Franchising Comparative Guide - - United Arab Emirates

1 Legal and enforcement framework

1.1 Which legislative and regulatory provisions govern franchising in your jurisdiction?

The United Arab Emirates has no standalone franchise legislation. Federal Law 18/1981 on the Organisation of Commercial Agencies (as amended) (‘Commercial Agency Law') applies to franchise arrangements where the franchise agreement is registered as a commercial agency agreement with the UAE Ministry of Economy.

In order for the Commercial Agency Law to apply, the following criteria must be satisfied:

The agent (franchisee) must be:
- a UAE national or a company wholly owned by UAE nationals;
- a UAE public joint stock company with a majority share (ie, 51% or more) owned by UAE national(s); or
- a UAE private entity owned by a public joint stock company with a majority share (ie, 51% or more) owned by UAE national(s);
The relationship must be exclusive; and
The relationship between the agent (franchisee) and principal (franchisor) must be registered with the Ministry of Economy.

In addition to the Commercial Agency Law, the following UAE federal laws are also relevant for the purposes of franchising:

Federal Law 18/1993 Concerning the Commercial Transaction Law (‘Commercial Code'); and
Federal Law 5/1985 On the Civil Transactions Law of the United Arab Emirates State (‘Civil Code').

1.2 Do they apply to foreign franchisors entering your jurisdiction or only to domestic franchises?

The Commercial Agency Law applies to both foreign and domestic franchises where the franchise agreement is registered as a commercial agency agreement with the Ministry of Economy. In order for the franchise agreement to be registered with the Ministry of Economy:

the criteria mentioned in question 1.1 must be satisfied; and
the franchise agreement must be written in or translated into Arabic, notarised and legalised.

1.3 Do any special regimes apply in specific sectors?

There are no special regimes applicable to specific sectors. However, the franchisee will be required to comply with all applicable regulations – for example, a restaurant franchise business must comply with Federal Law 10/2015 on Food Safety.

1.4 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

Given that there is no standalone franchise law in the United Arab Emirates, there is no specific regulatory body responsible for enforcing franchising laws and requirements. If the franchise agreement is registered as a commercial agency agreement, it will be regulated by the Ministry of Economy. In addition, where the franchise agreement is registered, the Commercial Agency Committee is responsible for enforcing the Commercial Agency Law. The committee has exclusive jurisdiction over commercial agency disputes between the parties to the agreement.

1.5 What is the regulator's general approach in regulating the franchise sector?

The franchise sector is not specifically regulated. However, if the franchise agreement is registered as a commercial agency agreement, it will be regulated by the Ministry of Economy.

1.6 Are there any trade associations for the franchise sector? If so, what are the conditions for membership? What are the commercial implications of not being a member?

There are no official trade associations for the franchise sector in the United Arab Emirates. However, there are other associations/conferences set up by franchise consultants.

2 Franchise market

2.1 How mature is the franchise sector in your jurisdiction?

Given the historical foreign ownership restrictions in the United Arab Emirates (see question 16.1), the franchise model is well established and has been utilised for some time.

2.2 In which sectors is franchising most common?

Franchising is common across multiple sectors in the United Arab Emirates, including food and beverage, retail, beauty, education, healthcare and hospitality.

2.3 Who are the biggest and most successful franchisors in your jurisdiction? How are they typically structured?

The United Arab Emirates is still mainly an inbound market where international brands franchise to large family-run businesses, rather than local brands franchising within the country. The largest franchisee families include the Al-Futtaim Group, Al-Ghurair, the AW Rostamani Group, the Chalhoub Group and the Al Tayer Group.

3 Franchising models

3.1 Is master franchising or the development model most common in your jurisdiction?

Both master franchising arrangements and the grant of area development rights are common in the United Arab Emirates. Given the geographical size and spread of the country, it is also common to see the grant of franchising rights limited to specific emirates or areas only.

3.2 What other models of franchising are commonly used in your jurisdiction?

Single unit franchise models are also commonly used in the United Arab Emirates. This is common where the franchisor is new to the region and wants to test out a new franchisee or a location before committing to a significant number of outlets.

3.3 What are the potential advantages and disadvantages of these different models?

There are some disadvantages with a master franchising model where sub-franchise rights are granted. Given that there is often a limited legal relationship between the franchisor and the sub-franchisee, it can be difficult to enforce obligations – particularly those concerning brand protection and IP infringement – if the relationship between the franchisor and the master franchisee has deteriorated. As discussed in question 3.2, a single unit franchise model allows the franchisor to assess whether the prospective franchise business will be successful and whether the franchisee is capable of taking on more responsibility.

3.4 What specific considerations should be borne in mind in the case of cross-border franchising into your jurisdiction?

Certain cultural and religious sensitivities should be considered when franchising in the United Arab Emirates. For example, when it comes to operating hours and obligations around opening, foreign franchisors should be aware that during the holy month of Ramadan, working hours are reduced to comply with labour laws. Ramadan hours may also impact on timelines for any outlet fit-outs.

In addition, there are restrictions on serving pork products and alcohol. If these are integral parts of the franchise business, such restrictions should be provided for in the franchise agreement, as the franchisee may need to make adjustments to the menu.

It is also common for the franchisee to lease the premises from which it will conduct the franchised business. This is different from other countries, where the franchisor customarily holds the lease and then sub-lets to the franchisee. Commercial leases in the United Arab Emirates are usually for three to five years and tenants are expected to pay at least one entire year's rent upfront.

4 Definitions and scope of application

4.1 How is ‘franchising' defined in your jurisdiction?

‘Franchising' is not defined under any federal UAE law. Franchise agreements that are registered with the Ministry of Economy under the terms of the Commercial Agency Law will fall under the wider definition of a ‘commercial agency agreement'. This is defined as: "The representation of the Principal by an Agent pursuant to a contract of agency, distribution, sale, display, franchise or offer of a commodity or service inside the state in return for a commission or profit."

4.2 What are the key requirements that apply to franchising? Is pre-contractual disclosure required? Is registration of documentation required? Are mandatory terms imposed?

There are no key requirements and no pre-contractual disclosure obligations in the United Arab Emirates. Registration of the franchise agreement is not required; however, if the agreement is registered as a commercial agency agreement, additional factors will need to be considered, such as termination (see question 7.8) and governing law (see question 7.2).

4.3 What specific activities (if any) are prohibited under the franchising laws and regulations? What are the potential consequences of breach?

There are no prohibited activities. The rules governing contract formation and enforcement are applicable to franchise agreements. These can be found in the Civil Code and the Commercial Code.

5 Initial steps

5.1 Are there any restrictions on foreign franchisors entering your jurisdiction?

If the franchisor wishes to set up an entity in the United Arab Emirates, under Federal Law 2/2015 on Commercial Companies (‘Commercial Companies Law'), there are certain restrictions on foreign entities and individuals conducting business in the United Arab Emirates. Up until recently, 100% foreign ownership was not permitted for entities incorporated in the mainland (ie, within the United Arab Emirates, but outside the free zones) and foreign companies were required to have at least 51% majority UAE ownership. Recent amendments to the Commercial Companies Law, however, have created some exemptions permitting 100% foreign ownership of companies incorporated in the mainland if they operate in specific industries. A ‘positive list' of specific industries where this exemption applies has been introduced.

It remains to be seen how this new law will be applied in practice. This notwithstanding, franchising is likely to remain the preferred model for businesses entering the United Arab Emirates, as most franchisors do not wish to set up their own office/entity in the country.

5.2 What is the most common structure adopted by foreign franchisors entering your jurisdiction?

Foreign franchisors are not required to have a presence in the United Arab Emirates or incorporate a legal entity in order to establish a franchise relationship.

5.3 What requirements or restrictions apply with regard to the selection and recruitment of franchisees?

There are no requirements or restrictions when selecting or recruiting franchisees in the United Arab Emirates.

5.4 Are franchisees subject to any legal obligations when purchasing a franchise?

Franchisees must have the appropriate business/trade licence to conduct the relevant business in the United Arab Emirates.

6 Disclosure and due diligence

6.1 What pre-contractual disclosure requirements apply to franchisors in your jurisdiction?

There are no pre-contractual disclosure obligations in the United Arab Emirates; however, as with all contracts, the parties to a franchise agreement are expected to deal with one another in good faith.

6.2 What formal, substantive and procedural requirements apply with regard to the disclosure document in your jurisdiction?

There is no requirement for a separate disclosure document under UAE law.

6.3 What pre-contractual disclosure requirements apply to franchisees in your jurisdiction?

There is no requirement for a separate disclosure document under UAE law.

6.4 What are the consequences of any breach of the pre-contractual disclosure requirements?

See question 6.1.

6.5 What other due diligence should the parties undertake before entering into a franchise agreement?

In the United Arab Emirates, it is difficult to obtain extensive information on a prospective franchisee, as this is not publicly available. This can make it difficult to conduct effective independent due diligence on a prospective franchisee. Reliance is usually placed on the cooperation of the franchisee to provide corporate documents and respond to questions on the company. Due diligence considerations in the region are not exhaustive; however, it is crucial that the prospective franchisee has the appropriate trade licence to be able to conduct the relevant business activities in the emirate.

6.6 Are there any restrictions imposed upon franchise brokers in your jurisdiction?

No restrictions are imposed on franchise brokers in the United Arab Emirates, apart from obtaining an appropriate trade licence in the relevant emirate to undertake their business activities.

7 Franchise agreement

7.1 What formal, substantive and procedural requirements apply with regard to the franchise agreement in your jurisdiction? Are there any mandatory terms? What terms are typically included in the agreement?

No formal, substantive or procedural requirements apply to franchise agreements in the United Arab Emirates. The parties are free to contract and the rules governing contract formation and enforcement are applicable to franchise agreements.

7.2 Do any specific requirements apply regarding the governing law or jurisdiction of the franchise agreement?

UAE laws allow for contracting parties to choose a foreign law to govern contractual agreements. If a dispute is brought before a local UAE court, the court may not uphold a foreign choice of law clause if the dispute concerns public policy or morality matters.

7.3 Does the franchisor have any mandatory rights and obligations under the franchise agreement?

The franchisor has no mandatory rights or obligations under the franchise agreement, but the franchise agreement must comply with certain mandatory provisions of UAE law.

7.4 Does the franchisee have any mandatory rights and obligations under the franchise agreement

The franchisee has no mandatory rights or obligations under the franchise agreement, but the franchise agreement must comply with certain mandatory provisions of UAE law.

7.5 What restrictions can the franchisor impose on the franchisee's activities under the terms of the franchise agreement (eg, purchasing requirements, non-compete obligations, exclusivity, price control)?

The parties are generally free to determine the terms of the franchise agreement. Restrictive covenants such as non-compete agreements are common practice and enforceable in the United Arab Emirates, provided that they are:

reasonable;
limited in time, place and activity; and
imposed only to the extent necessary to protect legitimate business interests.

UAE competition law considerations may also apply.

7.6 Is there a duty of good faith imposed upon the franchisor and franchisee?

The principle of good faith is an important part of the UAE legal system and applies to the franchise relationship. Although ‘good faith' is undefined under UAE law, the Civil Code expressly requires the parties to perform their obligations in accordance with fairness and good faith.

For franchise agreements which adopt UAE law as their governing law, good faith is an implied term and local UAE courts can apply a broad interpretation of ‘good faith'.

7.7 What are the parties' rights and obligations in relation to renewal of the franchise agreement, and what is the process for renewal?

Under the Commercial Agency Law, a registered franchise agreement will be automatically renewed. Where the agreement is not registered, renewal rights and obligations will be determined by the terms of the franchise agreement.

7.8 What formal, substantive and procedural requirements apply with regard to termination of the franchise agreement in your jurisdiction?

If the franchise agreement is registered as a commercial agency agreement, it can be terminated only by court order or if the parties consent to the termination – even in the event of a breach of the franchise agreement that would otherwise result in the right to exercise an agreed termination clause.

If the franchisee does not consent to the termination of the registered franchise agreement, it may continue to trade (and the franchisor is prohibited from appointing a replacement franchisee) until such time as there is a court order validating the termination or the parties reach a settlement, often requiring compensation in substantial amounts be payable to the franchisee in exchange for its consent. It is also possible that a local UAE court may decide not to terminate the franchise agreement and so it will remain as a registered commercial agency agreement if the court determines it would be unfair to deregister the agreement. The court may order the franchisor to compensate the franchisee if it deems termination was unfair or without cause.

These restrictions do not apply if the franchise agreement is not registered, in which case the parties may terminate the franchise agreement in accordance with the terms and conditions of the franchise agreement. If the governing law of the agreement is UAE law, some other relevant contractual provisions should be taken into account; however, these are similar to those in Western jurisdictions (eg, reasonable notice period).

7.9 Are there any restrictions on repatriating moneys out of your jurisdictions?

There are no foreign exchange controls or restrictions on the remittance of funds in the United Arab Emirates.

7.10 Are there any withholding taxes that apply to franchising in your jurisdiction?

There are no withholding taxes applicable in the United Arab Emirates. Customs duties are payable for the import and export of goods.

8 Operational standards

8.1 What legal status does the operations manual have in your jurisdiction?

The operations manual is not considered a legally binding contract unless the franchise agreement contains terms to the contrary.

8.2 How can the franchisor ensure compliance with its operational standards during the term of the franchise agreement?

Compliance with the franchisor's operational standards should be included as a term of the franchise agreement and there should be clear consequences of any related breaches. Practically speaking, the franchisor should consider conducting regular site visits, audits and training to ensure that the franchisee is compliant.

8.3 Can the franchisor make unilateral changes to its operational standards during the term of the franchise agreement?

The parties are free to determine the terms of the franchise agreement and can include terms in the agreement which allow the franchisor to make unilateral changes to its operational standards during the term of the franchise agreement. However, the franchisor should ensure that any rights negotiated in the franchise agreement or exercised are in accordance with the principles of good faith.

9 Intellectual property

9.1 How are brands protected in your jurisdiction and what specific implications does this have in the franchising context?

Most companies will register their trademarks with the Ministry of Economy before entering the UAE market. Trademark registration in the United Arab Emirates:

provides a first-to-file priority;
establishes registered user rights; and
ensures that franchisees are prevented from registering the trademark in their own name.

9.2 How are other intellectual assets of the franchisor (eg, know-how, trade secrets) protected in your jurisdiction and what specific implications does this have in the franchising context?

It is common for trade secret owners to protect their trade secrets contractually to prevent the recipient from using or disclosing the trade secret information (eg, a non-disclosure agreement). To further enhance the protection of trade secrets, franchisors should ensure that any disclosure is done in the strictest of confidence. One way to achieve this is for the franchisor to require the franchisee's operations manager or other key personnel to sign a non-disclosure agreement directly with the franchisor. The franchise agreement should be specific about what the franchisor's trade secrets are and include adequate protection provisions and enforcement rights.

It is possible to obtain copyright registration for materials and works in the United Arab Emirates. Registration is not mandatory, but can be useful in the event of infringement where the copyright owner seeks to enforce its rights in a local UAE court.

The parties should ensure that acknowledgement of copyright ownership is specified in the franchise agreement. Such material is often translated into Arabic or, in the case of marketing materials, tailored to suit UAE consumers. It is important that the franchise agreement is clear as to which party owns the copyright in the translation or modifications to the franchisor's copyrighted materials.

10 Employment

10.1 What is the applicable employment regime in your jurisdiction and what specific implications does this have in the franchising context?

Companies based in the United Arab Emirates must comply with UAE immigration and labour laws (Federal Law 8/1980 Concerning the Regulation of Labour Relations). This means that employers must obtain a labour permit and a UAE residence visa for non-UAE national employees.

Where a foreign franchisor (based outside the United Arab Emirates) seconds one or more of its employees to the franchisee to assist with the training or management of the franchise business, such secondment must also comply with UAE labour and immigration laws.

10.2 Can franchisees be deemed to be employees of their franchisor?

It is unlikely that franchisees will be considered an employee of the franchisor, particularly where the franchisor entity is not registered in the United Arab Emirates. The entity that sponsors an employee's visa will be recognised as the employer.

11 Competition

11.1 What is the applicable competition regime in your jurisdiction and what specific implications does this have in the franchising context?

Federal Law 4/2012 and Council of Ministers Resolution 37/2014 (‘Competition Law') focus on anti-competitive practices – particularly in relation to restrictive agreements, abuse of a dominant position and economic concentration.

Provisions commonly seen in standard franchise agreements – such as price controls and mandatory purchase of products from authorised suppliers – are unlikely to require the approval of the Competition Regulation Committee.

Where the franchise agreement is registered, it will be considered a commercial agency agreement under the Commercial Agency Law. Exclusive franchise agreements governed by the UAE Commercial Agency Law are specifically excluded from the UAE Competition Law.

12 E-commerce

12.1 How is e-commerce regulated in your jurisdiction and what specific implications does this have in the franchising context? Can franchisees be prohibited from using e-commerce in their businesses?

Federal Law 1/2006 on Electronic Transactions and Commerce regulates e-commerce in the United Arab Emirates. There are no prohibitions on franchisees using e-commerce in their businesses operations.

13 Consumer protection

13.1 What consumer protection measures are applicable in your jurisdiction and what specific implications do these have in the franchising context?

Federal Law 15/2020 on Consumer Protection (‘Consumer Protection Law') applies to the sale and purchase of all goods and services (in a consumer context) provided in the United Arab Emirates. The Consumer Protection Law will therefore apply where the franchise business is centred on the provision of goods and services.

13.2 Are franchisees covered under any of these consumer protection measures?

Franchisees are not mentioned specifically under the Consumer Protection Law. However, if the franchisor provides goods and services to the franchisee under the franchise agreement, the law may potentially apply.

14 Data security and cybersecurity

14.1 What is the applicable data protection regime in your jurisdiction and what specific implications does this have in the franchising context?

There is currently no federal data protection law in the United Arab Emirates. However, an individual's right to privacy is regulated under the UAE Constitution and Federal Law 3/1987 on the Penal Code, as amended.

14.2 What cybersecurity obligations are applicable in your jurisdiction and what specific implications does this have in the franchising context?

Federal Decree Law 5/2012 on Combating Cybercrimes, as amended (‘Cybercrimes Law') punishes with imprisonment or a hefty fine anyone that deliberately and without authorisation:

receives or intercepts any communication through any computer network;
discloses confidential information; or
publishes illegal content.

The Cybercrimes Law may apply in a franchising context, given that e-commerce platforms, online payment gateways and social networks are used, and are common platforms for cyber breaches. Franchise agreements will typically include terms on data protection and other regulatory requirements to promote compliance.

15 Disputes

15.1 In which forums are franchising disputes typically heard in your jurisdiction? What issues do such disputes typically involve?

If a franchise agreement is not registered as a commercial agency agreement, the parties may choose a foreign law to govern the terms of their agreement. However, this will not prevent the UAE courts from accepting jurisdiction, in the absence of an arbitration clause, if the agreement was performed in the United Arab Emirates or if one of the parties is domiciled in the United Arab Emirates.

The parties may also choose free zone courts such as the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Market (ADGM) to hear their disputes. These courts are modelled on the courts of England and Wales, and are made up of a court of first instance and a court of appeal. Compared to local courts, one of the benefits of a free zone court is that proceedings are conducted in English rather than Arabic.

A dispute may also be resolved by arbitration if agreed by the parties in the franchise agreement. Arbitrations, excluding those seated in the DIFC or the ADGM, will be governed by the UAE Federal Arbitration Law (6/2018). Each of the emirates has a designated arbitration centre (in Dubai, the Dubai International Centre); and there is also the option of the DIFC-LCIA Arbitration Centre or the ADGM Arbitration Centre, both of which are modelled on the UNCITRAL Model Law. Both can be chosen by parties irrespective of their connection with the DIFC or the ADGM.

An arbitration agreement in respect of a registered franchise agreement under the Commercial Agency Law will not be enforceable, as any disputes will fall under the exclusive jurisdiction of the UAE courts. The advantages of arbitration include that it is private and proceedings can be conducted in English; however, arbitration is expensive when compared to court proceedings and may not be appropriate in all circumstances.

15.2 Is mediation commonly used in franchising in your jurisdiction? Is arbitration commonly used in franchising in your jurisdiction?

Both mediation and arbitration are commonly used to resolve franchising disputes in the United Arab Emirates.

15.3 Can class actions be brought in your jurisdiction? If so, what specific implications does this have in the franchising context?

Class action lawsuits are not recognised under UAE law.

15.4 Have there been any recent cases of note?

N/A.

16 Trends and predictions

16.1 How would you describe the current franchising landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

As mentioned in question 5.1, there have been some recent updates to the foreign direct investment landscape in the United Arab Emirates. These changes introduce some exemptions permitting 100% foreign ownership of companies incorporated in the mainland United Arab Emirates.

The new amendments set out a ‘positive list' of specific industries in which this exemption applies. The positive list includes sectors where franchising is common, such as "restaurant management" and "retail sales in non-specialised stores". In light of these legislative changes, it is possible that we will start seeing more company-owned franchises as foreign franchisors may opt to set up a legal presence in the United Arab Emirates.

17 Tips and traps

17.1 What are your top tips for franchisors seeking to enter your jurisdiction and what potential sticking points would you highlight?

Conduct thorough due diligence on the prospective franchisee.
Ensure that the franchise agreement is drafted in a way that does not give rise to registration as a commercial agency agreement.
Take steps to protect IP such as trademarks through registration with the Ministry of Economy.

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.

United Arab Emirates: Franchising Comparative Guide