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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. When attending the recent Retail City Conference held in Dubai as part of the Cityscape Global event, the general impression was that notwithstanding the recent (and also the not so recent) global economic woes the retail sector in Dubai, and in the UAE generally, is remaining remarkably resilient. Certainly at Al Tamimi we continue to see a steady flow of enquiries from both franchisees 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 franchisee in the UAE.
The UAE Commercial Agencies Law
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 (as amended by Federal Law No. 14 of 1988, and further amended by Federal Law No. 13 of 2006 and Federal Law No. 2 of 2010) (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 which must be met, the main ones being:
Some franchisees may claim that unless a franchise agreement is registered with the Ministry it is not legally valid. This is not the case (the reasons for them wanting to register such an agreement are 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% foreign shareholding (i.e. they are not 100% owned by UAE nationals) or that are not exclusive which are valid arrangements notwithstanding that they do not qualify for registration with the Ministry. Further, even franchise agreements which may meet the qualifying criteria for registration with the Ministry do not have to be registered although in such circumstances franchisor’s should bear in mind that a franchisee 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 recognize 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 even if such cancellation is done in accordance with terms of the agreement. However, in this article we will focus on the effect of registration of franchise agreements with the Ministry.
Consequences of registration under the UAE Commercial Agencies Law
If an agreement qualifies, franchisees generally prefer to register an agreement with the Ministry. The main consequences of registration are:
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 franchisee in the UAE prior to the franchisor entering into any negotiations with a potential franchisee.
Recent developments regarding the UAE Commercial Agencies Law
By way of background, the UAE Commercial Agencies Law was amended in 2006 to make it more favourable to principals and less protectionist towards local registered agents. The key changes made at that time were (i) the abolition of the commercial agencies committee (a committee established under the auspices of the Ministry and whose role was to hear disputes between registered agents and principals) with the result that disputes were to be referred directly to the UAE courts (who were generally considered at that time to be less sympathetic to local agents than the commercial agencies committee had been), and (ii) allowing principals to unilaterally deregister fixed term registered agreements upon the expiry of their term (and the practice of the Ministry at one stage extended to allowing principals to de-register agreements by notifying the Ministry of their intention to give notice of non-renewal of agreements that contained automatic renewal provisions).
However, in 2010 the Commercial Agencies Law effectively reverted to the pre-2006 position with the reintroduction of the commercial agencies committee and the removal of the right of principals to de-register agents upon the expiry of a fixed term agreement. The UAE’s reaction to the economic crisis was to become more protectionist with regard to 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 it will be and how successful it is in providing a considered and fair forum for the resolution of disputes between registered agents and principals.
A few other issues…..
By way of conclusion, I thought it may be helpful to mention a few other UAE specific matters that I have come across when dealing with franchise arrangements in the UAE.
I am often asked if an agreement has to be in Arabic and/or notarized to be valid. As mentioned above, if an agreement is to be registered then it must be notarized (and in order to be notarized it must be translated into Arabic). However, if an agreement is not registered then there is no need for it to be notarized or translated into Arabic to be valid.
I have also come across 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 and, for example, it is always considered appropriate for female employees to wear conservative clothing. There are also issues regarding restrictions on serving pork products and alcohol and this may also need to be provided for in the franchise agreement (for example, in the context of the franchisor being entitled to determine menu items in restaurant franchises).
I am sure that franchising will continue to play a major role in the UAE economy going forward 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.
Marcus Wallman is a partner in Al Tamimi & Company’s Commercial Advisory practice which provides a comprehensive range of advice in the areas of General Commercial & Advisory; Joint Ventures; Commercial Agencies; Consumer Protection & Competition and Anti-Corruption.