Marcus Wallman a partner in Al Tamimi & Company’s Commercial Advisory practice looks at franchising in the Middle East with an emphasis on Dubai and the UAE.
When walking from the car park of the Dubai International Financial Centre to my office each morning, I pass a Costa Coffee, Caribou Coffee, Caffe Nero, a Yo Sushi restaurant, a Gourmet Burger Kitchen restaurant and a Potbelly Sandwiches outlet among others. Thankfully the DIFC also has a Fitness First gym! Clearly, franchising is a very popular method of conducting business in Dubai and we continue to see a steady flow of enquiries from both franchise owners and franchisors relating to the establishment of new franchised brands in the UAE.
In this article I will look at the main legal considerations for a potential franchisor in connection with the appointment of a franchise owner in the UAE.
The main piece of legislation to consider in the context of franchise arrangements in the UAE is what is commonly referred to as the Commercial Agencies Law. The Commercial Agencies Law has potential application not only to what would be strictly considered as agency agreements in many foreign jurisdictions 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:
Some franchise owners may claim that unless a franchise agreement is registered with the Ministry it is not legally valid however this is not the case. There are many franchise agreements in the UAE that have been entered into between foreign franchisors and local companies that have a foreign shareholder or that are not exclusive, which are valid arrangements notwithstanding that they do not qualify for registration with the Ministry.
Furthermore, even franchise agreements which may meet the qualifying criteria for registration with the Ministry do not have to be registered although in such circumstances franchisors should bear in mind that a franchise owner may later approach the UAE courts for an order that the agreement be registered in order to obtain the protections offered by registration.
Unregistered arrangements 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. In general terms, these laws 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 franchise owner to claim damages upon the cancellation of the agreement by the franchisor even if such cancellation is done in accordance with terms of the agreement.
If an agreement qualifies, franchise owners always 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.
It is very difficult for a franchisor to establish "justifiable cause". Matters that may amount to justifiable cause would include the franchise owmer no longer being appropriately licensed to undertake the franchised activity in the UAE, repeated material breaches of the terms of the franchise agreement and/or gross negligence, and dealing with competitive products where this is clearly prohibited under the terms of the franchise agreement.
In practice, the circumstances surrounding the termination of a registered franchise agreement will be considered more with a view to determining what would be an appropriate compensation payment, if any, to be awarded to the franchise owner as a result of the termination of the agreement. If a justifiable cause is found to exist then it may be that the commercial agencies committee (or court on appeal, see below) will find that no compensation is payable to the franchise owner.
The franchise owner 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 franchise owner in an extremely strong negotiating position in the event that a franchisor wants to terminate an agreement and appoint a replacement franchise owner. It allows the franchise owner to effectively block the franchisor’s access to the local market while the issue of compensation is being negotiated or the dispute is being dealt with via the commercial agencies committee (see below) or the UAE courts (on appeal). A final determination, if a decision of the commercial agencies committee is appealed to the local courts, may take in the region of three years (or possibly longer) to obtain.
The factors that the commercial agencies committee (and local court, if appealed) will take into account when assessing the level of compensation payable to a registered franchise owner upon termination of the arrangement include the performance of the franchise owner, how long the arrangement has been in place and whether the franchise owner has incurred significant expenditures in establishing the business (with more weight being given to more recent expenditures).
As a result, franchisors generally consider it preferable not to have their agreements registered. This is an issue that needs to be fully understood by any franchisor looking to appoint a franchise owner in the UAE prior to the franchisor entering into any negotiations with a potential franchise owner.
Amendments made in 2010 to the Commercial Agencies Law effectively reversed amendments that were made to that law in 2006 (the earlier amendments made the law less protectionist for registered agents).
The 2010 amendments reintroduced the commercial agencies committee (a committee established by the Ministry to hear disputes between registered agents and principals) and removed the right of principals to de-register agents upon the expiry of a fixed term agreement. These amendments were largely a response to the 2008 global financial crisis and pressure from local agents. The commercial agencies committee has only just started to accept disputes and it remains to be seen what the committee’s general approach will be and whether it will be provide a considered and fair forum for the resolution of disputes between registered agents and principals.
I am sure that franchising will continue to play a major role in the UAE economy and franchisors should not be afraid to do business here. 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 advisable to get local law advice before entering into any franchise arrangement.