1. May a foreign supplier establish its own entity to import and distribute its products in your jurisdiction?
A foreign supplier seeking to import and distribute its products in the UAE may do so either by:
• entering into a commercial agency agreement with a UAE national or a company wholly owned by UAE nationals, acting as an agent, and governed by UAE Federal Law No. 18 of 1981 on Commercial Agencies;
• establishing an onshore company for the import and distribution of its products directly in onshore UAE markets; • entering into a distribution agreement with a UAE entity licensed to import and distribute goods in the UAE. The distribution agreement will be governed by UAE Federal Law No. 5 of 1985 on Civil Transactions;
• entering into a franchising agreements with a UAE entity licensed to import and distribute goods in the UAE. The franchising agreement will be governed by UAE Federal Law No. 5 of 1985 on Civil Transactions; or
• entering into a joint venture agreement with a UAE entity licensed to import and distribute goods in the UAE. The joint venture agreement will be governed by UAE Federal Law No. 5 of 1985 on Civil Transactions.
2. May a foreign supplier be a partial owner with a local company of the importer of its products?
Where the foreign supplier opts for establishing an onshore company licensed to import and distribute its products in the UAE, the provisions of UAE Federal Law No. 2 of 2015 on Commercial Companies will apply (the Companies Law).
Article 10 of the Companies Law provides that any company established in the UAE shall have one or more UAE partners (either UAE nationals or companies wholly owned by UAE nationals) holding at least 51 per cent of the total capital of the company.
Therefore, up until recently, the position in the UAE was that a foreign investor wishing to establish an onshore company to directly import and distribute goods in the UAE, must partner with a UAE entity, which would be the registered owner of 51 per cent of the company.
It is worth stressing that foreign suppliers cannot transact their trading business in the UAE through a branch. While a branch structure permits a foreign entity to maintain ownership, in practice, the competent licensing authorities do not grant branches of foreign suppliers licenses to import and distribute goods in the UAE.
However, UAE Federal Law No. 19 of 2018 on Foreign Direct Investment (the FDI Law) creates a possibility for some foreign investors to set up in onshore UAE without handing over a majority shareholding to a UAE partner.
The FDI Law creates an exemption to article 10 of the Companies Law by allowing up to 100 per cent foreign ownership of companies incorporated in onshore UAE, subject to certain requirements and limited to specific economic activities.
The FDI Law establishes a legal framework for the exemption to the minimum local ownership requirement. It sets out the criteria for companies to be eligible for the exemption, and the procedures they must follow to become exempt.
The main factor determining if a company is eligible and the procedures that apply with respect to the exemption is the economic activity that the company undertakes. The FDI Law creates three categories of economic activities. One category, designated as the ‘Negative List’, consists of economic sectors that are sensitive domains of the UAE economy and society. Companies that provide activities stated on the Negative List cannot benefit from the FDI Law and must adhere to the minimum local ownership requirements stipulated in the Companies Law.
The second category are companies that provide activities that fall under the ‘Positive List’. The UAE Cabinet is set to form a Foreign Direct Invest Committee, which will be tasked with including economic sectors on the Positive List. It is also expected that the UAE Cabinet will impose conditions and requirements that companies covered by the Positive List must fulfil and adhere to in order to have a greater foreign ownership than 49 per cent.
The third category is made up of economic sectors that do not fall within neither the Negative List nor the Positive List. A competent authority created by the FDI Law will maintain discretion to decide on the application of the FDI Law with respect to companies operating in such sectors.
3. What types of business entities are best suited for an importer owned by a foreign supplier? How are they formed? What laws govern them?
Onshore limited liability companies are commonly considered as best suited for an importer owned by a foreign supplier to transact their trading activity in the UAE.
As mentioned under question 3, onshore limited liability companies are governed by the Companies Law. A foreign supplier looking to carry out its trading activity in the UAE through a limited liability company should pay particular regard to the provisions of article 10 of the Companies Law, and the FDI Law, both of which relate to the minimum local ownership requirement in limited liability companies.
To establish as a limited liability company, the company must register a memorandum of association with the competent registrar in the UAE, made in Arabic and attested by a UAE notary public. The memorandum of association is entered into between the shareholders of the company and sets out, among other things, the shareholders’ rights, provisions relating to shareholders meetings, duties and powers of directors, and provisions on profit and loss distribution.
Foreign suppliers who must adhere to the 51 per cent local ownership requirement usually enter into ‘side agreements’ with the UAE partner in addition to the memorandum of association. The purpose of these side agreements is to ensure that the foreign supplier is awarded full control of the onshore limited liability company.
4. Does your jurisdiction restrict foreign businesses from operating in the jurisdiction, or limit foreign investment in or ownership of domestic business entities?
See questions 2 and 3.
5. May the foreign supplier own an equity interest in the local entity that distributes its products?
See questions 2 and 3.
6. What are the tax considerations for foreign suppliers and for the formation of an importer owned by a foreign supplier? What taxes are applicable to foreign businesses and individuals that operate in your jurisdiction or own interests in local businesses?
According to UAE Federal Decree-Law No. 8 of 2017 on Value Added Tax (VAT) (the VAT Law), foreign suppliers established in the UAE must register for VAT if they perform taxable supplies or imports that exceed the mandatory registration threshold of 375,000 dirhams per annum, and they may choose to voluntarily register for VAT if their supplies and imports are less than the mandatory registration threshold but exceed the voluntary registration threshold of 187,500 dirhams.
Additionally, import VAT of 5 per cent is payable in addition to a customs duty of 5 per cent due on movement of goods into the UAE. However, if the importer of record is VAT registered, it is likely that there will be a reverse-charge mechanism available to allow the importer to ‘pay’ and ‘recover’ the import VAT at the same time, mitigating any cash flow impact.
Reverse charge is a mechanism under which VAT is required to be paid for goods or services by the recipient instead of the supplier when the supplier is not a resident in the UAE, where the supply takes place. When the reverse charge is applied, the recipient of the goods or services makes the declaration of both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return. In this way, the two entries cancel each other from a cash payment perspective in the same return.
For the purposes of the VAT Law, ‘imports’ are defined as goods brought into the UAE from outside the Gulf Cooperation Council area. As a general rule, imported goods are liable to VAT at the point of entry into the UAE. In most cases, a registered taxpayer in the UAE can reclaim the VAT paid on the goods they have imported as input tax. The taxpayer will need the import VAT document to show that import VAT has been paid.
Finally, it is worth stressing that the reverse charge can only be performed by a VAT-registered person. Therefore, cross-border business-to-consumer supplies cannot be subject to the reverse charge.
Local Distributors and Commercial Agents
7. What distribution structures are available to a supplier?
As mentioned in question 1, distribution structures available to suppliers in the UAE include the use of:
• distributors, whereby the supplier and the UAE-established distributor enter into a distribution agreement governed by UAE Federal Law No. 5 of 1985 on Civil Transactions;
• franchising agreements and joint venture agreements governed by UAE Federal Law No. 5 of 1985 on Civil Transactions; and
• commercial agencies, whereby the principal and the agent enter into a commercial agency agreement governed by UAE Federal Law No. 18 of 1981 on Commercial Agencies.
8. What laws and government agencies regulate the relationship between a supplier and its distributor, agent or other representative?
Are there industry self-regulatory constraints or other restrictions that may govern the distribution relationship? The main laws regulating the relationship between a supplier and its distributor are:
• UAE Federal Law No. 18 of 1981 on Commercial Agencies (as amended by UAE Federal Law No. 14 of 1998, UAE Federal Law No. 13 of 2006 and UAE Federal Law No. 2 of 2010);
• UAE Federal Law No. 2 of 2015 on Commercial Companies; and
• UAE Federal Law No. 5 of 1985 on Civil Transactions.
The government agencies that regulate the relationship between a supplier and its distributor are the Ministry of Economy and the Department of Economic Development in Dubai, Abu Dhabi, Umm al Quwain, Ajman, Fujairah and Ras Al Khaimah. A consumer protection division exists under each of these departments.
9. Are there any restrictions on a supplier’s right to terminate a distribution relationship without cause if permitted by contract? Is any specific cause required to terminate a distribution relationship? Do the answers differ for a decision not to renew the distribution relationship when the contract term expires?
Termination of a distribution agreement governed by UAE Federal Law No. 5 of 1985 on Civil Transactions
Distribution agreements governed by UAE Federal Law No. 5 of 1985 are subject to the principle of freedom of contract. Accordingly, there are no statutory restrictions on a supplier’s right to terminate a distribution relationship without cause where such termination is permitted by the distribution agreement, or when the agreement reaches its contractual term.
Termination of a commercial agency agreement governed by UAE Federal Law No. 18 of 1981 on Commercial Agencies
UAE Federal Law No. 18 of 1981 governing registered commercial agency agreements (the Commercial Agency Law) affords the agent statutory protection against termination of the distribution relationship without cause, or upon such agreement reaching its contractual term. In effect, section 8 of the Commercial Agency Law provides that termination of a commercial agency agreement registered in accordance with the provisions of the Commercial Agency Law is only permitted for a ‘material reason’. UAE courts have held that a ‘material reason’ may include the following:
• the agent’s failure to meet sales targets or minimum purchase requirements;
• any breach of the Commercial Agency Law by the agent; • the agent undertaking activities that compete with the foreign supplier’s products or services; and
• the agent failing to maintain the brand and image of the foreign supplier or acting in a manner that damages the reputation of the foreign supplier or its products or services.
Alternatively, the principal and the agent under a commercial agency agreement entered into in accordance with the Commercial Agency Law can mutually agree to terminate their commercial agency relationship following which the agent irrevocably waives its statutory right of protection against termination.
10. Is any mandatory compensation or indemnity required to be paid in the event of a termination without cause or otherwise?
In the event of a termination without cause of a commercial agency agreement entered into in accordance with UAE Federal Law No. 18 of 1981, the party terminating the agreement faces two material risks with respect to brand visibility and commission.
If the products of an agency agreement are imported by a party other than the registered agent, this agent has the right to request that the UAE customs impound the shipment of these products, and that they block them and prevent them from entering the market. If the products are allowed into the UAE through an entity other than the registered agent, this agent may be entitled to a commission for these sales based on the remuneration agreed in the agreement, and may request that these sales be confiscated. Either party may claim damages if the termination has caused them damages. The agent can also claim compensation for abusive termination under the agreement and damage to reputation, if the principal has not actually performed its duties or collected any commission.
Termination of a distribution agreement regulated by UAE Federal Law No. 5 of 1985 on Civil Transactions is governed by the general principles of contract law, whereby compensation is paid by the breaching party to the innocent party in the event of a breach of contract.
11. Will your jurisdiction enforce a distribution contract provision prohibiting the transfer of the distribution rights to the supplier’s products, all or part of the ownership of the distributor or agent, or the distributor or agent’s business to a third party?
The UAE allows distribution contracts to include a provision prohibiting such a transfer of the distribution rights. Contracts may include clauses limiting the agent’s right to assign their responsibilities to another party; a breach of this provision may constitute a ‘material breach’ by the agent that would allow the principal to terminate the agreement. It is also common for contracts to include clauses on the appointment of sub-distributors allowing agents to appoint sub-distributors if the principal has authorised this in writing and whereby the agent shall be fully liable for any compensation to the sub-distributors.
Regulation of the distribution relationship
12. Are there limitations on the extent to which your jurisdiction will enforce confidentiality provisions in distribution agreements?
UAE Federal Law No. 31 of 2006 on Industrial Property, UAE Federal Law No. 5 of 1985 on Civil Transactions, and provisions of competition law all provide regulations on matters relating to confidentiality. However, the absence of a uniform trade secrets law means there is a degree of uncertainty as to protection of these rights under UAE law. UAE courts will generally act to prevent the confidential information of one party being used or disclosed by another party, especially where there are specific contractual provisions in the distribution agreement.
13. Are restrictions on the distribution of competing products in distribution agreements enforceable, either during the term of the relationship or afterwards?
Restrictions on the distribution of competing products in distribution agreements are always enforceable during the term of the relationship. Most, if not all, such agreements will include a provision stipulating that an agent shall at no time engage in any unfair trade practices with respect to the principal. As for the enforceability of the clause after the term of the relationship, the principal will generally include a clause preventing the agent from distributing competing products for a certain period of time.
14. May a supplier control the prices at which its distribution partner resells its products? If not, how are these restrictions enforced?
Contracts generally include a resale price maintenance clause whereby a principal and its distributors agree that the distributors will sell the principal’s product at certain prices, at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). If a distributor refuses to maintain prices, either openly or covertly, the supplier may stop doing business with it.
15. May a supplier influence resale prices in other ways, such as suggesting resale prices, establishing a minimum advertised price policy, announcing it will not deal with customers who do not follow its pricing policy, or otherwise?
Suppliers will generally ensure that the contract contains a clause stipulating that the agent shall comply with the principal’s minimum advertised price (MAP) policy, which may be modified or cancelled by the principal. The MAP will generally be appended to the contract.
16. May a distribution contract specify that the supplier’s price to the distributor will be no higher than its lowest price to other customers?
A distribution contract may specify that the supplier’s price to the distributor will be no higher than its lowest price to other customers.
17. Are there restrictions on a seller’s ability to charge different prices to different customers, based on location, type of customer, quantities purchased, or otherwise?
A distribution agreement may place restrictions on purchase orders issued to retail accounts. Following these restrictions, the agent must enforce a limitation on purchase by the buyer they deal with, whereby the merchandise purchased by the buyer from the distributor must be sold to the end consumer only. The buyer dealing with the distributor will be expressly prohibited from selling the merchandise purchased to a retailer, or from exporting the items purchased outside the country where the goods were purchased. The buyer will further be required to comply with the supplier’s MAP policy.
18. May a supplier restrict the geographic areas or categories of customers to which its distribution partner resells? Are exclusive territories permitted? May a supplier reserve certain customers to itself? If not, how are the limitations on such conduct enforced? Is there a distinction between active sales efforts and passive sales that are not actively solicited, and how are those terms defined?
Under a distribution agreement regulated by UAE Federal Law No. 5 of 1985 on Civil Transactions, a supplier may restrict the geographical area to which its distribution partner resells, for example, to a specific territory which can be the country in which the agreement is entered into. The supplier may further restrict the categories of customers to which the distribution partner resells, such as to another dealer who sells similar and competitive products, to any party who may resell the products, or to a customer who the agent has reason to believe will take the product outside the country. Reasonable measures must be taken by the agent to ensure these conditions are complied with. In relation to commercial agency agreements entered into in accordance with UAE Federal Law No. 18 of 1981, parties are bound to restrict their commercial agency to the territory of the UAE. Accordingly, online distribution under such agreements is restricted by law.
19. May a supplier restrict or prohibit e-commerce sales by its distribution partners?
Under a distribution agreement regulated by UAE Federal Law No. 5 of 1985 on Civil Transactions, the supplier may restrict or prohibit e-commerce sales by its distribution partners, by including a clause in the agreement that states that the distributor must obtain the principal’s written consent in order to sell a product on an online platform or through an e-commerce intermediary. The supplier may also prevent the distributor from selling the product to any person or entity who might export the product outside the designated territory. In relation to commercial agency agreements entered into in accordance with UAE Federal Law No. 18 of 1981, parties are bound to restrict their commercial agency to the territory of the UAE.
20. Under what circumstances may a supplier refuse to deal with particular customers? May a supplier restrict its distributor’s ability to deal with particular customers?
A supplier may restrict the distributor’s ability to sell products to any customer that the distributor has reason to believe may export the product outside the designated territory or resell the product on an e-commerce platform, if this has indeed been restricted in the distribution agreement.
21. Under which circumstances might a distribution or agency agreement be deemed a reportable transaction under merger control rules and require clearance by the competition authority? What standards would be used to evaluate such a transaction?
Under UAE Federal Competition Law (Federal Law No. 4 of 2012), it is prohibited for dominant companies in a relevant market to take advantage of this position to breach, minimise or prohibit competition, by undertaking practices such as price fixing, undercutting prices, discriminating with no objective justification in respect of prices for identical contracts, or obliging a client not to deal with a competitor. Such companies are also prohibited from disseminating false information about products or their prices, and under supplying or flooding the market with their products. For the purposes of these provisions, a dominant position arises if the market share of the company exceeds the total transactions in the relevant market. The UAE Cabinet can also, upon recommendation from the Minister of Economy, increase or decrease the rate of this ‘economic concentration’ depending on economic need. It is possible for companies to apply to the Ministry of Economy for an exemption from the application of these prohibitions, by adducing evidence to demonstrate that the practice will, in fact, enhance economic development and improve competition.
22. Do your jurisdiction’s antitrust or competition laws constrain the relationship between suppliers and their distribution partners in any other ways? How are any such laws enforced and by which agencies? Can private parties bring actions under antitrust or competition laws? What remedies are available?
UAE Federal Competition Law (Federal Law No. 4 of 2012) prohibits ‘restrictive agreements’, such as those that specify prices or conditions for the buying or selling of commodities and services, or are tantamount to collusion in respect of tendering and bids, or that have the effect of limiting the flow of commodities and services to the market, or conversely flooding the market with such items. Agreements that divide markets or assign clients based on geographical area, and those that hinder the entrance of businesses to the market, are also banned. The Competition Law does expressly state, however, that this aspect is subject to the provisions of Federal Law No. 18 of 1981 (as amended) (Commercial Agency Law). Accordingly, registered distribution agreements fall outside the scope of the prohibition on restrictive agreements.
23. Are there ways in which a distributor or agent can prevent parallel or ‘grey market’ imports into its territory of the supplier’s products?
The effect of registering a commercial agency agreement regulated by UAE Federal Law No. 18 of 1981 (the Commercial Agency Law) with the UAE Ministry of Economy is that the commercial agent has exclusivity for the market. As per the Commercial Agency Law, third parties are not allowed to import into the UAE any commodity, product, manufactured good, material or any other merchandise that is the subject matter of a commercial agency registered at the Ministry of Economy without the prior consent of the registered commercial agent. Accordingly, only the commercial agent will be able to stop parallel imports that are coming into the UAE through channels other than the registered commercial agency.
24. What restrictions exist on the ability of a supplier or distributor to advertise and market the products it sells? May a supplier pass all or part of its cost of advertising on to its distribution partners or share in its cost of advertising?
Commonly, under distribution agreements registered in the UAE, the principal and the agent agree that the agent will, in good faith and at its own expense, market, advertise, promote and resell the products to the retailers pursuant to the distribution agreement, consistent with good business practice. The agent will further agree to advertise and market the products it sells in a manner that reflects favourably on the products and the name, goodwill and reputation of the supplier. Finally, advertising and marketing costs can either be shared between the principal and the agent, or solely covered by the agent.
25. How may a supplier safeguard its intellectual property from infringement by its distribution partners and by third parties?
Are technology-transfer agreements common? The supplier may agree with the distributor that the distributor does not acquire ownership of the supplier’s intellectual property rights and that these rights remain the exclusive property of the supplier. This may include trademarks and patents. The agreement may also stipulate that if the agent were to acquire intellectual property rights pursuant to the distribution agreement, that these rights would irrevocably be assigned to the supplier, and that the agent would only use these rights to perform its obligations under the distribution agreement.
26. What consumer protection laws are relevant to a supplier or distributor?
Each Emirate of the UAE contains a Department of Economic Development that deals with consumer rights issues and manages consumer protection laws. UAE Federal Law No. 24 of 2006 on Consumer Protection provides that anyone offering a product to a customer must comply with health and safety standards (the customer’s right to safety), and provide accurate information about the goods (the customer’s right to know).
27. Briefly describe any legal requirements regarding recalls of distributed products. May the distribution agreement delineate which party is responsible for carrying out and absorbing the cost of a recall?
Products distributed in the UAE must comply with UAE Federal Law No. 24 of 2006 (the Consumer Protection Law) and Cabinet Resolution No. 12 of 2007 Concerning the Executive Regulations of Federal Law No. 24 of 2006. In summary, the supplier or principal under a distribution agreement or a commercial agency agreement (as the case may be) may be required to recall any product that does not comply with the foregoing statutory provisions concerning consumer protection. However, parties to a commercial agency agreement registered in the UAE Ministry of Economy in accordance with UAE Federal Law No. 18 of 1981 may delineate to the agent the responsibility for carrying out the recall and absorbing the related costs.
28. To what extent may a supplier limit the warranties it provides to its distribution partners and to what extent can both limit the warranties provided to their downstream customers?
The supplier may warrant that products will be fit for purpose, if operated correctly. It may, however, refuse to warrant that the products will be fit for purpose in all locations or environments, that the products will be error free, and that all errors in the products will be corrected. It may further refuse to warrant that the products will meet the customer’s requirements. The agreement may confirm that the distributor will not make any warranties on the supplier’s behalf.
29. Are there restrictions on the exchange of information between a supplier and its distribution partners about the customers and end users of their products? Who owns such information and what data protection or privacy regulations are applicable?
The distribution agreement may include restrictions on the exchange of information between a supplier and its distribution partners about the customers and end users of their products, namely by stating that all data collected on customers and end users shall only be used for the performance of one party’s obligations under the agreement. This would indeed prevent the supplier and its distribution partners from exchanging any such information outside the scope of their professional obligations with respect to the agreement.
30. May a supplier approve or reject the individuals who manage the distribution partner’s business, or terminate the relationship if not satisfied with the management?
Parties to either a distribution agreement governed by UAE Federal Law No. 5 of 1985 on Civil Transactions, or a commercial agency agreement governed by UAE Federal Law No. 18 of 1981 on Commercial Agencies (the Commercial Agency Law), may agree to grant the supplier or principal (as the case may be) the power to approve and revoke the individuals who manage the distributor’s or the agent’s (as the case may be) business. However, although the supplier may terminate the distribution relationship if it is not satisfied with the management as agreed in the distribution agreement, termination of the commercial agency agreement will only be possible if breach of the management provisions constitutes a ‘material reason’ for terminating the commercial agency agreement, in line with the ‘agent’s protection against termination’ encapsulated in section 8 of the Commercial Agency Law.
31. Are there circumstances under which a distributor or agent would be treated as an employee of the supplier, and what are the consequences of such treatment? How can a supplier protect against responsibility for potential violations of labour and employment laws by its distribution partners?
There are no circumstances under UAE laws following which a distributor would be treated as an employee of the supplier. Further, the parties to a distribution agreement registered in the UAE commonly agree that the agent, or any director, officer or employee of the agent will be considered as an employee of the supplier. These provisions are intended to exclude the application of UAE labour laws and regulations.
32. Is the payment of commission to a commercial agent regulated?
Article 1 of Federal Law No. 18 of 1981 defines a commercial agency agreement as an arrangement whereby a foreign company is represented by an agent to distribute, sell, offer or provide goods or services within the UAE against a commission or profit. The payment of a commission to a commercial agent is a condition for the existence of an agency agreement between a principal and an agent. Further, if products are allowed into the UAE through, or services are provided by, another (unregistered) agent, the registered agent will have the right to claim a commission on any profit generated by the sale of these goods or services. The commission will be at the rate stated in the agreement.
33. What good faith and fair dealing requirements apply to distribution relationships?
In distribution relationships, distributors may be restricted from engaging in the following activities with respect to the supplier, product or service:
• engaging in any unfair trade practices;
• making false or misleading statements;
• communicating information with respect to guarantees or warranties to third parties, except as authorised by the supplier; or
• disclosing confidential information.
34. Are there laws requiring that distribution agreements or intellectual property licence agreements be registered with or approved by any government agency?
Registration of commercial agency agreements governed by UAE Federal Law No. 18 of 1981 on Commercial Agencies UAE Federal Law No. 18 of 1981 on Commercial Agencies (the Commercial Agency Law) sets out the following requirements for a valid and enforceable commercial agency agreement:
• the agent must be a UAE national or a company wholly owned by UAE nationals (section 2 of the Commercial Agency Law);
• the commercial agency relationship must be exclusive (section 5 of the Commercial Agency Law);
• the commercial agency agreement must be in respect of a defined territory in the UAE (section 5 of the Commercial Agency Law); and
• the commercial agency agreement must be in Arabic, notarised before a notary public, and registered with the UAE Ministry of Economy (section 3 of the Commercial Agency Law).
The effect of registration is that third parties are not allowed to import into the UAE any commodity, product, manufactured good, material or any other merchandise that is the subject matter of a commercial agency registered at the Ministry without the prior consent of the registered commercial agent.
Registration of trademark licence agreements governed by UAE Federal Law No. 37 of 1992 on Trademarks Trademark licence agreements are governed by UAE Federal Law No. 37 of 1992 on Trademarks (the Trademark Law). Section 5 of the Trademark Law provides that all trademark licences must be registered with the UAE Ministry of Economy for the licence to be enforceable against third parties.
35. To what extent are anti-bribery or anti-corruption laws applicable to relationships between suppliers and their distribution partners?
The UAE Federal Penal Code (the Code) is the main federal law which regulates anti-bribery practices in the UAE. Articles 234 to 239 of the Code contain provisions that criminalise the bribery or attempted bribery of both public and private sector employees. It applies to the relationships between suppliers and their distribution partners in the UAE.
Under the provisions of the Code, a bribe would be anything that confers a benefit on a public or private sector employee, as the case may be, with the intent to procure that such employee acts in a way that violates the duties assigned to his function or to commit an act that falls outside such duties. Accordingly, it is important for parties under a distribution agreement to have regard to the foregoing provisions of the Code.
36. Are there any other restrictions on provisions in distribution contracts or limitations on their enforceability? Are there any mandatory provisions? Are there any provisions that local law will deem included even if absent?
There are no limitations under UAE law on the enforceability of distribution agreements or commercial agency agreements validly entered into in accordance with the provisions of UAE Federal Law No. 5 of 1985 on Civil Transactions (with respect to distribution agreements) or UAE Federal Law No. 18 of 1981 on Commercial Agencies (with respect to commercial agency agreements). In relation to mandatory provisions, see in question 34 Finally, there is a ‘duty to act in good faith’ implied by section 246 of UAE Federal Law No. 5 of 1985 on Civil Transactions into all agreements and contracts that requires the parties to act with ‘utmost good faith’ when performing their contractual obligations. The implied duty to act in good faith applies to distribution agreements and commercial agency agreements.
Governing law and choice of forum
37. Are there restrictions on the parties’ contractual choice of a country’s law to govern a distribution contract?
Distribution agreements governed by UAE Federal Law No. 5 of 1985 are subject to the principle of freedom of contract. Accordingly, there are no statutory restrictions on the parties’ choice of law and jurisdiction to govern their distribution relationship. However, in relation to commercial agency agreements entered into in accordance with UAE Federal Law No. 18 of 1981, parties are bound to submit their contractual relations to the jurisdiction of UAE federal courts, which will apply UAE federal law.
38. Are there restrictions on the parties’ contractual choice of courts or arbitration tribunals, whether within or outside your jurisdiction, to resolve contractual disputes?
See question 37.
39. What courts, procedures and remedies are available to suppliers and distribution partners to resolve disputes? Are foreign businesses restricted in their ability to make use of these courts and procedures? Can they expect fair treatment? To what extent can a litigant require disclosure of documents or testimony from an adverse party? What are the advantages and disadvantages to a foreign business of resolving disputes in your country’s courts?
In proceedings before UAE courts, a party’s (or third party to the claim) duty to disclose (and allow inspection) arises only if and when the court makes an order for specific disclosure. It is worth noting that UAE courts have seldom made orders for such disclosure. Moreover, the following are interim remedies available to litigants before an UAE onshore court:
• application for summary judgment;
• interim injunctions; and
• interim cost orders.
Security for costs orders made pursuant to a defendant’s application, if it is concerned that the claimant does not have sufficient funds to meet the costs of the proceedings if the action is successfully defended – are not available under UAE civil procedure rules. Finally, the general principle under UAE civil procedure rules is that the unsuccessful party will be ordered to pay the costs of the successful party. However, in practice, an award of costs in the UAE is usually restricted to litigation disbursements such as court fees and expert fees. Only rarely have parties to a dispute been able to recover the fees of their legal representatives in full.
40. Will an agreement to mediate or arbitrate disputes be enforced in your jurisdiction? Are there any limitations on the terms of an agreement to arbitrate? What are the advantages and disadvantages for a foreign business of resolving disputes by arbitration in a dispute with a business partner in your country?
An agreement to mediate or arbitrate disputes will only be enforced in the UAE if it relates to a distribution agreement regulated by UAE Federal Law No. 5 of 1985 on Civil Transactions. As such agreement is subject to the principle of freedom of contract, there are no statutory limitations on the terms of agreement to arbitrate set out under it. However, an agreement to arbitrate or mediate under commercial agency agreements entered into in accordance with UAE Federal Law No. 18 of 1981 on Commercial Agencies will not be enforceable, as contractual relations and disputes arising from such agreements are subject to the exclusive jurisdiction of UAE federal courts (which will apply UAE federal law)