UAE Agency Law under pressure - Dubai Economic Report
A Half Yearly Publication of National Bank of Dubai - Dec 2003

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In the Emirates the principal barriers to foreign investment have been two pieces of legislation - the Commercial Companies Law and the Commercial Agencies Law. The first of these includes the regulations that oblige foreign companies to have local sponsors or partners holding 51 per cent of their equity. This does not suit large corporations that are likely to make substantial investments and want to have complete management control over their operations.

The second law states that foreign - nonresident- companies must have a local agent to sell their products. It contains provisions for exclusivity - foreign companies may not have more than one agent in one territory, though they can have different agents for different lines of products. It also makes it very difficult for a company to change its agent.
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Within WTO there are always “rounds” of negotiations in progress, intended to make trade between members ever more free, and the current round is supposed to reach completion in 2005. In the negotiations the UAE is under pressure to reform the Commercial Agencies Law - but it is not thought very likely that agreement will be reached on this in the time available. Dubai is probably more pro-change than its partners in the federation.

Change is most likely to be brought about by a later round of negotiations, following a legal challenge. It may well be that a foreign company experiencing difficulties in changing an agent will challenge the Commercial Agencies Law before the WTO tribunal. This body, of course, cannot rewrite a country’s legislation, but if its mechanism for the resolution of a dispute does not work, it can give a trading partner - the country of the company issuing the challenge - the right to retaliate against the country refusing to change. At this point negotiations generally begin again.
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It may well be that change in the UAE legislation will come initially through an amendment which will remove the exclusivity of agencies. This would have almost the same effect as legislation making it easier to change agents.
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In changing UAE commercial legislation there is a social cost. The legislation of all the Gulf oil states, as it evolved from the early 1970s, has been geared to funnelling as much as possible of each country’s oil wealth to its own nationals - and in the context of 1970s oil prices and the stage of development the states had reached then, this was the right and logical thing to do. The fact that the legislation now puts a brake on these countries’ growth does not make it any easier to change.

Even in Dubai, which is much less of a classic oil state than its neighbours, it is estimated that about half of the income of “nationals”, as opposed to expatriates, is derived from rents, sponsorship and agencies. Liberalisation of these areas of the economy may produce faster and more balanced growth in the long term, for the benefit of all, but in the short term it will have a negative impact on the incomes of an important part of the population.
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