The franchise model has become a popular method for overseas companies seeking to do business in the UAE to enter the market whilst retaining control over their brand. It is also popular with UAE businesses seeking to expend domestically and regionally.
In brief:
There is no one specific franchise law in the UAE. The concept of franchising falls within the ambit of commercial and agency laws which do not specifically differentiate between franchise, agency or distribution agreements.
The Agency Law tends to favour agents/franchisees rather than franchisors.
Registration of agreements with the Ministry of Economy can provide an enhanced ability to prevent parallel trading of goods and a clear evidential basis upon which to proceed with any actions for trade mark infringement, however termination of a registered agency agreement is can be difficult.
We are often asked by international brands looking to enter the UAE retail market and potential franchisees looking to acquire a franchise interest what franchising laws the UAE has in place.
Franchising refers to the business model whereby one entity (the franchisor) grants an independent operator the right to use the franchisor's business methods and practices and can include the right to distribute products manufactured by the franchisor, use the franchisor's trade marks and obtain training and other support such as international and national advertising. Such agreements are often for a long period with early termination by either party usually incurring serious penalties.
Although there is no one specific franchising law (as many other countries have), in the UAE, a range of civil and commercial laws apply depending on the terms of the contract. The concept of franchising in the UAE falls within the ambit of commercial and agency laws which do not differentiate between franchise, agency or distribution agreements.
There are three main laws which can apply (depending on the specific terms of the agreement) to franchising relationships being:
(a) Federal Law No. 18 of 1981 on the Organisation of Commercial Agencies (as amended by Law No. 14 of 1998) and which was recently further amended by Law No. 13 of 2006 hereinafter referred to as the "Agency Law"; and
General contractual principals regulating agency and distributorship contained within the Civil Transactions Law, Federal Law No. 5 of 1985 ("Civil Code") and the Commercial Transactions Law, Federal Law No. 18 of 1993 ("Commercial Code").
In addition to the above (and again depending on the terms and conditions of the agreement) other laws such as Federal Law No. 8 of 2002 (amended by Federal Law No. 37 of 1992) on Trademarks and the UAE Civil Procedure Code being Federal Law No 11 of 1992 can also apply. Further laws and regulations can be relevant, including employment (particularly where a franchisor may second staff to the franchisee), Municipality rules in relation to business names and signage together with other UAE general principles dealing with restraint of trade, and assignment of the franchise back to the franchisor in the event of default can also directly affect the terms and conditions of the franchise agreement.
Pursuant to the Agency Law, a Commercial Agency is defined as "the representation of a Principal by an Agent on the distribution, sale offer or presentation of commodity or service within the State" (being the UAE).
In order for the Agency Law to apply however the:
(a) agent must be a UAE national or a company wholly owned by UAE nationals;
relationship must be exclusive; and
(c) relationship between the agent and principal must be registered (this is done with the with the UAE Ministry of Economy).
The Agency Law however tends to favour agents/franchisees rather than franchisors and therefore in the context of international brands looking to expand into the UAE market, consideration needs to be given to whether it is appropriate to have the agreement registered with the UAE Ministry of Economy. With franchisees often the decision lies solely with whether they are UAE nationals (or their company is wholly owned by UAE nationals) and therefore can avail of the benefits that registration of the agreement and therefore the Agency Law affords to agents.
For both franchisors and franchisees, registration can provide an enhanced ability to prevent parallel trading of goods and a clear evidential basis upon which to proceed with any actions for trade mark infringement. For franchisors however, termination of a registered agency agreement is usually difficult, substantial compensation could be awarded to the agent upon termination (or failure to grant a further "term" by the franchisor) and the agent is entitled to commissions from sales made by others in their designated territory. In addition, once the agency agreement is registered, notwithstanding the positive amendments made in 2006 to the Agency Law, it can be difficult for principals to appoint a replacement agent in the event of termination or failure to renew the agreement.
Given the disadvantages that a registered agency can have for franchisors, there are a number of methods that can be used in order to attempt to mitigate the effects of the UAE Agency Law from applying to a franchise relationship depending on the specific terms and conditions of the franchise agreement being negotiated.
Readers may also find our Quick Guide for Foreign Companies Setting Up in the UAE helpful.
Conclusion
Franchising is an effective way of building a brand presence and enables the franchisor to retain much control over the way the brand is managed. Brands seeking to enter the UAE by way of a franchise model should consider the three key pieces of legislation that govern such agreements with that of the company's internal and external objectives. Franchisees also particularly need to be aware of the specific laws in the UAE that apply, especially where they may not be a UAE national (or a company wholly owned by UAE nationals) and therefore can not rely on the protections afforded by the UAE Agency Law. UAE legal counsel can help companies better understand and implement the legal requirements and practices of the UAE.
By Melissa Murray
© Hadef & Partners 2009
