales, effects on supply chains or closures due to government imposed COVID-19 lockdowns.
In this article, we aim to outline the general distinctions between appointing an agent or a distributor, highlighting some key UAE law implications which should be considered when making a decision on how to enter the UAE market.
Differences between an agent and a distributor
The choice essentially comes down to the specific business needs of a foreign business.
An agent is often appointed to introduce a foreign business to local customers and/or to make direct sales, sometimes concluding contracts on behalf of the foreign business. Agents are given authority to negotiate on behalf of a foreign business and the agent usually engages in such activity in return for commission. Legal ownership to any products does not pass to the agent; the foreign business would assume the associated legal and commercial risks. This is popular with foreign businesses with an established international reputation, as the agent can act as a point of contact for consumers in the UAE.
It is also preferred by businesses that wish to have a more hands-off approach, as the agent is able to source customers and work on sales in place of the foreign company itself. Local agents are also often required in order for companies to tender for government projects. Handing so much responsibility to a local agent may not seem attractive to some foreign businesses, but the terms of the agency agreement can be drafted and tailored to suit individual business needs.
A local distributor, on the other hand, purchases products from a foreign business and sells these products to end-user customers with a distribution agreement governing this relationship. Legal ownership to the products passes on to the distributor and it is the distributor itself who will enter into the contractual relationship with end-user customers as opposed to the foreign business.
This is a popular means of conducting business for smaller, growing businesses in the UAE as they can gain access to local knowledge and resources whilst retaining a sense of control over the business. However, a distributor will not be able to act on behalf of the foreign business in terms of concluding contracts and arranging UAE residency visas for employees. Instead, the distributor's role will be restricted to distributing the product to end-customers.
The position in the UAE for registered agents
UAE Federal Law No. 18 of 1981 regulating Commercial Agencies (Commercial Agency Law) does not distinguish between agents and distributors, simply calling them agents, and affords special protections to agents registered with the UAE Ministry of Economy (MoE).
Registered agency agreements benefit from:
- Exclusivity protections – the agent is afforded the exclusive right to the relevant market or product;
- Commission entitlement – registered commercial agents are entitled to commission on any sales of the particular product regardless of whether the agent participated in the sale or not; and
- Strict termination position – it can be difficult and costly to terminate agreements generally due to the UAE being a civil law jurisdiction, and so unless there is a court order or mutual agreement to terminate, termination can be very difficult.
Registered agency agreements are also provided special legal recourse - any dispute arising out of a registered commercial agency agreement will be first reviewed by the Commercial Agencies Committee. A party seeking to terminate a registered agency agreement must demonstrate a 'valid' reason to the Commercial Agencies Committee for such termination. Federal Law No. 11 of 2020 amending Federal Law No. 18 of 1981 regarding Commercial Agencies (the Amended Agencies Law), which came into force in June 2020, further cements the position in the UAE regarding the termination of registered agency agreements. Article 8 of the Amended Agencies Law states that a registered agency agreement may not be terminated or not renewed unless there is a fundamental reason justifying this. We note that the expiry of a contract period is also not considered to be a fundamental reason for terminating an agency agreement.
Given the protective treatment of registered agents in the UAE, some businesses may wish to opt for the route of setting up a new trading company in the UAE, such as an LLC, over appointing an agent or distributor, and our International Corporate team would be happy to discuss the best structuring options for your business.
In our next article in this series, we will outline the operation of shareholders' agreements in the UAE and how these can be used to protect the interests of foreign investors into the UAE.