Franchise Laws in the UAE

The term “franchise,” as used in isolation, is not defined because the idea lacks a distinctly legal framework under UAE National Law. As opposed to this, an “agency” is determined by the Commercial Agencies Law (Federal Law No. 18 of 1981) as any arrangement in which a Principal is represented by any agent “for the purpose of distribution, selling, display, or rendering of a commodity or service in the State, against a commission or profit.” This concept would include and imply “franchising,” as demonstrated by practice. As long as they meet the regulatory requirements, many franchisees in the United Arab Emirates have chosen to register as commercial agents. The Ministry of Economy oversees and organizes the registration on a national level.

There is no legislation that specifically regulates franchising in the UAE. Instead, franchising implicitly falls within the scope of different laws, such as the Commercial Agency Law, Commercial Transactions and Civil Transactions Law, trade marks and other intellectual property regulations. Some of those applicable laws include the following:

1. Federal Law No. 18 of 1981 on Organizing Commercial Agencies and its amendments.
2. Federal Law No. 5 of 1985 on Civil Transactions.
3. Federal Law No. 18 of 1993 on Commercial Transactions.
4. Federal Law No. 37 for the Year 1992 for Trade Marks.
5. Federal Law No. (7) of 2002 On Copyrights and Related Rights.
6. Federal Law No. 31 For The Year 2006 Pertaining To The Industrial Regulation And Protection Of Patents, Industrial Drawings, And Designs.

Registration Requirements for Franchise

In the UAE, franchise registration is not necessary. However, if the franchisee wanted to sign up as a commercial agent, they would have to submit a documented and notarized contract along with an application for registration in the commercial agents’ registry (with Arabic translation). The application must be accompanied by “supporting documents,” which must list the agent’s name, the principal’s name, nationality, address, and any assets, goods, or services pertinent to the trade agency, as well as the agent’s activity area and the start and end dates of the agency.

A trademark license that falls under a franchise agreement may also be registered at the UAE trademark office. Most franchise agreements contain this license of brand usage, and the parties choose to finish the necessary record procedures. This makes it easier to demonstrate trademark usage and enables parties to assert some rights. However, it is not required to mention record or franchise ownership formally.

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:

• The agreement cannot be terminated by the franchisor without the franchisor being able to show “justifiable cause” even if the franchisor has a clear contractual right to terminate in the franchise agreement itself.
   
  It is very difficult for a franchisor to establish “justifiable cause”.  Matters that may amount to justifiable cause would include the franchisee no longer being appropriately licensed to undertake the franchised activity in the UAE, repeated material breaches of the terms of the franchise agreement and/or gross negligence, and dealing with competitive products where this is clearly prohibited under the terms of the franchise agreement. 

• In practice, the circumstances surrounding the termination of a registered franchise agreement will be considered in view of assessing what would be an appropriate compensation payment, if any, to be awarded to the franchisee as a result of the termination of the agreement.  If a justifiable cause is found to exist then it may be that the commercial agencies committee (or court on appeal, see below) will find that no compensation is payable to the franchisee.

Termination

• The franchisee is able to instruct the UAE ports and customs authorities to prohibit any products in respect of which it is the registered agent entering the UAE without its consent. While this provides good protection against parallel imports it also puts a registered franchisee in an extremely strong negotiating position in the event that a franchisor wants to terminate an agreement and appoint a replacement franchisee.  This is because the registered franchisee can force the franchisor to go to the commercial agencies committee (and, potentially, then to the local courts on appeal) to seek termination of the registered agreement and while such case is being heard the registered franchisee (who will remain registered until a judgment for de-registration is given or a settlement reached between the parties) can block the importation of the franchisor’s products into the UAE.  This, in practice, restricts the franchisor from access to the UAE market, either by way of itself establishing a licensed presence in the UAE or by appointing an alternative franchisee, until the case has been finally determined or settled and the agreement de-registered.  A final determination, if a decision of the commercial agencies committee is appealed to the local courts, may take in the region of 3 years (or possibly longer) to obtain. 

• The factors that the commercial agencies committee (and local court, if appealed) will take into account when assessing the level of compensation payable to a registered franchisee upon termination of the arrangement include the performance of the franchisee, how long the arrangement has been in place and whether the franchisee has incurred significant expenditures in establishing the business (with more weight being given to more recent expenditures).

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.