Challenges and Opportunities in the Emirates
As the home of the world's largest shopping mall – which had more than 65 million visitors in 2012 – Dubai's credentials as a leading global fashion destination cannot be doubted. The UAE retail market proved surprisingly resilient during and after the global financial crisis, and instability elsewhere in the region has further enhanced its attractiveness.
The availability of many international brands and fashion collections in the UAE is a direct result of the popularity of the franchise model. Many retailers have concluded that franchising is ideally suited to Middle Eastern markets, where US and European brands are highly sought after.
However, franchising in this region brings its own challenges. In particular, several features of UAE law and the UAE legal system need to be addressed by the parties, over and above those issues that typically form the basis of franchisor/franchisee negotiations. Some of the common pitfalls encountered by international brands wishing to appoint a franchisee in the UAE are discussed below.
- Regional vs. national rights
It is typical for a franchisee to request a territory covering multiple countries, partly because many Middle Eastern markets are still relatively undeveloped. In many cases, rights are granted across the entire Gulf Cooperation Council (GCC) – the United Arab Emirates, Kingdom of Saudi Arabia, Oman, Kuwait, Qatar and Bahrain). This often means that development obligations cover multiple countries and that franchise agreements entered into pursuant to those obligations may require localisation in more than one country to ensure that they are capable of local enforcement.
Although the GCC is often treated as a single territory for franchise purposes, it comprises six different legal systems. Local advice is essential. Where entry into a territory is unplanned, it can have a negative impact on a franchisor's timelines and budget.
- Foreign ownership
Foreign retailers have the option of setting up a limited liability company (LLC) in the UAE to operate their store. Importantly, a UAE national or a company wholly owned by UAE nationals must hold at least 51 percent of the shares in an LLC. Similar rules apply in the other GCC countries although the percentage of share to be "locally" held differs.
This rule is often overlooked when appointing a single master franchisee to cover the whole region. The master franchisee will itself need to comply with local ownership rules. In many GCC countries, the LLC ownership rules are relaxed to some extent where one of the shareholders is a GCC national. However, the point often overlooked by international franchisors is that the entity it appoints for the GCC will not necessarily be entitled to trade in every country, and additional companies (possibly bearing the franchisor's trading name) will need to be incorporated.
- The Agency Law
This is perhaps the key issue to be considered by prospective franchisors entering the UAE market. Under UAE law, the term "agency" covers a wide range of relationships, including the appointment of distributors, licensees and franchisees. Registration under the Agency Law confers certain enhanced rights on the "agent" at the expense of the franchisor. It can be extremely difficult to terminate a registered agreement (or even allow it to expire), and under UAE law the agent is also entitled to significant compensation at the end of a franchise relationship. If a franchisee registers its agreement under the Agency Law, it will be able to block imports of any products covered by the franchise which are being shipped to other consignees. In practice, this gives a franchisee an immensely strong negotiating position and best practice for franchisors is to take steps to ensure that no registration under the Agency Law occurs.
- Choice of foreign law
While parties are free to choose a foreign law to govern their agreement, if the agreement pertains to activities that are being conducted in the UAE, or if the defendant is a UAE individual or company, then local courts may assume jurisdiction in the event of a dispute. The UAE court may apply the chosen foreign law, but there is a risk that:
- provisions or legal concepts will not be applied correctly or
- any provision which is inconsistent with local UAE law (including Sharia law and local customs) will be deemed to be unenforceable and the court will apply UAE law instead.
There are also certain circumstances (such as registration under the Agency Law) where the local courts will ignore the parties choice of law and apply UAE law in all cases.
The UAE courts' approach to the parties' choice of law is a key factor in the popularity of arbitration in the Dubai International Financial Centre (DIFC), which applies the London Court of International Arbitration rules. Enforcement of DIFC awards in the UAE is likely to be more straightforward than enforcing a foreign court judgment or a foreign arbitral award.
- Protecting intellectual property
All of the tools that are required by international franchisors to protect their franchise systems are available in the UAE. UAE law protects confidential information and copyright and allows a franchisor to register trademarks and designs (as well as patents). Registration of trade marks in the UAE is voluntary but is highly advisable because there is very little protection for unregistered marks without an international reputation.
Enforcement of IP rights through the UAE courts can be particularly challenging. Decisions of UAE courts are rarely published and there is no doctrine of precedent, both of which make the outcome of a dispute difficult to predict. There is also no specialist court for IP disputes, and the UAE courts will assume jurisdiction over any dispute involving UAE-registered IP.
The availability of remedies for infringement is also an area in which UAE law is still developing. For example, UAE law does not explicitly provide trademark owners with the right to apply for an injunction. The UAE courts have granted stop orders to successful applicants in limited circumstances, although infringement cases can take years to resolve.
Potential pitfalls can be easily addressed
Many of these potential pitfalls can be easily overcome by franchisors who take timely advice on local law. Simple changes to a standard franchise agreement may significantly reduce the franchisor's risks. Similarly, ensuring that registrations for all relevant IP rights are obtained in advance, and across the franchise territory, will place a prospective franchisor in a stronger position when negotiating with local franchisees .
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