1. RELEVANT LEGISLATION AND RULES GOVERNING FRANCHISE TRANSACTIONS
1.1 What is the legal definition of a franchise?
In this article we shall limit our reply with regard to UAE law but not in respect of the Dubai International Financial Centre or Abu Dhabi Global Markets law.
There is no specific legal definition of franchise in UAE law; however, franchise is commonly used to refer to a grant of the right to operate and share in the profits of a business or sell goods or services under a brand or chain name. Additionally, franchise may mean the right granted to a person to operate a store or sell goods or services under a franchise agreement. The owner (the franchisor) will license outlets to others (the franchisees) to operate using business concepts, property, trademarks and tradenames owned by the franchisor.
1.2 What laws regulate the offer and sale of franchises?
The UAE has no specific laws specifically governing franchising. As a result, certain contracts and commercial law are applicable to franchise agreements in the UAE. In particular, the articles found in the commercial agency, distribution and Intellectual Property (IP) laws/sections of the law would commonly be referred to when resolving a franchise dispute. There are several laws which can apply to franchising relationships including the following:
- Federal Law No. 18 of 1981 on the Organization of Commercial Agencies (as amended by Law No. 14 of 1998) and Law No. 13 of 2006.
- Federal Law No. 18 of 1981 on Organizing Commercial Agencies as amended.
- Federal Law No. 5 of 1985 on Civil Transactions.
- Federal Law No. 18 of 1993 on Commercial Transactions.
- UAE intellectual property laws for trademarks, copyright and patents.
1.3 If a franchisor is proposing to appoint only one franchisee/licensee in your jurisdiction, will this person be treated as a "franchisee" for purposes of any franchise disclosure or registration laws?
No, there are no franchise registration or disclosure laws; however, the Commercial Agencies laws in the UAE may allow the appointment of an exclusive agent who may, in turn, be considered a sole franchisee.
1.4 Are there any registration requirements relating to the franchise system?
There are no registration requirements related to the franchise system.
1.5 Are there mandatory pre-sale disclosure obligations?
There are no specific mandatory disclosure obligations in connection with the sale of a franchise in the UAE.
1.6 Do pre-sale disclosure obligations apply to sales to sub-franchisees? Who is required to make the necessary disclosures?
No, pre-sale disclosure obligations do not apply to sales to sub-franchisees.
1.7 Is the format of disclosures prescribed by law or other regulation, and how often must disclosures be updated? Is there an obligation to make continuing disclosure to existing franchisees?
There are no such disclosures that are applicable in the UAE.
1.8 What are the consequences of not complying with mandatory pre-sale disclosure obligations?
There are no such disclosures that are applicable in the UAE.
1.9 Are there any other requirements that must be met before a franchise may be offered or sold?
There are no requirements.
1.10 Is membership of any national franchise association mandatory or commercially advisable?
Membership is not mandatory in any case.
1.11 Does membership of a national franchise association impose any additional obligations on franchisors?
No, a membership with a national franchise association does not impose any additional obligations on franchisors.
1.12 Is there a requirement for franchise documents or disclosure documents to be translated into the local language?
Translation is not required; however, dealings with any government departments or the courts will require that documents are translated into the local language.
2. BUSINESS ORGANISATIONS THROUGH WHICH A FRANCHISED BUSINESS CAN BE CARRIED ON
2.1 Are there any foreign investment laws that impose restrictions on non-nationals in respect of the ownership or control of a business in your jurisdiction?
The UAE Companies Law, which applies to the UAE with the exception of the free zones, requires that all Limited Liability Companies must be 51% owned by UAE nationals. Most free zones do not carry that requirement and therefore foreigners may own a free zone entity entirely.
2.2 What forms of business entity are typically used by franchisors?
The most common entity that is used by franchisors are Limited Liability Companies established pursuant to the UAE Companies Law.
2.3 Are there any registration requirements or other formalities applicable to a new business entity as a pre-condition to being able to trade in your jurisdiction?
An entity practising any commercial activity in the UAE will require a licence to do so. When registering an entity, the authority registering the entity may require additional requirements for certain activities, whilst some activities do not require additional or specific approvals. The approvals and requirements will be set by other government authorities and a person registering an entity will need to obtain a "No Objection" from the relevant authority in order to proceed to register the entity.
3. COMPETITION LAW
3.1 Provide an overview of the competition laws that apply to the offer and sale of franchises.
The UAE Competition Law (Federal Law No. 4 of 2012) (the Law) and the Executive Regulations (Council of Ministers' Resolution No. 37 of 2014) prohibit certain anti-competitive practices and provide for the establishment of a "Competition Regulation Committee" (the Committee) under the authority of the UAE Ministry of Economy (the Ministry). The Regulations deal in detail with the procedures of applying to the Committee for exemptions, approvals and the examination of complaints. The Law has been in force since February 2013 and the Regulations since October 2014. However, the application and enforcement of the provisions has not been possible in practice due to the absence of certain key information. This has now been addressed by two Cabinet Resolutions (Resolution Nos 13 and 22 of 2016). Both Resolutions take effect as from 1 August 2016.
3.2 Is there a maximum permitted term for a franchise agreement?
There is no maximum permitted term.
3.3 Is there a maximum permitted term for any related product supply agreement?
There is no maximum permitted term.
3.4 Are there restrictions on the ability of the franchisor to impose minimum resale prices?
The restrictive agreements which are considered prohibited are mentioned as a non-exclusive list of examples, which primarily focus on the collusion of persons in a market and against anti-competitive practices including and not limited to, price-fixing, abuse of a dominant position in the market, imposing terms or prices of resale, etc. What is important to note is one of the tests that the law focuses on, which is any act that is anti-competitive in nature under the law, which seeks to prejudice, limit or prevent competition.
3.5 Encroachment – are there any minimum obligations that a franchisor must observe when offering franchises in adjoining territories?
There are no rules mentioned in respect of encroachment.
3.6 Are in-term and post-term non-compete and non-solicitation of customers covenants enforceable?
Yes, they are enforceable.
4. PROTECTING THE BRAND AND OTHER INTELLECTUAL PROPERTY
4.1 How are trade marks protected?
Federal Law No. (37) 1992 on trademarks, or trademark law, which was amended by Law No. (19) 2000 and Law No. (8) 2002, provides protection for registered trademarks in the UAE and aims to safeguard the interests of both businesses and consumers in the country. The law includes the definition of trademarks, signs that cannot be registered as trademarks, trademark registration and cancellation procedures, transfer of ownership and mortgage of trademarks, licensing others to use trademarks, penalties for trademark law infringement and general and transitory provisions.
Some of the main articles of the trademark law include:
Article (19): The period of protection provided by the registration of a trademark is 10 years which can be renewed for a successive period of 10 years by submitting an application within the last year of the protection period in accordance with the terms and conditions set by this law and its executive regulations.
Article (20): The Ministry can remove a registered trademark forthwith after notifying the concerned party about the reasons for removal, listening to their explanations and considering their defence. The affected parties can appeal the removal decision at the relevant civil court within 30 days from the date of notification about the removal.
Articles (37) and (38) detail the penalties for violating the trademark law. The following acts will invite an imprisonment and/or a fine of at least AED 5,000:
- Forging or imitating a trademark registered according to the law in a way that misleads the public who use goods and services distinguished by the original trademark. The same applies to all who deliberately use a forged or imitated trademark.
- Using a registered trademark owned by a third party or placing it illegally and with bad intention on the products.
- Deliberate sale, display, promotion or possession (with the intent of selling) of products with a forged, imitated or illegally placed trademark.
- In addition, article (38) can lead to a jail term not exceeding one year and a fine of not less than AED 5,000 and not more than AED 10,000 or one of these penalties for anyone who uses a trademark that may not be registered as per the provision of this law, or illegally writes statements on trademarks or commercial documents giving a false impression that the person holds a registered trademark.
4.2 Are know-how, trade secrets and other business-critical confidential information (e.g. the Operations Manual) protected by local law?
Yes, the new UAE Companies Law that came into force on 1 July 2015 contains a provision entitled "Disclosure of company secrets" (article 369). The UAE already has a number of laws that penalise the disclosure of trade secrets or impose obligations of confidentiality that provide differing scopes of protection for trade secrets. For example: the Civil Transactions law imposes an obligation on employees to keep confidential the commercial and industrial secrets of their employers even after the end of their employment contract (articles 905 and 922); and the UAE Penal Code punishes anyone who holds a secret because of his profession or position and discloses it other than when legally permitted, or uses it for his own or another's benefit without permission (article 379). Know-how is protected by the UAE Patent law of 2002 as information or facts of a technical nature resulting from experience obtained in the practice of a profession and capable of being practically applied.
4.3 Is copyright (in the Operations Manual or in proprietary software developed by the franchisor and licensed to the franchisee under the franchise agreement) protected by local law?
Yes, it is protected under the provisions of the Federal Law No. (7) 2002 On Copyrights and Related Rights.
5.1 What are the remedies that can be enforced against a franchisor for failure to comply with mandatory disclosure obligations? Is a franchisee entitled to rescind the franchise agreement and/or claim damages?
Although there is no mandatory disclosure under the law, if contractually agreed, the franchisee may have the right to rescind the agreement and/or claim damages.
5.2 In the case of sub-franchising, how is liability for disclosure non-compliance or for pre-contractual misrepresentation allocated between franchisor and master franchisee? If the franchisor takes an indemnity from the master franchisee in the Master Franchise Agreement, are there any limitations on such an indemnity being enforceable against the master franchisee?
The UAE law focuses on the parties to a transaction (unless the misrepresentation is handled under the criminal articles of misrepresentation). Therefore, a sub-franchisee shall have a right against the franchisee unless the third-party rights are created by contract. An indemnity may be relied on from the master franchisor by the sub-franchisee if it is directed to his benefit. In most circumstances, such a misrepresentation when leading the sub-franchisee to court will prompt the sub-franchise to claim against both the franchisor and master franchisor.
5.3 Can a franchisor successfully avoid liability for pre-contractual misrepresentation by including disclaimer clauses in the franchise agreement?
A franchisor may successfully avoid liability for pre-contractual misrepresentation by the use of disclaimers; however, such disclaimers may not exclude a franchisor from any criminal liability for pre-contractual misrepresentation.
5.4 Does the law permit class actions to be brought by a number of aggrieved franchisees and, if so, are class action waiver clauses enforceable?
Class actions are not permitted in such claims.
6. GOVERNING LAW
6.1 Is there a requirement for franchise documents to be governed by local law? If not, is there any generally accepted norm relating to choice of governing law, if it is not local law?
There is no requirement for an agreement to be governed by local law. There is nothing to prevent parties from choosing a particular law or court to be chosen for the Franchise Agreements. The general norm is to have the local courts, courts of the franchisor or arbitration.
6.2 Do the local courts provide a remedy, or will they enforce orders granted by other countries' courts, for interlocutory relief (injunction) against a rogue franchisee to prevent damage to the brand or misuse of business-critical confidential information?
Yes. The UAE laws may enforce foreign orders and awards. The UAE courts may also entertain applications for interlocutory relief and enforce any order to desist from using names, products or services.
6.3 Is arbitration recognised as a viable means of dispute resolution and is your country a signatory to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards? Do businesses that accept arbitration as a form of dispute resolution procedure generally favour any particular set of arbitral rules?
Yes, arbitration is recognised as a viable means of dispute resolution in the UAE. The UAE is a party to the New York Arbitration Convention. Parties, when agreeing to an arbitration clause, will typically elect the Dubai International Financial Centre London Court of International Arbitration (DIFC-LCIA), Dubai International Arbitration Centre (DIAC) or rarely, the International Chamber of Commerce (ICC).
7. REAL ESTATE
7.1 Generally speaking, is there a typical length of term for a commercial property lease?
Generally, commercial property leases last for three years or five years. There is a tendency nowadays to register one-year leases following the registration requirements of registering leases annually.
7.2 Is the concept of an option/conditional lease assignment over the lease (under which a franchisor has the right to step into the franchisee/tenant's shoes under the lease, or direct that a third party (often a replacement franchisee) may do so upon the failure of the original tenant or the termination of the franchise agreement) understood and enforceable?
A term such as a lease assignment must be agreed and signed by the assignee, assignor and landlord. The concept is not widely used and typically a landlord would prefer to have the right to determine whether they would want a lease to be assigned and deal directly with a tenant without a lease assignment clause.
7.3 Are there any restrictions on non-national entities holding any interest in real estate, or being able to sub-lease property?
Non-nationals may not own property outside certain allowable territories. There are no legal restrictions that prohibit a non-national to lease or sub-lease because of his nationality.
7.4 Give a general overview of the commercial real estate market. Specifically, can a tenant reasonably expect to secure an initial rent free period when entering into a new lease (and if so, for how long, generally), or are landlords demanding "key money" (a premium for a lease in a particular location)?
A tenant can reasonably expect a rent-free period, which is referred to in the UAE as a grace period of three months. "Key money" is usually not demanded by the landlord, but rather by the existing tenant if there is a takeover of the lease.
8. ONLINE TRADING
8.1 If an online order for products or request for services is received from a potential customer located outside the franchisee's exclusive territory, can the franchise agreement impose a binding requirement for the request to be re-directed to the franchisee for the territory from which the sales request originated?
Agreements may impose a binding requirement for an order to be re-directed, and such breach of a clause may lead to the termination of the franchise or a cause for damages to be claimed.
8.2 Are there any limitations on a franchisor being able to require a former franchisee to assign local domain names to the franchisor on the termination or expiry of the franchise agreement?
There are no limitations and the franchisor may do so; however, it is advisable that such local domain names are mentioned in the agreement as owned by the franchisor.
9.1 Are there any mandatory local laws that might override the termination rights that one might typically expect to see in a franchise agreement?
There are no mandatory local laws that override termination rights except if such franchise agreement was registered with the Ministry of Economy as an exclusive agency agreement following the Commercial Agencies Law. Regardless, even if a party terminated a contract, the courts may decide not to terminate the contract (i.e. if it is unfair to do so) notwithstanding an agreed termination clause.
9.2 Are there local rules that impose a minimum notice period that must be given to bring a business relationship that might have existed for a number of years to an end, which will apply irrespective of the length of the notice period set out in the franchise agreement?
There are no local laws that impose minimum notice periods that must be given. The courts may, however, decide to find acts and terms unfair and may provide alternative remedies or decisions that protect the parties in a transaction.
10. JOINT EMPLOYER RISK AND VICARIOUS LIABILITY
10.1 Is there a risk that a franchisor may be regarded as a joint employer with the franchisee in respect of the franchisee's employees? If so, can anything be done to mitigate this risk?
No such risk can be assumed unless agreed and stated in the franchise agreement.
10.2 Is there a risk that a franchisor may be held to be vicariously liable for the acts or omissions of a franchisee's employees in the performance of the franchisee's franchised business? If so, can anything be done to mitigate this risk?
Not directly, in regard to the performance of the employees' duties.
11. CURRENCY CONTROLS AND TAXATION
11.1 Are there any restrictions (for example exchange control restrictions) on the payment of royalties to an overseas franchisor?
No, there are no such restrictions applicable in the UAE.
11.2 Are there any mandatory withholding tax requirements applicable to the payment of royalties under a trade mark licence or in respect of the transfer of technology? Can any withholding tax be avoided by structuring payments due from the franchisee to the franchisor as a management services fee rather than a royalty for the use of a trade mark or technology?
Entities in the UAE do not withhold tax and there are no withholding tax requirements in respect of royalties for franchisors.
11.3 Are there any requirements for financial transactions, including the payment of franchise fees or royalties, to be conducted in local currency?
No, there are no such requirements applicable in the UAE.
12. COMMERCIAL AGENCY
12.1 Is there a risk that a franchisee might be treated as the franchisor's commercial agent? If so, is there anything that can be done to help mitigate this risk?
Yes, there is such a risk. Mentioning clearly in an agreement that the relationship is not an agency is important, and ensuring that no instruments are signed or given which provide that the franchisee is acting as an agent would be highly advisable.
13. GOOD FAITH AND FAIR DEALINGS
13.1 Is there any overriding requirement for a franchisor to deal with a franchisee in good faith and to act fairly in its dealings with franchisees according to some objective test of fairness and reasonableness?
The courts will take into consideration the issues of dealings in good faith and to act fairly is a general principle in UAE law. The courts will, however, consider fairness and reasonableness in a particular case.
14. ONGOING RELATIONSHIP ISSUES
14.1 Are there any specific laws regulating the relationship between franchisor and franchisee once the franchise agreement has been entered into?
There are no specific laws in respect of franchise dealings.
15. FRANCHISE RENEWAL
15.1 What disclosure obligations apply in relation to a renewal of an existing franchise at the end of the franchise agreement term?
No disclosure requirements are specified by the law.
15.2 Is there any overriding right for a franchisee to be automatically entitled to a renewal or extension of the franchise agreement at the end of the initial term irrespective of the wishes of the franchisor not to renew or extend?
No, this is not applicable in the UAE.
15.3 Is a franchisee that is refused a renewal or extension of its franchise agreement entitled to any compensation or damages as a result of the non-renewal or refusal to extend?
Unless the refusal was conditional and such conditions were met, a franchisee will find it hard to convince a court that the franchisor acted unfairly by not renewing; therefore, a franchisor not extending and acting within his rights and according to what was agreed in the agreement may not be liable.
16. FRANCHISE MIGRATION
16.1 Is a franchisor entitled to impose restrictions on a franchisee's freedom to sell, transfer, assign or otherwise dispose of the franchised business?
Yes, a franchisor is entitled to impose restrictions on a franchisee's freedom.
16.2 If a franchisee is in breach and the franchise agreement is terminated by the franchisor, will a "step-in" right in the franchise agreement (whereby the franchisor may take over the ownership and management of the franchised business) be recognised by local law, and are there any registration requirements or other formalities that must be complied with to ensure that such a right will be enforceable?
A step-in clause will be recognised and enforced; however, with certain aspects of the business like the lease, there are certain relationships and rights that the franchisor may not be able to control. Structuring the correct step-in right is vital if the franchisor wishes that a step-in right can be properly enforced.
16.3 If the franchise agreement contains a power of attorney in favour of the franchisor under which it may complete all necessary formalities required to complete a franchise migration under pre-emption or "step-in" rights, will such a power of attorney be recognised by the courts in the country and be treated as valid? Are there any registration or other formalities that must be complied with to ensure that such a power of attorney will be valid and effective?
The power of attorney will be recognised so long as it is an official document. An official document in the UAE requires either a foreign government authority to authenticate it and thereafter the Ministry of Foreign Affairs of the UAE, or otherwise that it be authenticated by the notary public in the UAE.
17. ELECTRONIC SIGNATURES AND DOCUMENT RETENTION
17.1 Are there any specific requirements for applying an electronic signature to a franchise agreement (rather than physically signing a "wet ink" version of the agreement), and are electronic signatures recognised as a valid way of creating a binding and enforceable agreement?
There are no specific requirements for an electronic signature; however, the UAE has recognised electronic dealings and, in evidence, an email or an attached agreement that is electronically signed will be considered sufficient proof that the agreement was signed by the party sending that agreement.
17.2 If a signed/executed franchise agreement is stored electronically (either having been signed using e-signatures or a "wet ink" version having been scanned and saved as an electronic file), can the paper version of the agreement be destroyed?
No. Whilst an email is sufficient proof and evidence that the party sending the email confirms the agreement, an independent electronic file of the document stored will not achieve the same result; nor will it be sufficient to convince the courts. The original document in such an instance would need to be presented.
Originally published by International Comparative Legal Guide: Franchise 2020, Global Legal Group Limited.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.