Tag: Corporate and Commercial

New Commercial Transactions Law: Amendment to the Period of Limitation

The new commercial transactions law (Federal Decree Law 50/2022), which abrogated Federal Law 18/1993, has significantly reduced the period of limitation for initiating action relating to commercial transactions between ‘merchants’ from ten years to five years.

 

Application of the new commercial transactions law

The new commercial transactions law applies to merchants and all forms of commercial activities. The new commercial transactions law has broadened its ambit to include virtual commercial activities as well, i.e., commercial activities carried out by any person (even if the person is not a trader) through modern mediums of technology or in the technological sphere. The term ‘merchants’ is broadly defined and includes every person performing acts of commerce, and every company engaging in commercial activity in a form specified by Federal Decree Law 32/2021 on Commercial Companies.

 

The period of limitation

Under the now-repealed 1993 commercial transactions law, parties could bring actions relating to the commercial obligations of merchants within ten years from the breach of a contractual obligation (Old Period of Limitation). However, the new commercial transactions law prescribes that parties must initiate action within five years from the date the cause of action arises (New Period of Limitation). It is pertinent to note that the New Period of Limitation is shorter than the limitation period prescribed by the laws of England and Wales, which is six years from the date the cause of action arises.

 

What effect does the new limitation period have on a cause of action that arose before the new law?

An important question that would arise is, what would happen to those transactions where the cause of action arose prior to the effective date of the new commercial transactions law? The answer may be found in Articles 6 and 7 of the UAE Civil Code:

 

a) If the application of the New Period of Limitation would result in the expiry of a party’s right to commence action prior to the new commercial transactions law coming into force (2 January 2023), the Old Period of Limitation will be applied. For example, if the cause of action arose in 2014, in accordance with the Old Period of Limitation, the party would have the right to institute action until 2024. On the other hand, if the New Period of Limitation were to be applied, the party’s right would have lapsed in 2019 (prior to the new commercial transactions law coming into force). In such circumstances, the Old Period of Limitation will be applicable in order to prevent prejudice being caused to such party

 

b) If, on the effective date of the new commercial transactions law, the duration of a party’s right to commence action is longer than the New Period of Limitation, the duration of such right will be reduced in accordance with the New Period of Limitation. For instance, if on 2 January 2023, a party has the right to bring an action within eight years, such right will be reduced to five years.

 

c) If, on the effective date of the new commercial transactions law, a party has the right to commence an action within three years (shorter than the New Period of Limitation), the period of three years will continue to apply. ■

Executive Regulations concerning the UAE Consumer Protection Law

The UAE Cabinet recently issued Cabinet Decision 66 of 2023 (the Executive Regulations) concerning the executive regulations of the Federal Law 15 of 2020 on Consumer Protection (Consumer Protection Law). The Executive Regulations shall come into effect on 14 October 2023.

 

While the Consumer Protection Law previously laid down a broad framework for consumer protection in the UAE, the Executive Regulations appear to be not only a major step forward in the actual and practical implementation of this framework, but also cover additional elements of consumer rights, introduce a detailed mechanism for addressing consumer complaints, and impose heavy sanctions on suppliers. For example, an obligation has been imposed on suppliers to inform a consumer of any anticipated discount to be offered on a commodity, if such discount is expected to be offered within one week of the consumer’s purchase of the commodity.

 

It is pertinent to note that the definition of “Consumer” under the Consumer Protection Law does not differentiate between an individual and a company, and hence suppliers must be cautious to adhere to the applicable regulations while dealing with both: end-consumers utilizing the products/services for personal (non-commercial use) and also commercial consumers, obtaining products/services from suppliers for their business.

 

This inBrief sets out key features of the Executive Regulations.

 

Supplier’s accountability in e-commerce transactions

The Consumer Protection Law did not have much to offer in terms of consumer protection in relation to products or services availed through e-commerce platforms. Now, protection has been offered to consumers buying products online, by making the supplier responsible for any failure in the commodity offered by any third-party that uses the supplier’s platform for sale of such commodities.

 

This ensures greater accountability on e-commerce platforms while listing commodities for sale and may call for a back-end due diligence by the supplier on third party sellers before listing their products or services.

 

Detrimental conditions null and void

The Executive Regulations have detailed a list of terms and conditions, which may be considered detrimental to the consumers’ interests including, granting the supplier unilateral rights to amend or terminate contracts, obligating consumers to choose particular finance or insurance companies, etc. To offer further protection, the Executive Regulations clarify that such conditions will be null and void whether provided under any contract, invoice, documents or other manner relating to contracting with the consumer. This aims to protect consumers from falling prey to detrimental conditions imposed by suppliers with higher bargaining powers or detrimental conditions often included in the fine print of an invoice or terms and conditions while making a purchase.

 

Protection against misleading descriptions

While legislating misleading descriptions and advertisements of a commodity or service, the Executive Regulations define such descriptions and advertisements of commodities or services to be “deceptive” if they contain a misleading claim which creates a false or misleading impression to the consumer, including by way of deceptive trademarks, statements or logos. Moreover, the Executive Regulations prescribe a heavy fine of up to AED 250,000 for such misleading descriptions. This may be a significant measure to curb passing off of products having logos or trademarks of other manufacturers or brands.

 

Protection for children, the disabled and the elderly

The Executive Regulations go beyond the general disclosure requirements on packaging of commodities to specifically requiring suppliers to indicate the categories and age groups of consumers which may be susceptible to any risks upon using the commodity, in particular children, the disabled and the elderly.

 

Regulator’s power to counteract exorbitant price increases

A contingency measure has also been introduced under the Executive Regulations whereby the regulator has been given the power to take interim measures to curb exorbitant price increases (including by way of inflation). These measures include, among others, determination of prices of commodities and services, prohibitions on exports, and determination of quotes for sales.

 

Hefty Sanctions by the regulator

Hefty penalties and sanctions have been prescribed for any violation (by suppliers) of the Consumer Protection Law and/or the Executive Regulations. Penalties under the Executive Regulations range from a minimum of AED 50,000 to a maximum of AED 1 million. Under the Consumer Protection Law, penalty limits are higher with the possibility of imprisonment. Additionally, the regulator has the power to revoke the license of the supplier and order to strike off its name from the commercial registry.

 

Timeline for resolution of complaints

The Consumer Protection Law briefly touched upon the power of the regulator to receive consumer complaints and the Executive Regulations further describe the form in which a consumer complaint is to be submitted. There is no specified time period prescribed under the Executive Regulations (or the Consumer Protection Law) within which such complaints should be disposed of by the concerned regulatory authority. The regulatory authority is obligated to respond to the complainant depending on the nature of the complaint. ■

 

UAE: New End of Service Benefits Scheme for Employees in the Private Sector

The UAE Cabinet recently approved a scheme for the establishment of savings and investment funds for employees primarily in the private sector (including free zones). This scheme is an alternative to the current system of payment of end-of-service benefits (gratuity) to an employee at the end of his employment.

 

Participation in the scheme will be optional for employers. Under this scheme, the participating employer will be required to make a monthly contribution to the selected fund.

 

The funds will be supervised by the UAE Securities and Commodities Authority in coordination with the Ministry of Human Resources and Emiratization.

 

The scheme is likely to have three investments options: (i) risk-free investment option (which will maintain the capital), (ii) low, medium or high risk-based investment options; and (iii) sharia-complaint investment option.

 

An employee will be entitled to receive his savings (contributions made by the employer) and returns on investments (as per the investment option selected) at the end of his employment. If employment has been terminated, it is likely that an employee will have the option to continue with the fund (without additional contribution from the previous employer) by not withdrawing his savings and returns.

 

Participating employers will not be required to pay end-of-service gratuity to the employees at the end of their employment. However, other benefits such as return ticket/air fare, payment of unused annual leaves and other contractual benefits will still be required to be paid by the employers at the end of an employee’s employment.

 

Additionally, employers are currently not required to make a provision in their accounting books for their end-of-service benefits liability. End-of-service benefits are only due and payable to an employee at the end of his employment. In case an employer is in financial difficulties, such an employer is often unable to make payment of the end of service benefits to its employees. However, under the new scheme, employers will be required to make monthly contribution. Even if an employer is facing financial difficulties, if the said employer has already made monthly contributions, at least certain part of the end-of-service benefits of its employees will be protected.

 

There is currently no similar scheme in the UAE except for the pension scheme that is only applicable to GCC national employees and the DIFC Employee Workplace Savings Scheme (DEWS).

 

Detailed legislation regarding the scheme and its implementation is expected in due course. ■

Private Equity in the United Arab Emirates: Market and Regulatory Overview

A Q&A guide to private equity law in the United Arab Emirates.

 

The Q&A gives a high level overview of the key practical issues including the level of activity and recent trends in the market; investment incentives for institutional and private investors; the mechanics involved in establishing a private equity fund; equity and debt finance issues in a private equity transaction; issues surrounding buyouts and the relationship between the portfolio company’s managers and the private equity funds; management incentives; and exit routes from investments. Details on national private equity and venture capital associations are also included.

ESG in the UAE: Has it arrived?

Over the past few years, the United Arab Emirates has witnessed an increase in awareness and significance of environmental, social and governance (ESG) issues. While businesses in the UAE have begun to acknowledge that conscious efforts towards ESG compliance is imperative for growth and longevity of their business, the question remains whether ESG compliance can truly be said to now form a part of the UAE compliance ecosystem.

 

ESG significance on the rise: Key Factors

 

M&A has been on a steady rise in the MENA region (with the UAE continuing to demonstrate resilience despite global headwinds). ESG compliance has become a point of concern for investors, who are frequently concerned to fully investigate and understand the nature and extent of ESG compliance by UAE targets.

 

In cases where such compliance can be successfully demonstrated, investors derive comfort regarding sustainable financial performance and the ability of the management to identify and account for long term business risks. On the other hand, a lack of transparency concerning ESG compliance often results in questions regarding the sustainability of the business and management’s lack of sensitivity to an issue that is increasingly important to investors and stakeholders.

 

As a consequence, ESG rating agencies are often engaged by potential investors for the purposes of conducting an ESG diligence which has led to the “ESG Score/Ratings” becoming increasingly significant in evaluating, and to an extent negotiating certain contours of an investment. In most cases, the ESG score/rating will have a direct impact on the valuation of a target.

 

Good-to-have or must-have: Where do we stand?

 

While the UAE business ecosystem awaits further and more granular regulation of ESG matters, the question arises whether UAE businesses should of their own initiative, take cognizance of an issue that is now at the core of many investment mandates. Improved capability of risk management, higher brand value, advantage over non-compliant competitors and potentially reduced business costs resulting in higher valuation are only a few of the factors that influence the decision-making process. ■

Emiratisation deadline for the private sector set at 30 June for 2023 half yearly targets

The Ministry of Human Resources and Emiratisation has announced 30 June 2023 as the deadline for private sector companies with 50 employees or more to achieve their half-yearly Emiratisation targets, set at 1% of skilled jobs. This is in addition to the 2% Emiratisation that companies should have achieved by the end of 2022.

 

Organizations that failed to meet the 2022 targets were subject to a fine of AED 6,000 a month or AED 72,000 a year for each Emirati national not hired as per the Emiratisation norms. Post June 2023, fines will be applied on non-compliant companies for not achieving the required half-yearly rate for 2023 as well as the 2022 targets. A penalty of AED 42,000 (on half yearly basis) will be applied for every Emirati national not hired as per the Emiratisation norms by 30 June 2023. The calculation is based on a penalty of AED 7,000 per month for 2023 and will increase by AED 1,000 annually for each year until 2026.

 

Please refer to our earlier inBrief, where we had provided an overview of the Emiratisation requirements, applicability thresholds and the consequences of non-compliance, for further details. ■

Corporate Tax: Threshold for “small business relief” set at AED 3 million or less

The UAE Ministry of Finance today issued a new ministerial decision providing the threshold for “Small Business Relief”. Accordingly, taxable persons that are resident persons can claim “Small Business Relief” pursuant to Article 21 of the Corporate Tax Law if their revenue in the relevant tax period is below AED 3 million for the taxable period. If however the revenue threshold of AED 3 million for each tax period is exceeded, the “Small Business Relief” will not be available. This means that a taxable person that generates revenue of AED 3 million or less for each taxable period may elect to be treated as not having derived any taxable income.

 

The AED 3 million revenue threshold will apply to tax periods starting on or after 1 June 2023 and subsequent periods ending on or before 31 December 2026. ■

Termination of a Commercial Agency Contract under the (New) Commercial Agency Law

The importance of the UAE as a trading and consumer goods hub resulted in a protective approach of the authorities towards distributors and franchisees. The UAE Federal Law No. 18 of 1981 on Commercial Agencies (Old Law) was drafted with the intent of protecting the interests of UAE nationals (and companies wholly owned by UAE nationals), and was protective towards the interests of registered commercial agencies. In the last few years, there has been a gradual shift away from such protectionist measures and this shift has now led to the issuance of a new Federal Law No. 3 of 2022 Regulating Commercial Agencies in December 2022 (New Law).

 

The New Law repeals the Old Law and will come into effect in June 2023. Kindly refer to our inBrief of 26 January for a snapshot of the key changes to the regime. In this inBrief, we focus on the termination of commercial agency contracts and disputes that may arise.

 

1 – Term and termination: Expiry or termination of a registered commercial agency has been the most contentious issue under the Old Law. The Old Law provided that the principal is not permitted to terminate or refuse to renew a commercial agency contract unless there is mutual consent of both parties or there is a fundamental reason justifying the termination. The term ‘fundamental reason’ was not defined and was determined by the court or the Commercial Agencies Committee (Committee) at their discretion. The New Law has proposed major amendments in this regard and provides that:

 

(a) Unless otherwise agreed between the parties, if the contract requires the agent to establish display buildings, commodity stores, or maintenance or repair facilities, there shall be a default contract term of five years.

 

(b) The commercial agency contract shall expire in any of the following cases:

 

  • upon expiry of the contract term unless renewed;

 

  • pursuant to the terms of the contract;

 

  • by mutual agreement of the principal and the agent; or

 

  • by court order.

 

The ability of the principal to terminate the contract in accordance with its terms or at expiry of the term is a deviation from the Old Law which had very restrictive termination provisions.

 

2 – How to terminate? The party intending to terminate the agency pursuant to the terms of the agency contract is required to:

 

(a) send a termination notice to the other party of their wish to early terminate the agency contract. Unless otherwise agreed in the agency contract, the notice period for the termination notice should be not less than one year notice prior to the effective date if termination or prior to the lapse of one half of the contract term, whichever is less. This requirement can be dispensed with if agreed by the parties; and

 

(b) either party may submit a detailed report prepared by a specialized professional body on the settlement of dues, guarantees of non-interruption of after-sales services, estimation of assets and expected damages, consequent to the termination.

 

In case of non-renewal of the contract, the party wishing to not renew the contract is required to notify the other of non-renewal one year before expiry of the term or before the lapse of one half of the term, which is less, unless the two parties agree otherwise.

 

3 – How to challenge termination: A party may challenge the termination notice before the Committee. The Committee is required to give its decision within 120 days from the date of the request. If it does not give its decision within this timeline, the challenge is deemed rejected. The ability to terminate / not renew and the strict timelines for resolution of the challenges to termination are very principal friendly. This is a major departure from the earlier regime which practically saw a timeline of four to six months for the Committee to issue its decision on such matters.

 

4 – Compensation on termination: The New Law lays down certain provisions relating to the compensation that may be claimed upon termination/expiry of the agency contract. The New Law permits the parties to agree to ‘no compensation’ provisions in the contract in the event the contract is terminated due to expiry of the contract term. This however appears only to relate to circumstances  where the contract terminates due to the expiry of the contract terms. In circumstances where the agency contract is terminated pursuant to the terms of the contract, the agent shall be entitled to compensation, if it proves that their legitimate activity has contributed to the achievement of visible and significant success of the products of the principal, has led to the promotion of such products or the increase in the number of customers and that the termination of the contract would deprive the agent of their lost profit.

 

5 – Commercial Agencies Committee: In line with the Old Law, the New Law also provides that disputes in relation to commercial agencies shall be referred to the Committee prior to being referred to Court. This however does not appear to be the case if the parties have agreed to arbitration. The New Law introduces a timeline of 120 days for the Committee to issue its decision. Failure to comply with the timeline grants the parties the right to approach courts within 60 days of lapse of the deadline.

 

6 – Arbitration: In a major departure from the Old Law, the New Law recognises the parties’ right to agree to arbitration. While the default seat of arbitration has been identified as ‘within the UAE’, the parties are free to agree on a different seat. Note however that this provision does not apply to agency contracts in respect of which a dispute is being heard before the Committee or the competent courts before the New Law is issued. Also, if a party initiates arbitration after the issuance of the Committee’s decision, the Committee’s decision shall be disregarded and have no effect or consequences. The effect of this is likely to be that the Committee could be circumvented by a party, if the agency contract contains an arbitration clause.

 

7 – Application of termination provisions to existing agencies: In order to protect the existing agencies, the provisions relating to termination due to expiry of term or termination in accordance with the contract terms shall apply to existing agency contracts only after two years from the effective date of the New Law. Further, in case of agencies that have been registered for the same agent for more than ten years or agencies in which the volume of the agent’s investment exceeds AED 100 million, such provisions shall only apply ten years after the New Law comes into effect in June 2023.

 

Further clarity is awaited on penalty provisions, release of certain activities from the requirement of being undertaken only through commercial agency and provisions relating to import of goods and services into the UAE during the period of dispute between the parties.

 

Overall, the New Law introduces much expected changes. The provisions on commissions and exclusivity have been retained and existing agents have been protected from termination for a specified time. This would soften the blow on the existing agents who enjoyed full protection and advantages under the Old Law. ■

UAE Commercial Agencies Regime (2023)

The UAE commercial agency regime has been a central pillar of commerce since the issuance of UAE Federal Law 18 of 1981 (the 1981 Law). While piecemeal amendments to the 1981 Law have been introduced from time to time, the UAE government has now issued UAE Federal Law 3 of 2022 concerning commercial agencies (the New Agencies Law) which repeals and replaces the 1981 Law in its entirety.

 

The New Agencies Law represents a substantial modernisation of the 1981 Law and will no doubt contribute further to the development and expansion of the UAE economy and its integration into global commerce. This inBrief considers some of the salient issues concerning registration and termination of commercial agencies under the New Agencies Law.

 

Requirement for registration as a commercial agent

 

The New Agencies Law provides that the following shall be permitted to act as “commercial agents”:

 

– natural persons who are UAE nationals; or

 

– a body corporate that is wholly owned by:

 

(a) one or more natural persons who are UAE nationals; or

 

(b) a public company (subject to what is stated below).

 

A separate regime is contemplated for UAE incorporated public joint stock companies that are (or propose to be) registered as commercial agents under the New Agencies Law. Such companies may be registered as commercial agents notwithstanding that they do not have 100 per cent UAE national participation (but provided that UAE national participation is not less than 51 per cent) however, additional specific implementing regulations are contemplated.

 

In addition, the New Agencies Law provides that the UAE Federal Cabinet may, upon the recommendation of the Minister of Economy, permit an “international” business not owned by UAE nationals to promote and sell its own products in the UAE (and presumably to be registered as its own “commercial agent” in accordance with the New Agencies Law) provided that:

 

– there is no commercial agent registered for the relevant product(s) in the UAE; and

 

– there has not previously been a commercial agent registered for the relevant product(s) in the UAE.

 

The scope of this carveout for a foreign principal is anticipated to be supplemented by a decision of the UAE Federal Cabinet and we look forward to further clarity on what is no doubt going to be an issue of interest.

 

As with the 1981 Law, a written contract is required to be entered into and default jurisdiction for commercial agency disputes is reserved for the commercial agencies committee within the Ministry of Economy and subsequently the onshore courts of the UAE. However, the New Agencies Law allows for the parties to a commercial agency contract to provide for the resolution of disputes by arbitration. This is an important change to the 1981 Law which did not provide for such an alternative.

 

Expiry or termination of  registered commercial agencies

 

It is common knowledge that the 1981 Law provided substantial safeguards against termination to a registered commercial agent. The New Agencies Law provides that a commercial agency shall “expire” upon the expiry of the contractual term stated in the contract of commercial agency. The New Agencies Law also provides that a commercial agency contract may be terminated unilaterally by either principal or agent in accordance with the provisions of the commercial agency contract. Both of the foregoing concepts concerning expiry and termination are new and fundamentally change the previous position with respect to termination, as stated in the 1981 Law.

 

In addition, the New Agencies Law provides that a party wishing to terminate a commercial agency contract at the end of its term (i.e., a “non-renewal”) shall serve notice on the other party not less than either:

 

(a) one year prior to the expiry of the term of the underlying commercial agency contract; or

 

(b) prior to the lapse of half of the stated contractual term,

 

whichever of (a) and (b) is shorter.

 

Application of the New Agencies Law to existing commercial agencies

 

The New Agencies Law is stated to come into effect six months after the date of its publication in the Official Gazette. The New Agencies Law was published in the Official Gazette on 15 December 2022 and accordingly will come into effect in June 2023.

 

Notably however, the New Agencies Law provides that the stipulation concerning the expiry of a commercial agency (as summarised above in this inBrief) shall not immediately apply to commercial agency contracts in force at the time of the issuance of the New Agencies Law and shall only apply to such contracts after the lapse of two years of the date of application of the New Agencies Law (i.e., two years from June 2023). Equally importantly (and by way of exception to the two-year period above), where a commercial agency has been registered for a period of ten years or a commercial agent’s investment into the development of the relevant agency exceeds AED 100 million, the provisions of the New Agencies Law concerning expiry of a registered commercial agency shall only apply after the lapse of ten years from date of its application (i.e., ten years from June 2023) in relation to such agencies. Further implementing regulations concerning this carveout are contemplated in the New Agencies Law.

 

Key takeaways

 

As noted, the New Agencies Law represents a substantial modernisation of the 1981 Law. New provisions concerning the expiry and termination of registered commercial agency contracts have been introduced and will be very important in any negotiations concerning commercial agency contracts proposed to be entered into. A number of key provisions remain subject to further supplementary rules and legislation. As with all legislative updates, the application and enforcement of the New Agencies Law will determine the further development of the UAE commercial agencies regime. ■