Spotlight on UEA

posted on 28-Apr-2009

The mysteries of the Middle East are unravelled by Marcus Wallman to reveal a franchise market that is rapidly expanding

When walking from the car park of the Dubai International Financial Centre (DIFC) to my office each morning, I pass a Costa Coffee, Caribou Coffee, Yo Sushi! restaurant, Gourmet Burger Kitchen restaurant, Testa Rossa Café and a Hediard Café. Thankfully the DIFC also has a Fitness First gym!

Clearly, franchising is a very popular method of conducting business in Dubai. In an article appearing in The National (a UAE newspaper) recently, Matthew Shay, President and Chief Executive of the International Franchise Association, is quoted as saying that the UAE franchising industry, which is valued at about $30 billion, will grow between five and eight per cent in 2009. In the same article, Sary Hamway, the Dubai based Chief Executive of FranExcel, a franchise consultancy, said that in the past five years the UAE franchise industry has grown by about 25 per cent to roughly 400 franchising systems.

Legislation
The main piece of legislation to consider in the context of franchise arrangements in the UAE is Federal Law No. 18 of 1981 on the Organisation of Commercial Agencies (the ‘Commercial Agencies Law’). The Commercial Agencies Law has potential application not only to what would be strictly considered as agency agreements under UK law, but also to agreements regarding franchises, distributorships, commission arrangements, dealerships and other forms of sales representative or sales agency relationships.

I say ‘potential’ application as the Commercial Agencies Law only applies to contracts that are registered with the UAE Federal Ministry of Economy (the ‘Ministry’). In order for a contract to qualify for registration with the Ministry there are a number of criteria that must be met, the main ones being:

  • The franchisee must be a UAE national or an entity that is wholly owned by UAE nationals
  • The franchise agreement must grant exclusivity over all or a part of the UAE
  • The franchise agreement must be notarised.
Some franchisees may claim that unless a franchise agreement is registered with the Ministry it is not legally valid, however this is not the case, as discussed below.

There are many franchise agreements in the UAE that have been entered into between foreign franchisors and local limited liability companies, for example, where such companies have a 49 per cent foreign shareholding (ie, they are not 100 per cent owned by UAE nationals) or are not exclusive, are valid arrangements notwithstanding that they do not qualify for registration with the Ministry.

Unregistered agreements are governed by the various UAE federal laws, applicable generally to commercial arrangements such as the UAE Civil Code and the UAE Commercial Transactions Law. Generally these recognise the right of parties to contract with each other on such terms as they may agree, although there is scope under such legislation for a franchisee to claim damages upon the cancellation of the agreement by the franchisor.

Consequences of registration
If an agreement qualifies, franchisees generally prefer to register an agreement with the Ministry. The main consequences of registration are:

  • The agreement cannot be terminated by the franchisor without the franchisor being able to show ‘justifiable cause’, even if the franchisor has a clear contractual right to terminate in the franchise agreement itself. The one exception to this (provided for by a 2006 amendment to the Commercial Agencies Law) is where the agreement is for a fixed term.
  • The franchisee is able to instruct the UAE ports and customs authorities to prohibit any products in respect of which it is the registered agent entering the UAE without its consent.

While this provides good protection against parallel imports it also puts a registered franchisee in an extremely strong negotiating position in the event that a franchisor wants to terminate an agreement.

A registered franchisee will be placed in a much stronger position with regards to the quantum of damages that a court may award upon termination than an unregistered franchisee.

As a result, franchisors generally consider it preferable not to have their agreements registered. This is an issue that should be raised with any potential franchisee at the outset.

A few other issues…
I am often asked if an agreement has to be in Arabic and/or notarised to be valid. As mentioned above, if an agreement is to be registered then it must be notarised (and in order to be notarised it must be translated into Arabic). However, if an agreement is not registered then there is no need for it to be notarised or translated into Arabic to be valid.

Certain cultural issues such as a clause regarding uniforms being amended to include a reference to “giving due regard to cultural sensitivities.” While Dubai is reasonably relaxed when it comes to dress requirements, other Emirates and countries in the region have stricter requirements. There are also issues regarding restrictions of serving pork products and alcohol, and this may also need to be provided for in the franchise agreement (for example, for food franchises).

Franchising has a bright future in the UAE and franchisors should not be afraid to do business there. However, there are certain UAE law specific issues that do need to be dealt with over and above the standard issues that arise in the context of negotiating franchise agreements and it is always adviseable to get local law advice before entering into any franchise arrangement.

DIFC itself is what is referred to as a ‘financial free zone’ and is a separate jurisdictional area to the rest of the UAE. The UAE Commercial Agencies Law as discussed would not have application to franchise arrangements within the DIFC.

Marcus Wallman is an associate in the Corporate & Commercial Department of Al Tamimi & Company. Marcus has advised many international companies on how to carry out business in Dubai and in the United Arab Emirates.
For further information on franchising in Dubai contact
Marcus on m.wallman@tamimi.com