The United Arab Emirates economy has been growing at a dynamic pace; and one of the major reasons that has contributed towards this is that the country does not levy any direct taxes and capital gains. With the rapid development of commercial properties, the franchising model has gained a lot of popularity in the UAE. Although Dubai has been a house to millions of brands, other States have also opened doors to franchisors and franchisees. Franchising opportunities in Dubai and the UAE can be summed in one single word – immense!
Understanding the Term Franchising and How Franchising Works in Dubai and UAE
- Franchising is the extension of a legal entity or brand that has already gained recognition in the market. Although the word ‘franchise’ is more synonymous with business, a grant of certain rights may also fall within the meaning of term franchise. In simple terms, franchising gives a right to the franchisee to sell a franchisor’s products in a certain area or territory using the franchisor’s (brand) name. One can franchise anything from a pen brand to hotel, pizzas to electronic devices, franchise models today even extend to media and entertainment industry.
- While investors have the option to buy out existing business, there are many investors who find starting their own venture more enforcing and satisfying, and franchise model suits the latter at best. Franchisees pay an initial fee (towards license, system and use of trademarks) plus regular royalties to franchisors.
- While the franchisor is a well-established brand, the franchisee after negotiating with franchisor signs a franchise agreement and agrees to market, promote, and sell franchisor’s products in accordance with the terms of the franchise agreement and under the same brand name as that of the franchisor, and using the franchisor’s product logo, system and concept.
- Given the franchisor’s immense popularity of its brand, their know-how and success rate, the possible risk factors for a franchisee intending to setup a franchise in Dubai or UAE are relatively on a lower end. For this reason, several investors view franchise option as a more profitable retailing opportunity.
Understanding Franchise Structures
- As explained above, under a franchising model, the one selling the rights of their business becomes the franchisor, while the one purchasing the rights becomes the franchisee. Although traditional franchise structures were bit complex, the modern present day structures are ideally a win-win model and devised in the interest of both – the franchisor as well as the franchisee.
- The franchising structure is divided into two (2) categories.
- Single Unit Franchisee – Only one location is assigned to a single franchisee. For example, a franchisor based in New Orleans, United States may agree to assign one single territory (say, Dubai) to the Franchisee. Under this model, the franchisor may be able to assign other territories within UAE (like Sharjah, or Abu Dhabi) to other franchisees. Franchisors see this as a potential division of risk.
- Developer Multi-Unit Franchisee – Multiple locations are assigned to a single franchisee. In this case the franchisor may grant franchisee with wider territory rights. This could be franchise right for whole of UAE or all of GCC. This option is best in cases where franchisors understand the current capability, market reach and expertise of franchisee and the value addition this would bring to both parties. Franchisees on the other hand benefit from wider territory coverage and hold on broader markets.
- A franchising system will typically include a license authorizing use of the system, a shared development expectation, and the franchisor’s right to decide how the business should be conducted.
Implications of UAE Commercial Agency Laws
- Federal Law Number 18 of 1981 on the Organization of Commercial Agencies, as amended by Law Number 14 of 1998, and which was further amended by Federal Law Number 13 of 2006 and Federal Law Number 2 of 2010, governs Commercial Agency (the Law) in the United Arab Emirates.
- Commercial Agency is defined as ‘representation of a principal by an agent for distribution, sale, display or provision of a commodity or service in the state in return for commission or profit.’
- Law Number 2 of 2010 has introduced a committee to manage disputes between principals and agents, called the “Commercial Agencies Committee.” It is mandatory for a dispute or disagreement to first go through the Commercial Agencies Committee before going to the courts. This Committee can issue awards, and aggrieved parties may challenge an award within 30 days of the date of its issuance.
- Federal Law Number 13 of 2006 states that a principal must provide justification rescinding an agency agreement, and that, unless the period fixed for the agreement has expired, it is forbidden to register an agency in another agent’s name in the Commercial Agency Register without the consent of both the old and new agents.
- Law Number 10 of 2010 has modified this: after the expiry of the validity of an agency agreement, the principal must obtain the consent of the old agent to appoint a new agent. This amendment indeed grants more authority to an agent whose term has expired and should have the effect of encouraging the principal to entertain a good relationship with their agent.
- The franchisors (or; their appointed counsels) draft a broad franchise contract. The franchise contract may also be termed as ‘Area Development Agreement’ or with a similar title. The franchise contract also includes other agreements such as license agreement, technical services agreement, royalty agreement, etc. to name a few.
- The contract comprises the terms and conditions of running the franchise. The terms and conditions of franchise are generally quite broad and for those franchisees based in Dubai, it is advisable that they obtain counsel from Dubai Law Firms. At times, it may be possible that the franchise contracts are entirely one-sided in favor of the franchisor. In experience, franchise contracts drafted by overseas law firms also fail to take in to account the Law and this can affect both the parties.
- The agency should be registered in the Commercial Agents’ Register, at the Ministry of Economy. In order to register the franchise contract, the parties (through their counsels) should submit the signed franchise contract along with necessary forms and fees. Once the franchise agreement is registered, franchisor and franchisee can benefit from Law and commence their newly found relationship. For registering franchise in Abu Dhabi, parties should approach the Ministry of Economy in Abu Dhabi.
Managing Contentious Disputes
- The best way to resolve a dispute is through an out of court settlement between both of the parties involved. It is likely that franchise contracts may provide for a clause on arbitration. Alternatively, parties may agree to refer their conflict or dispute for consideration before the DIFC Courts. Choosing of venue for settlement of disputes should be based on a careful review and advice from counsel. The cost of settling disputes may vary from one venue to the other. Also, the enforcement or execution of arbitration awards can in some instances be expensive and a time consuming affair.
- If the matter is not resolved through an amicable settlement, the parties may file a case in the domestic courts. However, the parties should make sure that they resort to the Commercial Agencies Committee before filing a petition at the courts.
- Commercial law and general contracts are applicable when no specific franchise legislation is available.
How to Protect Your IP and Brand
- The franchise contract lists the penal actions that can be taken against a franchisee in the case of misuse of intellectual property (IP) including logos, trademarks, copyrights, etc. Franchisors must ensure that they register trademark in Dubai and UAE. The UAE grants twenty years of protection and applications for trademark are to be lodged through trademark agents before Ministry of Economy.
- The franchisor should ensure that the franchisee is well aware of the products protected by the brand, and of the practices followed to maintain its market standards. Likewise, the franchisor should clearly be aware of the intellectual property rights in the region and franchisee should ensure that the intellectual property is at all times safeguarded.
- The franchisee, should also have the capability to take complete responsibility for the intellectual property that the franchisor has licensed to them.
What Governing Laws Would Apply
- Parties should operate a franchise only after obtaining an approval and registering the agreement at the Ministry of Economy.
- Although Dubai does not have any specific franchising law, certain laws directly concern franchising. Contractual and commercial laws may also apply. The laws listed below govern franchising in the UAE.
- Federal Law Number 5 of 1985 on Civil Transactions (as amended).
- Federal Law Number 18 of 1993 on Commercial Transactions (as amended).
- Federal Law Number 18 of 1981, as amended by Federal Laws Number 14 of 1998, 13 of 2006 and 2 of 2010 – the UAE Commercial Agency Law (as amended).