US embassy cable - 04ABUDHABI1022

UNCLAS SECTION 01 OF 03 ABU DHABI 001022 
 
SIPDIS 
 
DEPT FOR NEA, NEA/ARP 
DEPT PASS TO USTR - JASON BUNTIN 
GENEVA PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ETRD, WTO, USTR, TC 
SUBJECT: PRIMER ON UAEG AGENCY/SPONSORSHIP REGULATIONS 
 
REF: ABU DHABI 1004 
 
1.  Summary: The UAE maintains non-tariff barriers to 
investment in the form of restrictive agency, sponsorship, 
and distributorship requirements.  In order to do business 
in the UAE outside one of the free zones, a foreign business 
in most cases must have a UAE national sponsor, agent or 
distributor.  Once chosen, sponsors, agents, or distributors 
have exclusive rights.  The foreign principal can appoint 
one agent for the entire UAE or for a particular emirate or 
group of emirates.  The federal laws governing agency 
relationships provide that an agent can be terminated only 
by mutual agreement of the foreign principal and the local 
agent.  In practice, U.S. companies accustomed to doing 
business in the UAE have used the agency/sponsorship laws to 
their advantage -- often selecting prominent Emiratis with 
access to senior UAE leaders and other merchant families who 
can win contracts and enter into lucrative agreements on 
their behalf.  End summary. 
 
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THE AGENCY LAW IN DETAIL 
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2.  There are three important pieces of legislation 
regulating agency relationships in the UAE.  Federal Law No. 
18 of 1981 on the Organization of Commercial Agencies (as 
amended by Federal Law No. 14 of 1988) is known as the 
"Agency Law."  Although this is a federal law, local lawyers 
tell us that there are some differences of interpretation 
between the courts of the different emirates.  The UAE 
Commercial Transactions Law, Federal Law No. 18 of 1993 (the 
"Commercial Code") also contains several provisions relevant 
to commercial agencies.  The Commercial Code is relatively 
new and the interpretation and enforcement of its particular 
provisions by the UAE courts have not yet been tested. 
Local lawyers say that they expect courts to apply the 
provisions of the Commercial Code only to the extent that 
the Agency Law is silent.  The Civil Transactions Law, 
Federal Law No.5 of 1985 (the "Civil Code") is the final 
piece of legislation regulating agency relationships in the 
UAE, and the Civil Code applies in instances where there are 
gaps in the Commercial Code. 
 
3.  The Agency Law makes no distinction between commercial 
agency agreements, and agreements regarding 
distributorships, franchises, commission arrangements and 
other forms of sales representative or sales agency 
relationships.  All of these forms of business arrangements 
qualify as commercial agencies under the Agency Law. 
Article 1 of the Agency Law defines a commercial agency as 
"the representation of a principal by an agent for the 
purpose of distributing, selling, offering or providing 
merchandise, or services inside the state for a commission 
or profit."  A principal is defined as "the producer or 
manufacturer or the exclusive accredited exporter or 
representative of the producer." 
 
4.  Article 2 of the Agency Law provides that a registered 
commercial agent must be either a UAE national or a company 
incorporated in the UAE and owned 100 percent by UAE 
nationals.  No exception is given to nationals of other Gulf 
Cooperation Council states.  Although Article 2 restricts 
the appointment of registered commercial agents to UAE 
nationals or wholly owned UAE entities, an agency agreement 
also can provide for the management of an agency by a 
foreign principal or the delegation of management to a non- 
national. 
 
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It's Good To Be King 
-------------------- 
 
5.  The Agency Law affords a number of benefits to the UAE 
national agent.  Article 8 of the Agency Law provides that a 
principal cannot terminate or refuse to renew an agency 
agreement without "justified cause," even if the agency 
agreement provides for a fixed term.  In practice, U.S. 
companies say that establishing justified cause for 
termination before UAE authorities is very difficult, even 
in cases where the agent failed to perform. 
 
6.  Under Article 28 of the Agency Law, the Ministry of 
Economy's (MoE) Commercial Agencies Committee can review any 
dispute arising in connection with a registered agency. As a 
general rule, the Committee is protective of agents and 
usually concludes that a justifiable reason does not/not 
exist to permit the termination of an agency.  In cases when 
the Committee accepts that sufficient reasons exist to 
permit the termination of the agency, the MoE frequently 
orders the payment of compensation to the agent. 
 
7.  Article 9 of the Agency Law provides that if an agency 
has terminated improperly or on account of circumstances 
beyond the control of the agent, the agent may claim damages 
against the principal foreigner.  The refusal of the 
principal to renew an agency agreement upon its expiration 
also gives the agent the right to claim compensation.  In 
such cases, the agent simply must prove that the agent's 
activities led to some success in the distribution of the 
principal's products or in the promotion of their sales and 
that the non-renewal of the agreement will cause damage to 
the agent.  To defeat such a claim the principal must prove, 
as a minimum, that the agent has committed a material breach 
of the agreement.  Accordingly, the Agency Law provides an 
inherent right for agents to maintain their agencies 
irrespective of any specific performance criteria that may 
have been agreed by the parties. 
 
8.  A replacement agency may not be entered in the 
Commercial Agents Register maintained at the MoE unless the 
termination of the former agency has been nullified amicably 
(or by the courts), under Article 8. 
 
9.  Article 23 of the Agency Law gives registered commercial 
agents the exclusive right to import the goods that are the 
subject of the agency agreement.  While a termination 
dispute remains pending with the Agency Committee and 
perhaps later during an appeal to the UAE courts, a 
registered agent can prevent the foreign principal from 
importing such goods through a replacement agent.  This can 
provide registered agents with a strong tactical advantage 
in the litigation process. 
 
10.  According to Article 7, commercial agents can receive 
commissions on both sales made by the agent as well as any 
direct sales made by the principal or others -- regardless 
of whether these direct sales occur as a result of efforts 
by the agent. 
 
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A Word About Sponsorships 
------------------------- 
 
11.  Another aspect of the UAE's agency laws is the concept 
of a sponsor.  Foreign companies in the UAE are permitted to 
operate here in the form of a limited liability company (the 
foreign shareholder holds a maximum of 49 percent of the 
shares, but can receive up to 75 percent of the company's 
profits) or establish a branch office in the UAE.  A branch 
office is not permitted to carry on commercial activities 
and cannot physically deal in or trade in goods within the 
UAE.  It is, however, permitted to render maintenance and 
services to customers of its parent company.  A branch 
office can promote, advertise and market its parent 
company's goods and services and even enter into contracts 
for sales, however -- because of the prohibition against 
physically dealing in goods -- any goods imported into the 
UAE must be imported in the name of the customers as 
consignees. 
 
12.  As a prerequisite to obtaining a business license, the 
parent company must appoint a UAE national as the service 
agent of the branch office in the UAE under a written 
agreement.  If the service agent is a company, all of its 
partners must be UAE nationals.  The service agent is 
commonly referred to as a sponsor.  The UAE Commercial Code 
expressly limits the sponsor's obligations toward the 
company to rendering services without assuming any financial 
responsibility or liability relating to the business.  The 
sponsor basically obtains licenses, visas and permits 
necessary for the running of the business of the branch 
office.  In consideration of his services, the sponsor is 
paid a fixed annual sum and is not entitled to a share in 
any of the profits or other compensation. 
 
 
--------------------------------------------- ------ 
The Benefits Of Selecting The "Right" Local Partner 
--------------------------------------------- ------ 
 
13.  There are some important legal advantages to principals 
that select an appropriate local partner.  Although all IPR 
rights holders receive protection in the UAE under recently- 
enacted federal legislation, a primary benefit of hiring an 
agent registered under the Agency Law is the increased 
ability to protect against the infringement of the 
principal's trademark rights and to restrict parallel 
imports.  Under Article 23 of the Agency Law, no one is 
allowed to import into the UAE any commodities, products, 
manufactured goods, materials, or other merchandise that is 
in the name of a registered commercial agent without the 
prior consent of the agent.  Indeed, U.S. companies seeking 
damages for IPR infringement here generally receive a 
positive and expeditious judgment from the courts when the 
local agent initiates litigation.  The UAE customs 
authorities, likewise, are not permitted to clear imports 
through parties other than the registered agent without the 
prior approval of the MoE or the agent.  In practice, 
customs authorities detain imports at port warehouses until 
such a dispute is resolved. 
 
14.  There also are other, less obvious benefits to 
selecting an appropriate local agent.  U.S. companies with 
experience in the UAE know that the "right" local agent has 
access to key UAEG decision makers, and exploits his family 
and political connections to influence outcomes of major 
public and private sector contracts.  The titular head of 
the main families -- the Al-Otaibas, Al-Futtaims, Al- 
Ghurairs, to name a few -- also usually holds a high-ranking 
political position within the local government.   Shaykh 
Mohammed bin Butti Al-Hamed, for example, is the Mayor of 
Abu Dhabi and also sits on the powerful Abu Dhabi Executive 
Council -- a governmental body that approves the federal 
budget and wields tremendous influence over major (multi- 
billion dollar) government contracts in Abu Dhabi.  Shaykh 
Mohammed bin Butti also is the Chairman of Al-Hamed Group of 
Companies (a local agent) and Al-Ahlia General Trading 
Company (a local sponsor). 
 
15.  The fact that many local agents/sponsors also hold 
local government positions seems to be a conflict of 
interests by Western standards.  In the UAE, however, the 
agency/sponsorship system is a natural extension of a 
political system based on tribal affiliation.  UAEG 
officials make political decisions that benefit their tribe 
or family economically.  Although U.S. companies complain 
that the tendering of government contracts can be far from 
transparent, other American firms have made significant 
inroads in the UAE by hiring prominent local agents who help 
the principal win multi-million dollar contracts. 
 
16.  U.S. companies sometimes can circumvent sponsorship 
requirements in the UAE, although this practice is not/not 
common and applies primarily to foreign companies dealing 
with UAE governmental entities.  Foreign companies sometimes 
are the only suppliers of specialized goods or services that 
are not widely available.  As per ref, foreign defense 
contractors must negotiate directly with the UAE Offsets 
Group, and international oil companies work directly with 
the state-run oil company.  Some U.S. companies, such as 
Boeing, maintain an office in one of the UAE's free zones to 
avoid a local sponsor, but may be required to have a local 
sponsor to bid on a particular contract.  In the past, 
Boeing has negotiated directly with quasi-governmental 
Emirates Airlines for the sale of aircraft.  U.S. companies 
that enter into UAE governmental contracts without a sponsor 
often have no redress if the government entity does not 
fulfill or later changes the terms of the contract. 
 
Wahba