Cautions of Mediation in Commercial Transactions

The pitfalls of brokerage in commercial dealings are not a side detail of a deal; they are very often the difference between a successful transaction and a long dispute in court. The commercial broker who brings buyer and seller together, or who opens the door to a supply or investment deal, can be the key to profit or the source of loss when there is no written contract, when the condition for earning the commission is unclear, or when one party is circumvented. In the UAE, the Commercial Transactions Law regulates the commercial brokerage contract with clear rules, yet practice shows that most brokerage disputes arise from ignoring simple pitfalls that could have been avoided from day one.

In this guide we review the main pitfalls of brokerage in commercial dealings from both sides: the trader or investor who relies on a commercial broker, and the broker who wants to secure his commission and protect himself from liability. If you are looking for a commercial lawyer in Dubai to review a brokerage contract or handle a commission dispute, you will find at the end of this article how AWADH ALMHEIRI LAW FIRM AND LEGAL CONSULTATIONS can help you.

What are the pitfalls of brokerage in commercial dealings, and how do you protect yourself?

What is commercial brokerage, and why does it call for caution?

Commercial brokerage is a contract under which the broker undertakes to find a second party to conclude a specific contract and to mediate the negotiations for a fee. Under the Commercial Transactions Law it is a commercial activity whenever it is practised professionally. Here lies the first pitfall of brokerage in commercial dealings: many people treat the commercial broker as a friend who knows someone, whereas the law treats him as a trader with defined rights and obligations, whose actions produce legal effects binding on the principal and sometimes on the other party to the deal.

Commercial brokerage also differs from commercial agency: the broker brings the parties together and does not contract in the name of his principal, whereas the agent concludes the contract on behalf of the principal. Confusing the two roles is one of the most dangerous pitfalls of brokerage, because it can bind the principal to undertakings he never intended, or make the broker liable for performing a deal to which he was not a party.

Pitfall one: dealing with an unlicensed commercial broker

One of the most common pitfalls of brokerage in commercial dealings is dealing with someone who practises commercial brokerage without a trade licence covering that activity. In the UAE no commercial activity may be carried on without a licence from the competent authority, and certain types of brokerage, such as real estate brokerage, financial brokerage and brokerage in securities and virtual assets, are subject to special licensing and supervision by specific regulators. Dealing with an unlicensed broker exposes you to three risks: difficulty in recourse against him on breach, the possibility that certain acts are void, and a weak position before the regulators if it emerges that the deal passed through an unlawful channel.

Pitfall two: verbal agreements and the absence of a written brokerage contract

Many commercial dealings begin with a phone call or a WhatsApp message: find me a buyer and take your share. This verbal agreement is the widest door to brokerage disputes, because where there is no express agreement on the fee the law refers to commercial custom, and if there is no custom the judge assesses it according to the value of the deal and the effort expended. The result is that the broker may receive less than he expected, the principal may pay more than he estimated, and both lose time and litigation costs that a two-page written brokerage contract would have spared them.

A written contract does not protect the broker alone; it also protects the principal from surprise claims for commission on deals the broker did not actually mediate, or from another broker claiming credit for the same deal. It is always best for the commercial brokerage contract to define the scope of the mandate, its duration, the deals covered, the commission rate and the party liable to pay it.

Pitfall three: an unclear condition for earning the commission

The rule in the Commercial Transactions Law is that the broker earns his fee once the contract he mediated is concluded, even if it is not performed afterwards, unless agreed or customary otherwise. This rule surprises many traders who assume the commission is payable only after the price is collected or the goods delivered. One of the most important pitfalls of brokerage in commercial dealings is therefore leaving the trigger vague: is the commission earned on conclusion? On performance? On collection of a particular instalment? And what if the contract is conditional on a government approval or bank financing?

For full details on when the fee is earned and when it is forfeited, see our earlier article Commercial broker: what are your rights and how to protect them.

Pitfall four: circumventing the broker or the principal

Circumvention occurs when a party bypasses the commercial broker and contracts directly with the counterparty the broker introduced in order to save the commission, or when the broker exploits his principal's relationships and confidential data to conclude a parallel deal for himself or for others. This is among the most dangerous pitfalls of brokerage in commercial dealings because it happens quietly, months after the first introduction, and is hard to prove without a written agreement.

The practical solution is a Non-Disclosure and Non-Circumvention Agreement (NCNDA) that identifies the introduced parties, the duration of the obligation and the agreed compensation on breach, and that extends to affiliates and sub-brokers. Under the Civil Transactions Law the parties may agree in advance on the amount of compensation, subject to the court's power to adjust it to the actual loss. Without such an agreement the broker is left relying on the general rules of evidence, which is a costly battle.

Pitfall five: conflicts of interest and the broker who works for both sides

The commercial broker must present the deal honestly to both parties even if only one of them appointed him, and he forfeits his fee and the reimbursement of his expenses if he harms one party for the benefit of the other or obtains a benefit from the other party in bad faith. Nor may he make himself the counterparty to the contract without express permission. A pitfall of brokerage in commercial dealings that principals overlook is that the broker may collect commission from both sides without their knowledge, or be a hidden partner in the selling company, turning brokerage into a sale to himself at a higher price.

Pitfall six: marketing promises and the broker's liability for fraud

As a rule the broker does not guarantee the solvency of the parties, the performance of the deal, or the type and value of the goods, unless fraud or fault on his part is proven or he has guaranteed them by agreement. This means that the promises some brokers make, such as goods fully compliant, the buyer is a well-known Gulf bank, or the return is guaranteed, do not legally bind the broker unless documented as a written guarantee or proven to be deliberate fraud. A pitfall of brokerage in commercial dealings is for the principal to base his decision on the broker's words instead of examining the counterparty and its documents himself, only to discover too late that the broker offered nothing but a presentation that carries no liability.

Pitfall seven: handing money to the broker

Never make the commercial broker a channel for money without clear safeguards. Deposits, advance payments and bank guarantees should be delivered to the contracting party itself or into an escrow account, not into the broker's personal account. If money is handed to the broker, his capacity in receiving it must be documented: is he a trustee of the sum? An agent authorised to collect? Or a creditor for the commission? Each capacity carries a different liability on loss or refusal to return. And remember that routing large sums through unlicensed intermediaries or individuals' accounts can expose the principal himself to scrutiny under the anti-money-laundering laws even if his intentions were sound.

Pitfall eight: brokerage in international deals and high-risk investments

The pitfalls of brokerage in commercial dealings multiply when the counterparty is abroad, or the deal concerns overseas real estate, virtual assets, trading platforms or the supply of goods from distant markets. Verifying the identity and licence of the counterparty becomes difficult, and the broker is often the only reachable party inside the country. The brokerage contract should therefore specify the governing law and the forum, the broker's role should be precisely documented, and the broker should be required to disclose in writing everything he knows about the counterparty, because the law obliges him to do so and makes him liable for any fraud or fault.

Legal time limits you should know in commercial brokerage disputes

Practical tips to avoid the pitfalls of brokerage in commercial dealings

Legal references

• Federal Decree-Law No. (50) of 2022 on Commercial Transactions.
• Federal Law No. (5) of 1985 promulgating the Civil Transactions Law, as amended.
• Federal Decree-Law No. (31) of 2021 promulgating the Crimes and Penalties Law, as amended.
• Federal Decree-Law No. (32) of 2021 on Commercial Companies, as amended.

Frequently asked questions about the pitfalls of brokerage in commercial dealings