This article explores the scope of Federal Law No.18 of 1981 (as amended) on the Organisation of Commercial Agencies (the "Commercial Agencies Law") and the nature of franchise legislation that could be implemented in the UAE in light of the franchise laws in various jurisdictions around the world.
The Scope of Commercial Agencies Law
Under the Commercial Agencies Law there is 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 may qualify as commercial agencies under this law.
The following are characteristics and conditions applicable to a registered commercial agent under the Commercial Agencies Law:
Commercial agents must be UAE nationals or companies incorporated in the UAE and wholly owned by UAE nationals.
The agreement must be registered with the UAE Ministry of Economy in order for the commercial agent to avail of the protections afforded under the law.
Commercial agents are entitled to an exclusive territory encompassing at least one emirate for the specified products.
Unless otherwise agreed, commercial agents are entitled to receive commissions on sales of the products in their designated territory irrespective of whether such sales are made by or through the commercial agent.
Commercial agents are entitled to prevent products, the subject off their commercial agency, from being imported by any other party into the territory awarded to it under the agreement.
Commercial agents are entitled to receive compensation from the principal if the agency is terminated without substantial justification or at the end of the fixed period of the agreement.
Another commercial agent can not be registered unless the previous commercial agent has been deregistered.
In addition, the UAE Commercial Transaction Law, Federal Law No. 18 of 1993 (the "Commercial Code") contains several provisions, which regulate commercial agencies and the UAE courts tend to look and apply the provisions of the Commercial Code to the extent the Commercial Agencies Law is silent. Furthermore, the Civil Transactions Law, Federal Law No. 5 of 1985 also contains provisions which regulate commercial agency relationships in the UAE and are utilised in instances where there are gaps in the Commercial Code.
Scope of a typical franchise law
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. A law regulating franchises would normally seek to level the playing field between the parties to enter into a relationship (franchise agreement) in order to prevent any abuses that can arise in the franchise relationship and to establish certain minimum rights of the parties.
To explore what a franchise is (attracting the application of a franchise law), it would be appropriate to consider a typical definition of a franchise agreement, which would be as follows:
A franchise agreement
takes the form, in whole or part, of any of the following:
a written agreement;
an oral agreement;
an implied agreement; and in which a person (the "franchisor")
grants to another person (the "franchisee") the right to carry on the business of offering, supplying or distributing goods or services.
under which the operation of the business will be substantially or
materially associated with a trade mark, advertising or a commercial symbol:
owned, used or licensed by the franchisor; or
specified by the franchisor; and
under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor an amount including, for example:
an initial capital investment fee; and/or
a payment for goods or services; and/or
a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee;
a training fee or training school fee; but excluding:
payment for goods and services at or below their; usual wholesale price; and/or
repayment by the franchisee of a loan from the franchisor; and/or
payment of the usual wholesale price for goods taken on consignment; and/or
payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement.
A typical franchise law would normally seek for a disclosure of material information by the parties before and after entering into a franchise agreement and to govern the relationship between the parties. The existing franchise laws in various jurisdictions can, therefore, largely be divided into two categories; a disclosure law and a relationship law. A disclosure law would require a franchisor offering or selling a franchise to provide candid information necessary for a prospective franchisee in making a decision to acquire a franchise.
Generally, a strict regime would require the parties to disclose information in the following four broad categories:
Information about the Franchisor
The business history of the franchisor.
The employment history of the officers and executives of the company.
The litigation history of the officers and executives of the company.
The history of the company and certain key individuals with regard to bankruptcy.
Financial statements.
Information about the Franchisee
Detailed description of the franchised business.
Initial investment to be made by the franchisee.
Any requirements that the franchisee makes certain purchases or use specific suppliers.
Details of any finances provided by the franchisor.
Services that the franchisor is obligated to per form on behalf of the franchisee.
Right to use trademarks, patents, and copyrights.
Restrictions, if any, on sales.
Details about both current and terminated franchisees.
Site selection.
Employee and management training.
Details of the Franchise Agreement
Required fees.
Exclusive right to serve an area.
Extent of the franchisee's personal participation in the business.
Renewal, repurchase, and termination rights and responsibilities.
Procedures for modifying the agreement.
Covenants not to compete.
Term of the agreement.
Arrangements upon the death of the franchisee.
Supporting Facts for any Earnings Claims Made by the Franchisor
Information to support earnings claims is required only if the franchisor has made such claims, typically in promotional materials to prospective franchisees.
Earnings claims include oral, written, or visual representations that can be used to calculate state, or even suggest sales, income, or profit levels. Also included are claims of past or potential future earnings, or data presented in such a way that income or costs could be calculated by arbitrarily selecting a sales figure. An attorney experienced in this area of compliance can help a potential franchisor understand whether any of his or her statements might be considered earning claims.
Further, a strict relationship regime would regulate the following:
the term and renewal rights of the franchises.
the remedies available to the parties in case of a termination or breach of a franchise agreement.
the requirement of indemnities.
exclusive and non-exclusive nature of the franchise agreements.
In addition to the above, there could be compulsory registration regime requiring registration with and authority established to regulate the franchisee.
Nature of possible franchise legislation in the UAE
The following points can be considered while determining the nature of possible franchise legislation in the UAE:
The franchise law should attempt to level the playing field between franchisor and franchisee in order to prevent the abuses that can arise in a franchise relationship and to establish certain minimum rights of the respective parties.
European model covers disclosures only, which is widely acknowledged.
A specific disclosure/franchise law can be considered to ensure that the prospective franchisees who intend to invest in franchising receive material information about franchise offerings, thus permitting them to make an informed investment decision.
Alternatively, franchise legislation can be introduced within the Commercial Agencies Law.
Penalties can be introduced for the parties failing to disclose the information required under the franchise law.
The relationship regime can also be considered to regulate the fundamental terms and conditions relating to the franchise agreements including renewal rights, remedies in cases of wrongful termination or breach of a franchise agreement, requirement of indemnities, and the exclusive and non-exclusive nature of franchise agreements.
A government authority can be established to regulate the legal regime relating to the franchises with compulsory registration requirements.
By Muhammad Tariq, Corporate Commercial Department
© Al Tamimi & Company 2007
