Franchise Business in the United Arab Emirates…
When going out and about in downtown Dubai you will see a plethora of franchises such as KFC, McDonalds, Costa Coffee, Caffe Nero, and even Yo Sushi.
From a handmade gourmet burger kitchen restaurant through to RE/MAX or Keller Williams real estate agency and you can even find one of the gym franchisors in action for those seeking a workout!
Without doubt a franchise business model is highly accepted in Dubai but it does come with a need for specialised legal assistance, it is not as easy to terminate a franchise agreement as other regions and a franchisor should appoint someone with an element of caution when covering UAE or Gulf States
Although there is no one specific franchising law in Dubai, a range of civil and commercial laws apply depending on the terms of the contract. There are multiple laws which can apply to franchising relationships and these include: Federal Law No. 18 of 1981 on the Organization of Commercial Agencies (as amended by Law No. 14 of 1998) and which was further amended by Law No. 13 of 2006. Federal Law No. 5 of 1985 on Civil Transactions. Federal Law No. 18 of 1993 on Commercial Transactions. 16 In addition to the above depending on the terms and conditions of the agreement other laws and regulations may also be relevant, including: UAE intellectual property laws for trade-marks, copyright and patents. Labor laws, especially, where a franchisor may second staff to the franchisee. Local Municipality rules – in relation to business names and signage; UAE general principles dealing with restraint of trade and assignment of the franchise back to the franchisor in the event of default.
The UAE maintains a position as the major trade and investment hub for a large geographic region, which includes not only the Middle East and North Africa, but also South Asia, Central Asia, and Sub-Saharan Africa. The country ranked 19th in the World Economic Forum’s 2013- 2014 Global Competitiveness Index, and 23rd on the World Bank’s 2013 Doing Business report, improvements of five and three places respectively from the previous year. Multinational companies cite the UAE’s political and economic stability, rapid population and GDP growth, efficient and fast growing capital markets, an absence of corporate and personal taxes, or any evidence of systematic corruption, as positive factors maintaining the UAE’s attractiveness to foreign investors, with inward FDI recording a 20% year-on-year increase to reach $12 billion, accounting for over 40% of the total inward FDI of the entire GCC.
With all the above you would expect laws to be more favourable to overseas investors and in my opinion they are not. It is a legal framework that in my opinion is skewed in favour of local nationals.
A Federal Companies Law applies to all commercial companies established in the UAE and to branch offices of foreign companies operating in the UAE. Companies established in the UAE are required to have a minimum of 51 percent UAE national ownership. Regardless, profits may be apportioned differently and often are negotiated at fixed amounts. Branch offices of foreign companies are required to have a national agent with 100% UAE national ownership unless the foreign company has established its office pursuant to an agreement with the federal or an emirate government. The new draft Companies Law, as reported by government media, is near final form and awaits the final determinations from the President before it is decreed and published in the national gazette. However, the revised draft has been under consideration for several years and there has been no guidance given as to how quickly the new law might be issued and implemented.
Foreign investors may purchase 108 of the 135 issues on the UAE stock markets, the Abu Dhabi Securities Market (ADX) and Dubai Financial Market (DFM). The remaining 27 issues are primarily those of government-related entities (GREs), such as the national telecommunications and oil companies. Companies on the exchanges are subject to the Federal Companies Law, thus foreign investors are allowed to own up to 49 percent of a company. However, some company by-laws prohibit foreign ownership, and others limit it to less than the legally allowable 49 percent, although several major companies raised their foreign ownership limits in 2013 in anticipation of an increase in foreign investment generated by announcements that ratings agencies MSCI and Standard & Poor’s would upgrade the UAE from “frontier” to “emerging” market status. The international financial crisis and foreign speculation contributed to significant declines in local equity valuations since 2008, but the markets have rebounded strongly in 2013. The Emirates Securities and Commodities Authority (SCA), the UAE’s regulator, is considering raising the minimum level of capital for brokerages. The Commercial Agencies Law provisions are collectively set out in Federal Law No. 18 of 1981 on the Organization of Commercial Agencies as amended by Federal Law No. 14 of 1988 (the Agency Law) and applies to all registered commercial agents. Federal Law No. 18 of 1993 (Commercial) and Federal Law No. 5 of 1985 (Civil Code) govern unregistered commercial agencies. The Commercial Agencies Law requires that foreign principals distribute their products in the UAE only through exclusive commercial agents that are either UAE nationals or companies wholly owned by UAE nationals. The foreign principal can appoint one agent for the entire UAE or for a particular emirate or group of emirates. The Ministry of Economy handles registration of commercial agents. It remains difficult, if not impossible, to sell in UAE markets without a local agent. Only UAE nationals or companies wholly owned by UAE nationals can register with the Ministry of Economy as local agents. The federal Industry Law stipulates that industrial projects must have 51 percent UAE national ownership. The law also requires that projects either be managed by a UAE national or have a board of directors with a majority of UAE nationals. Exemptions from the law are provided for projects related to extraction and refining of oil, natural gas, and other raw materials. Additionally, projects with a small capital investment or projects governed by special laws or agreements are exempt from the industry law.
The legislation for a franchisor to consider in the UAE is Federal Law No. 18 of 1981 on the Organisation of Commercial Agencies (as amended by Federal Law No. 14 of 1988, and further amended by Federal Law No. 13 of 2006 and Federal Law No. 2 of 2010)
The Commercial Agencies Law
The UAE Commercial Agencies Law is applied to both agency agreements that cover franchisor/franchisee relationships, manufacturer’s agency agreements, distributors, dealers and self employed sales agency relationships.
As a franchisor you must seek specialised legal advice as this law will only apply to a contract that are registered with the UAE Ministry for the economy.
Any such contract will need to qualify for registration at Ministry level by many set policies including but not limited to a franchisee being a UAE national or a company/partnership 100% owned by UAE nationals.
Unlike EU agreements this franchise agreement must grant exclusivity over the region or its nominated territory being all or a part of the UAE.
To be enforceable a franchise agreement must be notarized and for some franchisees it is a minefield.
A franchise agreement not registered with the Ministry is legally not valid. That is one opinion but many franchise agreements in the UAE are entered into between foreign franchisors and local limited liability companies and these are regularly companies that have a 49% foreign shareholding so not 100% owned by UAE nationals.
If a non-exclusive agreement is set it will not qualify for Ministry registration.
Some say that franchise agreements which may meet the qualifying criteria for registration with the Ministry do not have to be registered although I say be prepared for your franchisee getting through the honeymoon period and then heading off to a UAE courtroom seeking a court to order a post completion registration and therefore gaining the fuller protection as offered by agreements with Ministry registration.
The UAE remains the UK’s largest market in the Middle East and the 12th largest globally by value in trade in goods and services. It provides access to the wider region including Africa and Asia, and a great deal of investment into the UK. However, despite the long association between the UK and the UAE, the UK has lost share of the expanding market, especially to emerging economies. A number of British companies who have been established in the UAE for over 70 years are now having to review and adapt the way they operate in this market in order to deliver in partnership with a UAE entity a “double bottom line” of profitability, capability and capacity building, if they are to maintain their commercial presence in the UAE long-term. Abu Dhabi and Dubai are very different places in which to do business. Dubai, with its “free zones”, world class transport links, and more liberal approach to trade and investment has been able to attract a vast range of UK companies, including many SMEs, and has successfully built an international financial centre in the Dubai International Finance Centre (DIFC) which is heavily influenced by the City and which operates its Courts under English Common Law. Abu Dhabi is more conservative and possesses most of the UAE’s oil and consequently its wealth. But a younger generation of leaders is now determined to diversify Abu Dhabi’s economy, not least for long term economic security. As well as competition from the Europeans and North American companies, UK companies will face increasing and aggressive competition from the high growth Asian economies such as Korea and China. The UAE can be a demanding and at times frustrating market in which to do business. But its strategic position and the vision of the UAE leadership make it one of the best places to do business in the Gulf. If UK companies are prepared to be here for the long-term, to partner with local UAE companies, to be versatile in their approach to doing business in the different Emirates and to contribute to the development of the UAE and its people in order to meet their vision for the future, then the prospects are good.
Frankly the British franchisors have allowed the UAE franchise market to become dominated by American brands and French brands.
As you may expect food & beverage battle it out with retail retail franchised brands. The Apart from this many Asian franchisors are entering the market.
We believe the next trend for this warm market is the smaller franchisee and area developer franchising from the UK is picking up.
As you can see franchise legislation, comes under general contract/commercial law in Dubai and the principles of Sharia law apply to commercial transactions in the Emirate.
The Repercussions Of Registration For Commercial Agencies Law UAE For Franchisors
Should you have an agreement that qualifies, then franchisees more often than not show preference in registration at the Ministry. The main consequences of registration are:
- The agreement cannot be terminated by the franchisor without the franchisor being able to show some kind of justification to cause termination and this is not a clear contractual right to terminate in the franchise agreement itself through non-performance. This is not easy!
- 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 new franchisee.
- This allows a franchisee to force a franchisor to go to the commercial agencies committee (and, potentially, then to the local courts on appeal) to seek termination of the registered agreement
- This, in practice, restricts a 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).
Currently, franchises are operating in fast foods, dine-in restaurants, auto leasing, apparel, soft drink bottling, beauty products, hotels, toys, photography, dry cleaning, furniture, hardware stores, office supplies, natural health products, publications, quick printing, garden care and florists, sporting goods, retail/convenience stores, maid and personal services.
Today, the largest segment in this industry is fast food with most major US fast food companies are already established in Dubai.
GCC nations are at the forefront of growing the franchise economy in the Middle East, while Egypt is the leading franchising destination among African nations. With a combined population of 1.4 billion, a GDP of $1.9 trillion, an affluent customer base and (relatively) business friendly environment, the Gulf Cooperative Council (GCC) – Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Bahrain and Oman – presents the biggest opportunity for existing and potential franchisors and franchisees in MENA.
The franchise economy in Middle East and North Africa (MENA) is worth $30 billion and is growing rapidly. As per Middle East and North Africa Franchise Association (MENAFA), the franchise industry in the Middle East and North Africa is worth over $30 billion today, and is growing at a CAGR of around 27% annually. Concentration of high net-worth individuals, favorable regulations, and a young and upwardly mobile consumer market are the key attractions for franchisors looking to expand their operations within the region. On the other hand, the driving factors for franchises and local governments are the entrepreneurial opportunities presented by the franchising model, job creation, and the ability to inject international grade skills and processes into the economy. Further, investors also feel more confident opening a store under the umbrella of a large, multi-national corporation, as they expect franchises to respect the strict quality standards issued by the mother company, and also benefit from the well-established operating, marketing, and accounting practices of the franchisor.
Not surprisingly, GCC nations are at the forefront of growing the franchise economy in the Middle East, while Egypt is the leading franchising destination among African nations. With a combined population of 1.4 billion, a GDP of $1.9 trillion, an affluent customer base and (relatively) business friendly environment, the Gulf Cooperative Council (GCC) – Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Bahrain and Oman – presents the biggest opportunity for existing and potential franchisors and franchisees in MENA.
Source: Arab Business Review – Legal source Tamimi & Co –UKTI