United Arab Emirates: UAE Franchise Laws And Regulations 2022

Source: Internet

The following UAE Franchise Laws and Regulations 2022 Guide covers common issues in franchise laws and regulations including competition law, real estate and protecting the brand and other intellectual property.

The guide was published on ICLG.com  and can be read below of downloaded here: UAE Franchise Laws and Regulations 2022

1 Relevant Legislation and Rules Governing Franchise Transactions

1.1 What is the legal definition of a franchise?

A franchise as a standalone terminology is not defined, as the concept does not have a separate legislative framework under UAE National Law. However, under the Commercial Agencies Law (Federal Law No. 18 of 1981), an ‘agency’ is defined 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 definition would extend and imply to ‘franchising’ and the practice reveals this. Many franchisees in the UAE opted to register themselves as commercial agents so long as they fulfil the statutory criteria. The registry is organized and managed federally by the Ministry of Economy.

1.2 What laws regulate the offer and sale of franchises?

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.

1.3 If a franchisor is proposing to appoint only one franchisee/licensee in your jurisdiction, will this person be treated as a “franchisee” for purposes of any franchise disclosure or registration laws?

There is no concept of a ‘franchisee’ defined in UAE law and no relevant disclosure or registration laws per se. Therefore, whether a licensee, (or agent) should be treated as a ‘franchisee’ will only be relevant from a commercial perspective and other angles, such as registered user or licensee of trademarks, and this will have a different implication than those assumed in a franchise system. No registration of its rights or disclosure of the same are required in light of current regulations.

That said and in addition to the trade mark licensee recordal example, the franchisee (eligible according to applicable criteria of commercial agents) can opt to register the franchise agreement with the Ministry of Economy and become a commercial agent of the Principal under the Commercial Agencies Law. Within this agreement the parties can choose to specify that the ‘franchisee’ is the sole agent of the Principal in the UAE, or at one of the emirates within the UAE. Nowadays, Principal’s consent to register such franchise as commercial agent should be acquired

1.4 Are there any registration requirements relating to the franchise system?

There are no franchise registration requirements in the UAE. However, if the franchisee wished to register as a commercial agent, an application for registration in the commercial agents registry will need to be submitted alongside a written and notarized contract (with Arabic translation). The application shall be accompanied by ‘supporting documents, and shall include name of agent, principal, nationality and address of each, assets, commodities and service relevant to trade agency, activity area of agent and commencement and expiry date of agency.

Trade mark license, within a franchise scope, can also be recorded at the UAE trade mark office. Most franchise agreements include this authorization of brand use and parties opt to complete the recordal formalities. This helps to prove trademark use and entitles parties to claim some rights. However, no direct reference to franchise rights or recordal is necessary to be included.

1.5 Are there mandatory pre-sale disclosure obligations?

There are no applicable pre-sale disclosure obligations apart from what parties agree contractually.

1.6 Do pre-sale disclosure obligations apply to sales to sub-franchisees? Who is required to make the necessary disclosures?

There are no mandatory disclosure obligations applicable to sales to sub-franchisees apart from what parties agree contractually.

1.7 Is the format of disclosures prescribed by law or other regulation, and how often must disclosures be updated? Is there an obligation to make continuing disclosure to existing franchisees?

There are no disclosure obligations in the initial stages of the franchise relationship nor throughout the duration of the agreement apart from what parties agree contractually.

1.8 What are the consequences of not complying with mandatory pre-sale disclosure obligations?

No disclosures are required and accordingly there are not consequences. Parties, however, should fulfil what they agree contractually.

1.9 Are there any other requirements that must be met before a franchise may be offered or sold?

There are no specific requirements which must be met.

1.10 Is membership of any national franchise association mandatory or commercially advisable?

Membership to any association is not mandatory and membership to franchise associations is not common.

1.11 Does membership of a national franchise association impose any additional obligations on franchisors?

No, no additional obligations are created.

1.12 Is there a requirement for franchise documents or disclosure documents to be translated into the local language?

If the franchise agreement is to be registered with the Ministry of Economy, the agreement will need to be translated into Arabic along with the application form specifying the terms of the relationship.

In the case of any governmental dealings or courts, Arabic translation of any relevant documents will be required in order to be considered.

2 Business Organisations Through Which a Franchised Business Can be Carried On

2.1 Are there any foreign investment laws that impose restrictions on non-nationals in respect of the ownership or control of a business in your jurisdiction?

Until 1 June 2021, the UAE Commercial Companies Law required for a UAE national to own at least 51% of the shares in the capital of onshore companies in the UAE. However, following Federal Decree Law No. 26 of 2020, this requirement was removed from Article 10, permitting 100% foreign ownership for many activities, subject to some restrictions.

The activities which are excluded from 100% foreign ownership include but are not limited to commercial agencies activities and strategic activities such as banking, insurance and telecommunications and others.

That said, under the Commercial Agency Law No. 18 of 1981 as amended by Law No. 11 of 2020 (which applies to franchise relationship if the Franchise Agreement is registered with the UAE Ministry of Economy and if the Franchise Agreement grants exclusivity over all of the UAE or certain emirates), it remains that commercial agency activities can only be carried out by one of the following:

  • UAE National
  • UAE Public Joint Stock company (PJSC) owned at least 51% by UAE Nationals.
  • UAE Private entity owned by a Public Joint Stock company (PJSC) meeting the above requirements.
  • UAE private entity that is 100% owned by UAE nationals

For those companies incorporated in a free zone, they continue to be capable of having a 100% foreign ownership according to the applicable regulations and requirements.

2.2 What forms of business entity are typically used by franchisors?

The most common form of business entity used by Franchisors in the UAE is a limited liability company. There are many cases of Franchisors entering into joint ventures with a local based entity in order to gain easy access and insight into the local market and in order to have control of the use of the know-how that will be transferred to the franchisee, however, such joint ventures’ structure is rarely selected in the UAE outside of the luxury goods sector. In addition, foreign franchisors are generally reluctant to fully participate in joint ventures through capital investment to acquire franchise rights.

2.3 Are there any registration requirements or other formalities applicable to a new business entity as a pre-condition to being able to trade in your jurisdiction?

All business entities are required to obtain a license in the UAE whereby they will designate the activities that they intend to provide under the entity. This will be reviewed by the government or free zone authorities and either granted or denied. In some cases, additional levels of approvals may be required to designate a particular business activity.

3 Competition Law

3.1 Provide an overview of the competition laws that apply to the offer and sale of franchises.

The Federal laws and regulations governing competition in the UAE are as follows:

  • The Federal Law No. 4 of 2012 on the Regulation of Competition (“UAE Competition Law”).
  • Cabinet Resolution No. 37 of 2014 concerning the Implementing Regulation of the UAE Competition Law (“Implementing Regulations”).
  • Cabinet Resolution No. 13/2016 (“The Ratio Decision”) which provides the ratios and controls related to the application of the UAE Competition Law.
  • Cabinet Resolution No. 22/2016 (“SME Decision”) in respect of small and medium projects and enterprises.

The UAE Competition Law applies to the activities carried out by the entities in the UAE and the exploitation of intellectual property rights inside UAE or abroad, and further, the law applies to the activities which are practiced abroad the UAE and affect competition in the UAE.

The main aim of the UAE Competition Law and Regulation is to protect and promote competition and anti-monopoly practices through maintaining a competitive market governed by market mechanisms, in accordance with the principle of economic freedom, by regulating the following areas:

  1. Restrictive Agreements:

The UAE Competition Law and Regulation prohibits the restrictive agreements that restrict and prevent competition in the relevant market. Therefore, and when drafting the Franchise Agreement, the parties need to ensure that the provisions of the Agreement are not in breach of the UAE Competition Law & Regulation, noting that the Agreements that include the following provisions are prohibited:

  • Agreements that specify directly or indirectly the purchase or sale prices of goods or services;
  • Agreements that freeze or limit production, development, distribution, marketing and other investment aspects;
  • Agreements that restrict the freedom of supply of goods or services in the relevant market;
  • Agreements that collude in refusing to deal with certain entities or limiting the sale or supply to certain organizations, etc.

The prohibitions stipulated under the UAE Competition Law & Regulation excludes the “low impact restrictive agreements” in which the total share of the parties to the agreements do not exceed 10% of the total transactions in the relevant market.

Further, Franchise Agreements that are registered as “commercial agencies” under the Federal Agencies Law No. 18 of 1981, are expressly exempted from the application of the UAE Competition Law & Regulation. The Competition Law expressly stated that certain restrictions cannot be included in agreements except to the extent they are included under the Agencies Law, such as the following:

  • The Agreements that are aimed at market sharing or allocation of clients on the basis of geographical areas, distribution centres, customer quality, seasons, periods of time or any other basis that affects competition.
  • The Agreements that are taking any measures to hinder the entry other entities to the market.
  1. Abuse of Dominant Position:

The UAE Competition Law and Regulation prohibits the companies of a dominant position in the relevant market, or in a substantial or influential part thereof, from carrying out any acts or actions that lead to the abuse of the position to prejudice, restrict or prevent competition. Therefore, and while having a dominant position is not in itself prohibited under the UAE Competition Law, using a dominant position for anti-competitive purposes is prohibited such as the following acts:

  • Imposing – whether directly or indirectly – prices or conditions for resale of goods or services.
  • Selling goods or services at below cost price with the aim of hindering the entry of competitive entities to the market.
  • Forcing customers not to deal with a competitive entity as well as unjustified discrimination of customers of identical contracts in terms of prices of goods or services or the terms of sale or purchase of contracts.
  • Disseminating false information about the products or services and their prices and other activities.

However, the UAE Competition Law provides that certain minimum threshold must be met, which is calculated by reference to the total market share of the parties to the agreement and whether the same exceeds a percentage specified by UAE Cabinet.

3.2 Is there a maximum permitted term for a franchise agreement?

There is no maximum permitted term prescribed by law for the term of a franchise agreement.

3.3 Is there a maximum permitted term for any related product supply agreement?

There is no maximum permitted term prescribed by law for any related product supply agreement.

3.4 Are there restrictions on the ability of the franchisor to impose minimum resale prices?

Generally, there are no restrictions imposed on the ability of the franchisor to impose minimum resale price in order to comply with the franchise standards. The only concern would be the competition law and whether the local entity, i.e. franchisor or franchisee, is considered a dominant entity as defined under the UAE Competition Law, as in such case such act would be potentially an issue that is considered as price-fixing by a dominant entity, and accordingly, would be subject to the sanctions stipulated under the UAE Competition Law.

In light of this, the franchisor shall be able to set the prices for the products or services, subject of the Franchise Agreements, as long as the franchisor and/or franchisee are not in a dominant position. The nature of product/service can trigger the Competition Law issue and potentially play a factor, i.e. whether the product is substantial, luxury for contain a direct need to consumers.

3.5 Encroachment – are there any minimum obligations that a franchisor must observe when offering franchises in adjoining territories?

There are no laws or regulations that govern competing franchisees which are granted franchise in neighbouring territories (encroachment). However, the main principle under the applicable UAE Laws is that contractual matters are subject to the agreement of the parties, which will be enforceable to the extent that it does not violate UAE public policy or morality. Further, the UAE Federal Law No. 5 of 1985 (Civil Code) provides that all contracts must be performed in a manner consistent with the requirements of good faith, accepted industry practice and honourable dealings.

Therefore, and as the franchise rights can be granted to franchisees on an exclusive and non-exclusive basis, the franchisor shall be clear regarding the territory or geographical limits granted to each franchisee when drafting the Franchise Agreement. The non-exclusive Franchise Agreement shall include sufficient provisions that expressly state that the franchisor will reserve the right to grant franchises to third parties within the territory in order to mitigate any risks in this regard, while the Exclusive Franchise Agreement shall include provisions that expressly state that the franchisor will reserve the rights to grant franchises to third parties outside the exclusive territory or even to grant franchises for similar concepts that do not incorporate the licensed or franchised intellectual property rights within the exclusive territory.

As for the Exclusive Franchise Agreements which are registered as a commercial agency agreement with the Ministry of Economy under the UAE Federal law No. 187 of 1981, the same grants exclusivity to the Franchisee in relation to the franchised Territory (whether in respect of one Emirate or number of Emirates or the entire UAE).

The franchisee which is recorded as a commercial agent will be able to prevent third parties – including the franchisor – from importing any commodity, product, material or any other merchandise that is the subject matter of a Franchise Agreement registered at the Ministry of Economy within the scope of the franchised territory.

3.6 Are in-term and post-term non-compete and non-solicitation of customers covenants enforceable?

Non-compete and non–solicitation clauses during the term and post termination are legally enforceable under UAE Laws but, in practice, they face serious practical challenges.

Provided such clauses are reasonably drafted and included, they can be enforced. In practice, generally, the courts in the UAE take in consideration the following factors when determining the reasonableness of a non-compete or non – solicitation restrictions:

  1. Duration of the restriction: The period of non-compete and non-solicitation clauses will be subject to challenge in case the same are considered long by the court.
  2. Geographical scope of the restriction: The geographical scope of non-compete and non-solicitation clauses will be subject to challenge in case the same are considered large by the Court.
  3. Position and status of the person or entity against whom the restrictions are imposed as well as the restricted activities.

Therefore, non-compete and non–solicitation clauses, in which the franchisees agree not to be involved in any similar or competing business and not to solicit any employees from the franchised business, are enforceable in the UAE provided they are reasonable in respect of the period, the geographical area and the activity restricted.

As for the franchisor’s know-how, it is possible to include standard indefinite restrictions or clauses on using any of the franchisor’s know-how in any other similar or competing business.

4 Protecting the Brand and Other Intellectual Property

4.1 How are trade marks protected?

In the UAE, trademarks are protected under Federal Law No. 37 for the Year 1992 for Trade Marks (the Trade Mark Law) and its amendments and may be registered before the UAE Trade Mark Office.

A trade mark registration lasts for a duration of 10 years from the date of application and can be renewed for further periods of 10 years.

In terms of process, an application must be made to the Trade Mark Office (in Arabic). The officials will then examine the trade mark on both absolute and relative grounds, as per the prescribed conditions in Articles 2 and 3 of the Trade Mark Law.

Providing no objections are made, the trade mark will be published in the Official Gazette and two local newspapers for a period of 30 days. If no opposition is lodged by a concerned third party within the requisite time period, the trade mark will be eligible for registration, which will be secured upon payment of the associated fee.

The owner of a registered trade mark maintains the exclusive right to use its trade mark and may bring action against any party which uses the trade mark without its consent.

4.2 Are know-how, trade secrets and other business-critical confidential information (e.g. the Operations Manual) protected by local law?

The UAE is party to the TRIPS Agreement and accordingly the concept of trade secrets and confidential information is provided for in the UAE Federal Laws under several different provisions. Under the Penal Code, it is a criminal offence for an individual who “… by virtue of his profession, craft, position or art is entrusted with a secret and divulges it in cases other than those allowed by law or if used for his own personal interest or for the interest of another person, unless authorized by the confiding person to disclose or use it

Under the Civil Transactions Law, employees must “safeguard the industrial or commercial secrets of their work, even after the expiration of the contract, as required by the agreement or customarily practiced”

The Labour regulations give some protection for trade secrets. For instance, gives an employer the right to take disciplinary measures if the employee “divulges any of the secrets of the establishment where he works“.

The UAE Companies Law that came into force on 1 July 2015 contains a provision in Article 369 titled “Disclosure of company secrets” which penalizes the following:

“1. anyone who takes advantage of data or information that he obtained from the incorporation committee at any stage of incorporation of the company and who is a legal or financial consultant or a subscription director or covering sponsor or the parties participating in the incorporation procedures or any of their representatives.

2 .the chairman, a board member or an employee who uses or discloses a company secret or intentionally tries to damage the company’s activity”.

Further, Federal Law No. 17/2002 on the Regulation and Protection of Industrial Property of Patents, Designs and Industrial Patterns (as amended by Federal Law No. 31/2006) recognizes the right of confidentiality in relation to know-how and requires that steps be taken to preserve the secrecy of that knowledge. In accordance with provisions of Chapter 6 of the Law and Chapter 5 of the Implementing Regulation, the party asserting confidentiality must demonstrate that positive steps have been taken to keep the information confidential and that the nature of the information as such was communicated. Also, Chapter 5 of the Implementing Regulation contains detailed requirements in relation to how the material that constitutes the know-how should be managed and provide for registration of know-how contracts with the Intellectual Property Protection Department.

It is also best practice to include obligations relating to trade secrets and confidential information in any franchise agreement which set out the circumstances of the disclosure of confidential information.

If the concerned contract is governed under the laws of the DIFC free zone, the relevant provisions can be found in the DIFC IP Law, which was implemented in 2020. This defines the concept of a trade secret as “all forms and types of financial, business, scientific, technical, economic or engineering information, including patterns, plans, compilations, programs, devices, formulas, designs, prototypes, methods, techniques, processes, procedures, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialised physically, electronically, graphically, photographically, or in writing. However, it must meet the following requirements:

(1) “the information involved constitutes a trade secret, or part thereof;

(2) the information derives actual or potential economic value from not being generally known to other persons who may obtain economic value from its disclosure or use; and

(3) the person lawfully in control of the information has taken reasonable measures to keep the information a secret.”

4.3 Is copyright (in the Operations Manual or in proprietary software developed by the franchisor and licensed to the franchisee under the franchise agreement) protected by local law?

Yes, copyright protection in the UAE is appliable to any original literary, artistic or scientific creation, whatever its type, mode of expression, significance or purpose of its creation. This is provided for under Federal Law No. (7) 2002 On Copyrights and Related Rights. The UAE is also signatory to several copyright treaties such as the Berne Convention, WTO Trips Agreement, WIPO Copyright Treaty and the Rome Convention.

5 Liability

5.1 What remedies can be enforced against a franchisor for failing to comply with mandatory disclosure obligations? Is a franchisee entitled to rescind the franchise agreement and/or claim damages?

There are no mandatory disclosure obligations under the applicable UAE Laws. However, and if such disclosure is agreed between the parties in the Franchise Agreement, then the franchisee may have the right to terminate the agreement or claim for damages, if the provisions of the agreement grants the franchisee such rights.

5.2 In the case of sub-franchising, how is liability for disclosure non-compliance or for pre-contractual misrepresentation allocated between franchisor and master franchisee? If the franchisor takes an indemnity from the master franchisee in the Master Franchise Agreement, are there any limitations on such an indemnity being enforceable against the master franchisee?

Any liability for misrepresentation under the Sub-Franchise Agreement which is made between the master franchisee and sub-franchisee would rest with the master franchisee, as the parties must have a contractual relationship to bring a claim of misrepresentation in the UAE. The franchisor or its officers and directors will not be liable for a breach by the master franchisee of its obligations.

In general, the provisions in a franchise agreement that provide for indemnification of a party against liability arising in a contract are enforceable under UAE Law, provided that the losses are not the result of the fraud, wilful default or gross fault or negligence of the party seeking to be indemnified. Therefore, the parties of the Franchise Agreement may include any indemnity clauses, however, if the Master Franchise Agreement between the Franchisor and Master Franchisee contains a wide obligation for the later to indemnify the franchisor for all the Master’ Franchisee’s acts or omissions, the courts would have the right to strike out the indemnity provision for being “unreasonable” in case the acts or omissions are caused by the franchisor’s own negligence.

5.3 Can a franchisor successfully avoid liability for pre-contractual misrepresentation by including a disclaimer in the franchise agreement?

It is best practice to include entire agreement and non-reliance clauses to prevent either party from bringing a misrepresentation action and disclaimers of this nature would generally be sufficient to avoid liability. However disclaimers would not exclude the franchisor from any criminal liability for pre-contractual liability.

5.4 Does local law permit class actions to be brought by a number of aggrieved franchisees and, if so, are class action waiver clauses enforceable?

The applicable UAE Laws do not legislate for class action lawsuits, However, in practice, a group of claimants may collectively commence legal proceedings against a single or a number of defendants. This may work in claims where various claimants suffered harm as a result of acts of a single or a number of defendants. However, this might be difficult in cases related to franchise.

6 Governing Law

6.1 Is there a requirement for franchise documents to be governed by local law? If not, is there any generally accepted norm relating to choice of governing law, if it is not local law?

There is no requirement for franchise documents to be governed by local law and generally the parties to any agreement are free to choose the governing law and forum within the contract. However, if the franchise agreement is registered with the Ministry of Economy at the Commercial Agencies Department, it will be subject to the Commercial Agency legislation and accordingly the mandatory to apply to the UAE Courts. The forum will also be subject to UAE local courts regardless of what parties may put in the agreement as governing law or jurisdiction.

6.2 Do the local courts provide a remedy, or will they enforce orders granted by other countries’ courts, for interlocutory relief (injunction) against a franchisee to prevent damage to the brand or misuse of business-critical confidential information?

The UAE courts may enforce orders granted by other courts if the foreign judgments fulfil the conditions stipulated in the UAE Laws and/or treaties. The foreign judgments can be enforced in the UAE either:

1) under a bilateral treaty signed between UAE and a foreign country;

2) under the provisions of the Executive Regulations of the Civil Procedure Law No. 11 for the year 1992 as amended on 2018 or

3) through the DIFC Courts or ADGM Courts.

6.3 Is arbitration recognised as a viable means of dispute resolution and is your country a signatory to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards? Do businesses that accept arbitration as a form of dispute resolution procedure generally favour any particular set of arbitral rules?

Yes, arbitration is readily available and widely used in the UAE as a form of dispute resolution. The UAE is signatory to the New York Arbitration Convention

7 Real Estate

7.1 Generally speaking, is there a typical length of term for a commercial property lease?

Generally a minimum of a year ,with most commercial leases being either three or five years.

7.2 Is the concept of an option/conditional lease assignment over the lease (under which a franchisor has the right to step into the franchisee/tenant’s shoes under the lease, or direct that a third party (often a replacement franchisee) may do so upon the failure of the original tenant or the termination of the franchise agreement) understood and enforceable?

Whilst it is possible to include a term of this nature into the franchise agreement, the tenant (the franchisee) would need to have express permission from the landlord in order to assign the lease to another party. If this was not obtained beforehand, any assignment would fail.

7.3 Are there any restrictions on non-national entities holding any interest in real estate, or being able to sub-lease property?

There are no legal restrictions that prohibit a non-national to lease or sub-lease a property due to the nationality. However, non-nationals may own property only in certain allowable territories in the UAE.

7.4 Give a general overview of the commercial real estate market. To what extent has the real estate market been affected by the Coronavirus pandemic? Specifically, can a tenant expect to secure an initial rent free period when entering into a new lease (and if so, for how long, generally), or are landlords demanding “key money” (a premium for a lease in a flagship location)?

The Coronavirus pandemic initially led to a fall in rental prices, with many landlords becoming more flexible in respect of payment terms and the requirement for post-dated cheques, permitting bank transfers instead. However, the Government (Dubai Land Department) stepped in to stabilise rental prices and has proposed a new draft law which is set to keep rents in Dubai unchanged for a three-year period. This should provide stability for both tenants and landlords.

Some landlords do advertise and are willing to provide rent free periods when entering into a new lease, but the availability of this can depend on the area and the relevant level of demand. Key Money is not usually demanded by landlords.

8 Online Trading

8.1 If an online order for products or request for services is received from a potential customer located outside the franchisee’s exclusive territory, can the franchise agreement impose a binding requirement for the request to be re-directed to the franchisee for the territory from which the sales request originated?

Yes, the franchise agreement can impose a binding requirement for the request to be re-directed.

8.2 Are there any limitations on a franchisor being able to require a former franchisee to assign local domain names to the franchisor on the termination or expiry of the franchise agreement?

There are no formal limitations. However, if the domain name is inclusive of the trade mark of the franchisor, the franchisor will be able to claim the domain name is their property and accordingly should be transferred. It is best practice to include provisions relating to any domain names within the franchise agreement.

9 Termination

9.1 Are there any mandatory local laws that might override the termination rights one might typically expect to see in a franchise agreement?

If the agreement is registered with the Ministry of Economy, under Article 8 of the Commercial Agencies Law, the franchisee will benefit from protection from termination or non-renewal of the agreement. This means that even if the agreement was for only a fixed term and has expired, it automatically gets renewed. Article 8 can only be terminated in the case of ‘material reasons’.

Furthermore, a franchise agreement cannot be registered in the name of a new commercial agent, unless it is terminated by mutual agreement between the franchisee and franchisor or unless the Commercial Agency Committee is convinced a material reason justifies the termination of the agreement.

9.2 Are there local rules that impose a minimum notice period that must be given to bring a business relationship that has existed for a number of years to an end, which will apply irrespective of the length of the notice period set out in the franchise agreement?

There are no local laws that impose a minimum notice period in the UAE.

10 Joint Employer Risk and Vicarious Liability

10.1 Is there a risk that a franchisor may be regarded as a joint employer with the franchisee in respect of the franchisee’s employees? If so, can anything be done to mitigate this risk?

No, UAE Employment Law requires all employees to be sponsored by a legal entity in the UAE for work and residency purposes. It would not be possible to suggest an employee of a franchisee to be regarded as an employee of the franchisor, unless the franchisor was based in the UAE and the franchisor sponsored the employees. Nevertheless, it is recommended to disclaim any relationship of partnership, employment or agency within the agreement in order to mitigate any risk.

10.2 Is there a risk that a franchisor may be held to be vicariously liable for the acts or omissions of a franchisee’s employees in the performance of the franchisee’s franchised business? If so, can anything be done to mitigate this risk?

Generally, the franchisor will not be held liable for the acts or omissions of the franchisee’s employees unless the franchisor has contributed in such acts, validate it, cause any omissions or misconduct due to its direct control over the franchisee’s employees and works, including day to day operations or due to common ownership of the franchisor and franchisee.

11 Currency Controls and Taxation

11.1 Are there any restrictions (for example exchange control restrictions) on the payment of royalties to an overseas franchisor?

There are no restrictions of this kind.

11.2 Are there any mandatory withholding tax requirements applicable to the payment of royalties under a trade mark licence or in respect of the transfer of technology? Can any withholding tax be avoided by structuring payments due from the franchisee to the franchisor as a management services fee rather than a royalty for the use of a trade mark or technology?

No, this is not applicable within the UAE.

11.3 Are there any requirements for financial transactions, including the payment of franchise fees or royalties, to be conducted in local currency?

There are no such requirements in the UAE.

12 Commercial Agency

12.1 Is there a risk that a franchisee might be treated as the franchisor’s commercial agent? If so, is there anything that can be done to help mitigate this risk?

Yes, there is a risk, especially if the franchise agreement is registered with the Ministry of Economy. Therefore, it is important to set out the rights of the franchisee within the franchise agreement and specifically mention that the franchisee is not an agent. It may also be useful to include a disclaimer within the agreement to this effect.

13 Good Faith and Fair Dealings

13.1 Is there any overriding requirement for a franchisor to deal with a franchisee in good faith and to act fairly in its dealings with franchisees according to some objective test of fairness and reasonableness?

Yes, a duty to act in good faith is implied into any agreement which is subject to UAE Law. As per Article 246 of the UAE Civil Code: “a contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith“.

13.2 Is there any limitation on a good faith obligation being unenforceable if it only applies from franchisee to franchisor, rather than being mutual?

The obligation to act in good faith applies to all contracts and is an obligation on both contracting parties, irrespective of the terms in the agreement.

14 Ongoing Relationship Issues

14.1 Are there any specific laws regulating the relationship between franchisor and franchisee once the franchise agreement has been entered into?

No, there are no specific laws that regulate the franchise relationship once the franchise agreement comes into effect. However, the parties shall not contravene any of the general principles of law in relation to the ongoing dealings between them.

Further, there are specific policies and regulations established for certain industries and certain categories of products or services, and therefore, the parties shall ensure to establish the requirements imposed for the industry subject of the franchise business, such as the franchises related to educational institutions or pharmacies, etc.

15 Franchise Renewal

15.1 What disclosure obligations apply in relation to a renewal of an existing franchise at the end of the franchise agreement term?

No disclosure obligations are specified by the applicable laws in the UAE.

15.2 Is there any overriding right for a franchisee to be automatically entitled to a renewal or extension of the franchise agreement at the end of the initial term irrespective of the wishes of the franchisor not to renew or extend?

There are no mandatory imposed rights in relation to automatic renewals of the franchise agreement at the end of the initial or subsequent term. However, and in case the Franchise Agreement is recorded as a commercial agency under the UAE Commercial Agency Law, the franchisor will be liable for compensation if non-renewal occurs by franchisor’s decision without a legitimate cause even if the franchise agreement term is fixed.

15.3 Is a franchisee that is refused a renewal or extension of its franchise agreement entitled to any compensation or damages as a result of the non-renewal or refusal to extend?

No, the franchisor and franchisee are free to agree the terms of the franchise agreement and no compensation or damages will be payable unless the contract provided for this.

However, and in case the franchise agreement is recorded as a commercial agency agreement under the UAE Commercial Agency Law, then the franchisee will be entitled to compensation on failure to renew an agreement even if the non-renewal is made in accordance with the terms of the franchise agreement. The amount of the compensation is decided on a case-by-case basis, however, the courts in the UAE take into account different factors when determining the amount of compensation, such as the duration of the franchise agreement, the net profit generated by the franchisee and its efforts in promoting the franchisor as well as the targets reached by the franchisee in accordance with the terms of the franchise agreement.

16 Franchise Migration

16.1 Is a franchisor entitled to impose restrictions on a franchisee’s freedom to sell, transfer, assign or otherwise dispose of the franchised business?

Yes, this can be set out in the franchise agreement

16.2 If a franchisee is in breach and the franchise agreement is terminated by the franchisor, will a “step-in” right in the franchise agreement (whereby the franchisor may take over the ownership and management of the franchised business) be recognised by local law, and are there any registration requirements or other formalities that must be complied with to ensure that such a right will be enforceable?

A step-in clause will be recognised however there may be limitations on the enforceability in respect of the franchisee’s own contracts with third parties, such as the landlord of the franchisee’s premises.

16.3 If the franchise agreement contains a power of attorney in favour of the franchisor under which it may complete all necessary formalities required to complete a franchise migration under pre-emption or “step-in” rights, will such a power of attorney be recognised by the courts in the jurisdiction and be treated as valid? Are there any registration or other formalities that must be complied with to ensure that such a power of attorney will be valid and effective?

In order to use a Power of Attorney in the UAE, it must be executed in the presence of a notary and legalised up to the UAE embassy in the country of execution. Once it reaches the UAE, it will require local authentication before it can be relied upon.

For Powers of Attorney from a UAE based entity, only execution in the presence of a notary is required.

17 Electronic Signatures and Document Retention

17.1 Are there any specific requirements for applying an electronic signature to a franchise agreement (rather than physically signing a “wet ink” version of the agreement), and are electronic signatures recognised as a valid way of creating a binding and enforceable agreement?

There are no specific requirements in respect of using electronic signatures and the UAE recognises electronic signatures as a valid form of signature, which are increasingly used in cross border transactions. Whilst an electronically signed document will still form a binding and enforceable agreement, it is best practice to execute the document in the presence of a notary in the UAE. As mentioned, if the franchise agreement is to be registered with the Ministry of Economy, it will require notarisation.

17.2 If a signed/executed franchise agreement is stored electronically (either having been signed using e-signatures or a “wet ink” version having been scanned and saved as an electronic file), can the paper version of the agreement be destroyed?

No, in the UAE it is common for the court to request the original contract and/or supporting documents as evidence of the agreements, signed using wet ink. Failure to provide the originals may not be sufficient to convince the courts a valid agreement exists. As for the agreements signed using e-signatures, the parties would be required to present copies of the emails exchanged by them containing the e-signed agreement in order to prove that the parties confirm the agreement.

18 Current Developments

18.1 What is the biggest challenge franchising is facing in your jurisdiction and how are franchisors responding to that challenge?

The termination of a franchisee in the UAE is a challenge, irrespective of the terms of the franchise agreement, due to Article 8 of the Commercial Agencies Law. Franchisors may only terminate the agreement for ‘material reasons’ and this will need to be endorsed by the court or the Commercial Agencies Committee in order to have legal effect. In practice ‘material reasons’ are very difficult to demonstrate and there is little guidance as to what constitutes a material reason.

A further challenge for franchisors is that the franchisee is likely to register a trade name in the UAE and this may include the name or trade mark of the business. Having this trade name revoked once the relationship has dissolved can present a further challenge to franchisors. In order to overcome this, franchisors should include specific terms of termination within the franchise agreement that sets out the assignment of any trade names if registered in the name of the franchisor.

As the leading franchise brokers and franchise consultants in Asia, VF Franchise Consulting will offer you many leading franchise opportunities.Please CONTACT US at info@vffranchiseconsulting.com for more information. 

Originally published by ICLG.

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.

MONDAQ 

by Munir Suboh , Amal Atieh and Felicity Hammond
BSA Ahmad Bin Hezeem & Associates LLP

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