The Middle East's buzzing commercial platform is attracting more and more international businesses in a wide variety of sectors. The business-friendly environment and the international consumer base make the franchise model especially attractive in the region. The franchising model is very popular in the UAE, in particular in the retail, food and beverage, hospitality, and beauty/personal care sectors. "Franchise Middle East", the biggest international franchise trade fair in the Middle East, is held each year in Dubai.
As there are no specific franchise laws in force in the UAE, and more generally in any of the GCC States, there are a number of potential pitfalls that franchisors looking to the UAE need to be aware of before entering in to a franchise agreement. This article highlights some of the key information to be considered for this purpose and for which insight from local counsel will be required.
AVOID REGISTRATION OF THE FRANCHISE AGREEMENT WITH ANY LOCAL AUTHORITIES
International franchisors should mitigate exposure to the UAE Commercial Agency legislation where it is possible to do so.
A franchise agreement may be eligible for registration as a commercial agency agreement under the UAE Commercial Agency Law1, though for some commercial areas it is mandatory for a registered commercial agent to be put in place.
Potential franchisees should note that if the franchise agreement is registered, the UAE courts will assume exclusive jurisdiction to hear any dispute arising out of the agreement (notwithstanding the dispute resolution mechanism provided for under the agreement). Not only that, but the courts will automatically apply the UAE Commercial Agency Law (notwithstanding the governing law provided for under the agreement). The jurisdiction of the UAE Courts together with application of local law, would have a significant and potentially highly positive impact on the rights of the local franchisee, and on the enforceability of certain clauses of the agreement.
It is therefore something to be avoided, unless it is a mandatory requirement.
Impact on franchisors of the application of the UAE Commercial Agency Law
If the UAE Commercial Agency Law applies to a franchise agreement, the franchisee would benefit from statutory rights, including a number of protections placing the franchisee in a very strong position such as:
- Unless there is mutual agreement of both parties, it will not be possible for the franchisor to terminate, or to end the agreement, without a "justifiable cause". This is even where the Agreement allows for the Franchisor to terminate the agreement, or not to renew the agreement once the fixed term has expired.
This means that unless there is a mutual agreement, it will be up to the courts to decide whether or not there is a "justifiable cause" for terminating or putting an end the agreement.
Under the UAE Commercial Agency Law, the term "justifiable cause" is not defined, but the local Courts have held that actions which may amount to a "justifiable cause" for termination could be:
- gross negligence;
- violation of a non-competition clause; or
- failing to meet sales targets.
- In the absence of a "justifiable cause", the principal will have to pay to the distributor damages to terminate the agreement. Again, the legislation is silent as to what the level of damages should be, but it appears the Courts will often look at three to five times the average generated profits during the three years prior to termination.
There exists similar Commercial Agencies Laws in the other GCC countries that may also apply to franchise arrangements. If you are looking at franchising, licensing or distribution in any of the GCC countries, you must obtain local advice.
Requirements for the application of the UAE Commercial Agency Law
As a result, and where possible to do so, a franchisor should take precautions to avoid the registration of its agreement with its UAE local franchisee with the Ministry of Economy as a commercial agency agreement. This would in turn prevent the agreement from being governed by the UAE Commercial Agency Law, which would confer much stronger statutory rights to the franchisee.
As a general rule in the UAE and the wider GCC, in order to be registered as a commercial agency agreement with the Commercial Agency Register, the agreement shall satisfy certain requirements and characteristics; these may vary from one GCC country to another.
In the UAE, in order to be eligible for registration with the UAE Ministry of Economy as a commercial agency agreement, the agreement must meet the following conditions:
- commercial agents must be UAE nationals or companies incorporated in the UAE and wholly owned by UAE nationals;
- commercial agents must have an exclusive right to distribute, sell, offer or provide goods or services within the UAE in consideration of a commission or profit; and
- the agreement shall be notarised (and, for this purpose, be translated in the Arabic language).
It is therefore essential for any franchisor to obtain details on the ownership structure of the prospective UAE franchisee. If the franchisee is 100% Emirati owned, then this should act as a red flag to the franchisor that care needs to be taken, as the potential franchisee would be able to be a registered commercial agent, provided all other requirements are met (exclusivity and the supporting documents).
One should note that in other GCC countries, such as Bahrain, Qatar and Saudi Arabia, for instance, the conditions are much more flexible.
Based on the foregoing, where the franchise agreement is eligible for registration with the UAE Ministry of Economy as a commercial agency agreement on the basis that all the above conditions are fulfilled, it is of primary importance to the franchisor to include in the agreement protective provisions to mitigate the risk of the agreement being registered as a commercial agency agreement (all the more since the franchisor's consent to registration is not required for this purpose).
Would-be franchisors should note that simply ensuring the agreement is not notarised/legalised, may not be sufficient to overcome such risk. If, for instance, the local franchisee holds a power of attorney from the franchisor, this could be used by the franchisee to sign the agreement before a notary both for the franchisor and the franchisee.
One of the simplest ways of ensuring the agreement cannot be registered, is for it to be non-exclusive. However, for commercial reasons in attracting the best monetary deal for the franchisor, this may not be an attractive proposition.
Register your trademark rights as soon as possible
International franchisors should take steps to protect their trademarks in the UAE and secure appropriate local domain names, early in the negotiation process with the franchisee. This is to avoid the trademark(s) and domain names being potentially high jacked by any future business partner.
There have been numerous instances where a local entity has itself registered the trademark. This has led to significant issues, and potential infringement actions brought against the principal where the misappropriated trademark rights are used to try and bring about a deal with the rightful brand owner, or force the true rights holder out of the market.
The GCC countries are amongst the most expensive countries in the world for trademark filings, and this is further compounded by the fact that these are single class jurisdictions, so each class of interest will need to be protected by a separate application (which further compounds the high protection costs). However, if by not protecting your trademarks, this means that your marks and potentially your local business could be hijacked by another, and so not protecting your rights here, can be a false economy for your company, if it means that you are unable to trade here.
It is therefore paramount to obtain experienced local advice on how to cost-efficiently protect intellectual property rights in the GCC.
Consider Arabic branding
Whilst English is the language of business in the region, Arabic is the official language.
In the GCC, generally speaking, there is no legal requirement for companies operating in the country to use an Arabic version of a brand. However, commercially almost all brands are used in both their original language version and their Arabic version.
Therefore, registering the Arabic branding helps to protect its commercial use and prevents others from registering it. In this respect, one should note that there have been cases where local partners/opportunists have registered Arabic branding where the principal had not done so, and the Arabic branding was held not to infringe the English only brand.
The Arabic version can be a translation or a transliteration of the brand. There may be a number of Arabic branding options for you to consider. Once you have picked the preferred option, it is then important that you are consistent in the use of the confirmed Arabic branding.
Be aware of cultural sensitivities
Franchisors may have to change their branding and/or their marketing campaigns in order to respect the local culture, religion and social norms in the Arab world.
Keep control over the recordal of short form agreements
It is important to note that under the trademark laws now in effect in Bahrain, Kuwait and Saudi Arabia2, it is no longer required to record a trademark license with the trademark authorities, in order for it to be effective against third parties in these territories3 (but, to be effective, it must be a written licence, an oral licence is not effective).
However, in these countries, a short form user agreement may still have to be submitted to, or recorded with, the local authorities for the purpose of allowing the franchisee to use the licensed trademarks on stores' signage.
International franchisors looking to expand in the region would therefore need to seek advice on the compulsory nature of registration of any licence agreement in relation to the use of their trademarks.
In countries where registration of a user agreement is required, either for enforceability purposes of the trademark license granted to the local entity, or for the purpose of allowing the franchisee to use the licensed trademarks on stores' signage, the franchisor should keep control over the registration of the agreement with any government body (whether IP or otherwise). This can be done through inserting the appropriate language in the franchise agreement.
The reason for this is to make sure that the local franchisee does not try to use such agreement to register itself as a commercial agent or take other steps which could make it difficult for the franchisor to de-register the agreement in future.
Also, the franchisor should insert provisions pursuant to which it has the right to cancel such registration upon expiration or termination of the Agreement by either party for any reason, with the franchisee agreeing not to contest such cancellation (see section below regarding PoAs)
Anticipate termination of the franchise agreement
PoA to deregister any filings or registrations with governmental authorities
In addition to the foregoing, it is common practice for the franchisor to require the local partner, upon execution of the franchise agreement, to execute and provide to it a notarised power of attorney for the purpose of amending or removing, on behalf of the franchisee, upon expiration or termination of the agreement, any filings or registrations with any governmental authorities containing or pertaining to the use of franchisor's name and trademarks, including the recordal of any license in the trade marks and the recordal of any trade name comprised of such trademarks.
However, franchisors must be aware that such PoAs are revocable at any time by the local partner. The steps the local partner must take to revoke the PoA may differ from country to country, but it should mean that a notice of revocation is sent to franchisor.
Authorisation letter to deregister any company name
Generally, we recommend that franchisees should not be permitted to use the franchisor's brand in any company name the franchisee may need to establish in order to operate its franchise. The reason being, is that this could provide the franchisee with certain trade name rights, or any such trade name could be used to block, or complicate matters for the franchisor in the event there is a future change of franchisee, or there is scope for multiple franchisees, in the jurisdiction.
If the local entity to be established is 100% owned by the franchisor, then this means that it is safer for the franchisor to use the trademark in the company name, as it will have control of that entity.
However, in certain GCC countries, such as Bahrain, there now exists a requirement that the trademark appears in the branch name of the local franchisee, in order to allow the local authorities to make a direct link between the trade licence and the branded outlet, so as to minimise any confusion.
In such countries, it may be difficult for the franchisor to purely rely on a PoA granted to it to deregister the franchisee's trade license or update the local company name upon expiration or termination of the franchise agreement.
Instead, the officials will require an explicit letter of authorisation from the local franchisee to the franchisor in which it provides authorisation for the franchisor to be able to carry out such work. The safest approach is therefore to include in the franchise agreement the requirement for this specific letter of authorisation, as well as the ability to require the local partner to provide an updated version of such letter on request, if and when the need arises.
Choose the most relevant jurisdiction to facilitate any potential enforcement process against the local franchisee
Enforcement of oversea judgments and foreign arbitration awards in the GCC
International franchisors looking to expand in the region generally want to avoid issues arising out of their franchise agreement being subject to the jurisdiction of local courts, in order to avoid the application of local laws. In fact, it is not uncommon for GCC national courts to ignore the choice of foreign law in a contract due to the evidentiary requirements contained in their respective Civil Code and instead to apply their respective local laws to a contractual dispute.
But, if a franchisor seeks to enforce its rights against its franchisee or wishes to collect damages, it will most probably be necessary to enforce those rights where the franchisee is located. One should note that GCC national courts can be unpredictable when it comes to enforcement of foreign judgments/arbitration awards. Some GCC national courts have refused enforcement of foreign judgments/arbitration awards4 on the basis that this would be inconsistent with their public order/morals or Islamic Sharia.
As a result, enforcement of overseas judgments/foreign arbitration awards in a GCC member state can often mean litigating the issues afresh. This is of course costly, and can be time-consuming and unpredictable. In the worst-case scenario a different decision may be reached by the local courts to the decision obtained elsewhere.
Also, in the event the local franchisee (located in the GCC) were to bring a claim relating to the franchise agreement before its local courts, where its headquarters are located, notwithstanding the choice of jurisdiction clause provided for under the agreement, there is a risk that such local courts will assume jurisdiction to hear the case.
In practice, it is not uncommon for the UAE courts to assume jurisdiction to hear a case where a party is a UAE entity and/or where the dispute refers to a contract to be/being performed in the UAE.
In order to reduce the exposure to the UAE federal enforcement regime, but also to mitigate the risk of the UAE onshore courts assuming jurisdiction to hear a case arising out of the franchise agreement5 where the franchisee is located in the UAE, an option is to provide for the exclusive jurisdiction of the DIFC (Dubai International Financial Centre) Courts.
The DIFC Courts are an independent English language common law judiciary, located in the Dubai International Financial Centre (DIFC), a free zone in Dubai.
In a situation where the is a dispute in an agreement where the DIFC Courts have jurisdiction, the risk of the onshore UAE local courts assuming jurisdiction to hear the case would be limited. The reason is that the UAE local courts should comply with the agreements on judicial cooperation that are in place with the DIFC Courts.
Also, any judgment in the matter issued by the DIFC Court should, in principle, be capable of enforcement and execution onshore through the UAE local Courts without any review of the merits, by virtue of the same judicial cooperation agreements which are in place. One should note that the DIFC courts would apply the law chosen by the parties as the governing law of an agreement.
Another option is to provide for an arbitration clause, where the arbitration would be seated in the UAE, in order to avoid any issues as to the enforceability of a foreign award in the UAE onshore courts.
To assist, the arbitration could be under the DIFC-LCIA Arbitration Centre Rules seated in DIFC. This is very popular in the region. A DIFC arbitration award is enforceable in the UAE "onshore". Upon an award being issued, it can be taken to the DIFC Courts for ratification and enforcement, effectively turning it into a judgment of the DIFC Courts. The judgment can then be enforced "onshore" as per the mechanism mentioned above. This process effectively side-steps the UAE federal enforcement regime.
These two options would also be relevant in the event that the franchise agreement subsequently expands to other GCC countries, and that, as a result, the franchisor needs at some point to enforce the agreement in other GCC countries.
A DIFC court judgment or a DIFC LCIA arbitration award will still have to be enforced before the relevant GCC national courts, but the enforcement mechanism would ordinarily be facilitated by the GCC Convention and the Riyadh Arab Agreement on Judicial Cooperation.
Be aware of prohibited restrictive practices
A number of the GCC member states have now adopted standalone competition laws.
In the UAE, the Federal Law N°4 of 2012 concerning Regulating Competition (the "Competition Law") which came into force on February 23, 20136, aims at regulating economic concentration, restrictive agreements and abuse of dominance. This is also supported by Cabinet Resolution n°13 and 22 of 2016, introduced to clarify a number of aspects of the Competition Law.
The provisions of the Competition Law that could affect franchise agreements are those prohibiting restrictive agreements, in particular price fixing of goods and services7, and market allocation8. Any breach of these provisions may lead to penalties, such as fines between AED 500,000 and AED 5,000,000, and temporary closure of the business.
This means that franchise agreements pursuant to which the franchisor fixes the price of the products retailed by the local franchisee and/or grants exclusivity to the franchisee9 could potentially constitute prohibited restrictive agreements under the Competition Law.
However, there exist a number of exemptions:
- It is possible to require an exemption from the Ministry of Economy to be authorised to enter into restrictive agreements;
- The Law does not apply to "small and medium establishments". "Small and medium establishments" are identifiable by annual revenues and number of employees, the threshold of which varies depending on the sector at issue;
- The Law does not apply to certain sectors such as telecommunications, financial services, oil and gas, pharmaceuticals, transport.
If not yet aware of any enforcement action taken on this basis, international franchisors seeking to award a franchise in the UAE should bear these anti-competition considerations in mind.
The GCC market offers huge growth opportunities for international brands. Local advice will be required to ensure the growth and success of your franchise business in the region.
1 Federal Law No 18 of 1981 Concerning Organizing Trade Agencies
2 Further to the implementation of the GCC Trademark Law
3 This is still required for now in Oman, Qatar and the UAE
4 Although the UAE is a member of the New York Convention on the recognition and enforcement of foreign arbitral award.
5 Only where the UAE Commercial Agency Law is not of mandatory application as a matter of public policy, since otherwise the UAE courts would in any event disregard the provisions of the contractual arrangement and accept jurisdiction to hear the dispute.
6 For the sake of completeness, Executive Regulations n°37 of 2014 came into force on October 27, 2014
7 Article 5.1.a of the Competition Law
8 Article 5.2.a of the Competition Law
9 Outside the Commercial Agency Law
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.