The UAE: A Franchise Haven, Heaven, or Both?
Various initiatives have been undertaken in the UAE to strengthen the franchise sector. For example, under the Dubai government’s initiative, the UAE Franchise Association was launched in 2004. Also, the Franchising Middle East Exhibition, an international trade show to support the franchise industry in the Middle East, has been held annually in Dubai for many years.
Legislative Framework - Old and New Issues
Although franchise arrangements are common in the UAE, there is no special purpose franchise law in the UAE. Various government bodies and other commentators have expressed interest in developing a special purpose franchise law, but this has not happened. Accordingly, the treatment of franchise arrangements in the UAE is somewhat of a grey area with respect to common franchise issues (e.g., mandatory disclosure).
Instead, franchise relationships are in general treated as simply another type of agency relationship. Thus, franchise arrangements in the UAE are usually governed by various agency laws, for example, Commercial Agency Law (Federal Law No. 18 of 1981, as amended), which generally protects the agent (e.g., franchisee). So, franchisors need to consider and plan for protective agency measures that may be available to franchisees under UAE law.
Other Laws and Legislative Developments
Franchise relationships invariably include the grant of a license or other types of rights to the franchisee to use the franchisor’s names, marks and other intellectual property. The UAE has a series of laws dealing with intellectual property. For example, trademarks are governed by Federal Law No. 37 of 1992.
Also of interest is the UAE’s consumer protection law, Federal Law No. 24 of 2006, which may apply to franchises in a number of ways (e.g., product warranties). Also, specific Emirates have consumer oriented policies and procedures aimed at consumer protection that may apply to franchising business in the UAE (e.g., requiring receipts to be issued to customers in Arabic and English).
Finally, a relatively new UAE Competition Law (2013) provides provisions that also may apply to franchise operations in a number of ways, depending on how they are structured (e.g., limitations on price control provisions).
Some Unique Challenges and Trends for Franchisors
The UAE legal system is founded on the Islamic Sharia law. Therefore, franchise arrangements must give due consideration to relevant local customs, practices and cultural sensitivities that might be relevant to the franchise (e.g., Halal food, dress code, etc.). Thus, franchise parties need to consider whether such cultural issues require adjustment to the normal franchise operations and agreements. For example, staff dress may need to be more conservative, and a franchised restaurant menu and its ingredients may need to be altered to accommodate restrictions on serving pork and alcohol. Indeed, we are aware of brands and concepts that have not been approved for operation in the UAE because of inconsistency with these types of cultural sensitivities. We also are aware of franchisors having to make changes to their standard trademarks, signage, logos or other components of their systems because of cultural sensitivities, in order to align the franchise with local customs and culture. So, while the hallmark of franchising is uniformity and consistency, there may be a degree of adaptation and adjustment required, or recommended, in order for a franchise to be able to succeed in the UAE.
The careful selection of a qualified franchisee in the UAE is critical. The commercial and legal risks associated with doing business in the UAE can be reduced by conducting appropriate due diligence concerning the potential franchisee and its ownership structure. This is often hindered by the lack of publicly available information, although credit risk agencies are becoming more mainstream. At a minimum, franchisors will want to review copies of the potential franchisee’s UAE licensing and charter documents to confirm who its owners are and also to ensure that the franchisee is qualified to engage in the specific activities contemplated in each applicable Emirate (or other relevant jurisdictions - see below).
Master Franchises and Sub-franchises
Master franchise relationships are quite common in the UAE and other GCC countries because of the relatively small size of each individual market. Thus, many franchisors are unable or unwilling to invest the time, effort and resources required to appoint and manage franchise relationships in each individual Emirate and/or country in the GCC or relevant region. Instead, franchisors often prefer to appoint a master franchisee for all of the UAE, and often for the entire GCC and perhaps other jurisdictions. Such master franchise relationships may be easier, cheaper and less cumbersome on the front-end during the engagement process, but they can present a myriad of issues to address once operations commence, and particularly in the event of termination. For example, there may be limitations on the legal and/or commercial capacity of a franchisee in the UAE to act in the other GCC or applicable countries, and vice versa. So, in the case of multiple-country arrangements the master franchisee usually appoints sub-franchisees. These sub-franchisees are often characterised as affiliates, although many are not in the formal legal sense. In any event, these sub-franchise relationships can be hard to manage (e.g., use of intellectual property, compliance with the franchise system and/or manuals), at least without direct privity of contract between the franchisor and sub-franchisees. And, in the event of termination of the master franchisee, franchisors can find themselves exposed to claims by multiple parties in multiple jurisdictions. Careful planning and good legal counsel is critical when implementing master franchise relationships.
If the franchisor decides to “second” certain of its personnel to the franchisee to help manage the franchise business, those persons usually need to become employees of the franchisee in order to satisfy the UAE immigration and/or labour sponsorship requirements, assuming the franchisor does not have a separate legal presence in the UAE that is capable of such sponsorship. In such situations, the seconded personnel will be deemed employees of the franchisee for local law purposes, and this can raise a variety of issues, including questions concerning the duties of confidentiality and loyalty for such employees.
It is advisable to obtain specific legal advice to fully understand, and plan for, the specific UAE legal requirements and practices that may apply to franchise arrangements, not only in connection with new franchises, but also when modifying or ending existing relationships.
Baker Botts L.L.P.
The foregoing overview is not intended to substitute for legal advice on specific matters.
Mark Bisch has been residing and practicing as a lawyer in Dubai since 1996. He is a partner at Baker Botts LLP, a full-service, leading international law firm. Mark has a fully integrated legal practice. He advises on a wide range of international commercial transactions, including joint ventures, mergers and acquisitions, corporate formations and governance, regulatory matters, banking and finance matters, real estate and construction projects, technology transactions, intellectual property issues, and labor and immigration matters.
Wicki Andersen has close to a decade of experience residing and working for Baker Botts in the Middle East. Clients rely on her practical experience in dealing with corporate and employment issues. She has considerable experience assisting on numerous big oil and gas projects in the Middle East and Africa