United Arab Emirates (UAE) is considered to be one of the most attractive and lucrative markets for that global companies that operate and expand under a franchise business model. Many international brands are choosing the UAE for the purposes of franchising and distribution due to a high level of foreign investment protection and business comfort which are provided by local laws and the government.
Key franchise industries
Franchising is growing at an average annual rate of 15% in the UAE. The keyindustries for franchising and distribution are:
- Hotels and leisure;
- Restaurants and cafes;
- Shops and retail stores;
- Medical services and clinics; and
- IT and online services.
Franchising v. agency
There is no specialor separate law on franchising in the UAE. Therefore, franchise agreement will be regulated by the general provisions and principles set forth by the UAE Civil Code and the UAE Commercial Code, as well as the international franchise practices.
Importantly, in certain cases when commercial agency relations arise between parties, franchise may be deemed as commercial agency with all potential legal implications, which may be applied if franchisees are registered as agents with the UAE Ministry of Economy. At present, only UAE nationals or entities incorporated in the UAE that are wholly owned by UAE nationals can be registered as commercial agents.
In practice, many franchisors will prefer not to register their franchisees in the Commercial Agencies Department of the UAE Ministry of Economy (and specifically mention this in their contracts) due to certain privileges and exclusive rights the latter can have as registered commercial agents.
Disclosures and registration
Pre-franchising disclosures are not mandatory under the UAE laws. Nor it is required for franchisors to provide disclosure updates to franchisees during the term of their contracts and ongoing relationship.
At the same time, certain disclosure obligations may be established by parties on an facultative basis and for the purpose of compliance with the local principle of "good faith" that is recognized against every commercial transaction targeted at the UAE. In this case, parties are free to use and be guided by the franchise disclosure documentation applied under the international practice.
Importantly, there is no mandatory or official franchise registration system in UAE, although franchisees may be registered as commercial agents, provided that commercial agency relations arise between parties, as mentioned above. Trademark or intellectual property (IP) licenses granted under franchise agreements do not require registration with UAE PTO. Contracts will be valid and enforceable when signed by parties (their authorized officers).
Article 129 of the UAE Civil Code provides that for a contract to be concluded:
- Two parties must agree on the essential elements of the contract (i.e. agreed essential elements);
- The subject matter of the contract must be defined or capable of being defined (i.e. defined subject matters); and
- There must be a lawful purpose for the contractual obligations (i.e. lawful purpose).
In other words, the underlying contract (franchise agreement) should contain the following material terms to meet the above civil-law requirements:
- The agreed essential elements;
- The defined subject matter; and
- The lawful purpose.
In practice, the franchise agreement will address the following essential elements:
- Consideration (e.g. royalties);
- Scope of franchised rights (including, exclusivity);
- Franchisee's duties and covenants (i.e., compliance with standards or manuals, quality compliance, confidentiality obligations, non-compete, site selection and approval, customers' support, trainings, etc.);
- Termand termination (for cause or convenience, post-termination, etc.);
- Franchise renewal (i.e., franchisee's right of first refusal);
- Territory (country, region, city); and
- Sub-franchising (permitted or prohibited).
The franchise will also address the franchise (or IP license) grant as the subject matter at the very beginning of the contract and the purpose of the deal, as well as the applicable industry.
Intellectual property rights
Trademarks are protected on the "fist to file" basis under the UAE Trademark Law. A trademark will be protected and enforced after it has been registered with the UAE Trademark Office. UAE is a signatory to the Madrid Protocol, therefore, an international trademark registration (designating UAE) will also be protected. When a trademark is registered it will be valid for 10 year and the trademark owner (registrant) can bring an action for infringement in the UAE.
Know-how or trade secret should not be registered, but it must be properly defined and documented. Trade secrets owner must take certain confidentiality (reasonable) measures to avoid disclosure of confidential information. Such reasonable measures must be undertaken by franchisor and their franchisees when trade secrets are transferred under contracts.
Most often, franchisors will provide operations manuals as well as proprietary software the framework of franchise relations. As a result, copyrights vested in such works will be usually licensed to franchisees.
Copyright subsists in scientific, literary and artistic works fixed in any tangible medium of expression, regardless of description, significance, purposes or methods of their expression. The following examples of works of authorship can obtain copyright protection in the UAE:
- designs; and
Also, copyright law will protect computer programs and databases in the UAE.
It is possible to register certain copyright subject matters in the Copyright Department of the UAE Ministry of Economy to obtain documentary proof of copyright ownership, including for enforcement purposes.
Taxation, customs duties, currency controls and franchise fees
At present, no withholding or corporate income taxes are imposed in the UAE. However, there is a 5%-value-added-tax (VAT) which may apply for certain products or items, in addition to customs duties payable for the import of export of goods.
In terms of the currency control, there are no foreign exchange controls or local currency restrictions on the international repatriation of funds. Foreign businesses can invest into the UAE or receive money from the UAE, including the contracted franchise fees.
Franchise fees are normally structured as royalties (e.g. between 5% to 10% of franchisees' net sales). In addition, there may be lump sum amounts or contract entrance fees set out in contracts. Certain service fees or payments to marketing funds can also be implemented by franchisors.
Governing law and dispute resolution
There is no legal requirement for a franchise agreement to be governed by the UAE law. Under the basic principle of the international private law, the contracting parties are free to choose the relevant governing law when entering into a deal, or afterwards. Hence, the franchise agreement may be governed by the applicable foreign law even if targeted at the UAE market. Parties can also choose a dispute resolution forum. The only exception here is when the franchise agreement represents the commercial agency contract and the franchisee is registered with the Commercial Agencies Department of the UAE Ministry of Economy (local UAE laws will be governing and the local competent courts will hear disputes between parties).
With regard to dispute resolution, parties will normally choose between local jurisdiction (courts), arbitration tribunals and mediation, if the issue or dispute cannot be negotiated. In practice, every international franchise agreement will contain an arbitration clause.
UAE is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (New York Convention). Therefore, an arbitral award received upon the franchising conflict from the other jurisdiction that is a signatory to the New York Convention may be enforceable in UAE, provided that it meets the local arbitration requirements and applicable rules.
Dubai International Arbitration Centre (DIAC) is one of the most popular venues for franchise arbitration in the UAE.
The concept of "good faith" is the basic and fundamental principle in the UAE jurisdiction that is prescribed by Article 246 of the UAE Civil Code. This principle is usually supported and enforced by local courts and arbitration institutions in all disputes involving civil-law contracts. Franchise agreements are not an exception in this regard.
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.