<p>When walking from the car park of the Dubai International Financial Centre to  my office each morning, I pass a Costa Coffee, Caribou Coffee, Caffe Nero, a Yo  Sushi restaurant, a Gourmet Burger Kitchen restaurant and a Potbelly Sandwiches  outlet (among others).&nbsp; Thankfully the DIFC also has a Fitness First  gym!<br /><br />Clearly, franchising is a very popular method of conducting business  in Dubai.&nbsp; When attending the recent Retail City Conference held in Dubai as  part of the Cityscape Global event, the general impression was that  notwithstanding the recent (and also the not so recent) global economic woes the  retail sector in Dubai, and in the UAE generally, is remaining remarkably  resilient.&nbsp; Certainly at Al Tamimi we continue to see a steady flow of enquiries  from both franchisees and franchisors relating to the establishment of new  franchised brands in the UAE.<br /><br />In this article I will look at the main  legal considerations for a potential franchisor in connection with the  appointment of a franchisee in the UAE.&nbsp;<br /><br /><strong>The UAE Commercial  Agencies Law<br /><br /></strong>The main piece of legislation to consider in the  context of franchise arrangements 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").&nbsp; The Commercial Agencies Law has  potential application not only to what would be strictly considered as agency  agreements in many foreign jurisdictions but also to agreements regarding  franchises, distributorships, commission arrangements, dealerships and other  forms of sales representative or sales agency relationships.<br /><br />I say  "potential" application as the Commercial Agencies Law only applies to contracts  that are registered with the UAE Federal Ministry of Economy (the "Ministry").&nbsp;  In order for a contract to qualify for registration with the Ministry there are  a number of criteria which must be met, the main ones being:</p>
<ul>
<li>The franchisee must be a UAE national or an entity that is wholly owned by  UAE nationals;</li>
<li>The franchise agreement must grant exclusivity over all or a part of the  UAE; and</li>
<li>The franchise agreement must be notarized.</li>
</ul>
<p>Some franchisees may claim that unless a franchise agreement is registered  with the Ministry it is not legally valid.&nbsp; This is not the case (the reasons  for them wanting to register such an agreement are discussed below).&nbsp; There are  many franchise agreements in the UAE that have been entered into between foreign  franchisors and local limited liability companies, for example, where such  companies have a 49% foreign shareholding (i.e. they are not 100% owned by UAE  nationals) or that are not exclusive which are valid arrangements  notwithstanding that they do not qualify for registration with the Ministry.&nbsp;  Further, even franchise agreements which may meet the qualifying criteria for  registration with the Ministry do not have to be registered although in such  circumstances franchisor&rsquo;s should bear in mind that a franchisee may later  approach the UAE courts for an order that the agreement be registered in order  to obtain the protections offered by registration.<br /><br />Unregistered  arrangements are governed by the various UAE federal laws applicable generally  to commercial arrangements such as the UAE Civil Code and the UAE Commercial  Transactions Law.&nbsp; In general terms, these laws recognize the right of parties  to contract with each other on such terms as they may agree although there is  scope under such legislation for a franchisee to claim damages upon the  cancellation of the agreement by the franchisor even if such cancellation is  done in accordance with terms of the agreement.&nbsp; However, in this article we  will focus on the effect of registration of franchise agreements with the  Ministry.&nbsp;<br /><br /><strong>Consequences of registration under the UAE Commercial  Agencies Law<br /><br /></strong>If an agreement qualifies, franchisees generally  prefer to register an agreement with the Ministry.&nbsp; The main consequences of  registration are:</p>
<ul>
<li>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. <br />&nbsp;<br />It is  very difficult for a franchisor to establish "justifiable cause".&nbsp; 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.&nbsp; 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.&nbsp; 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.</li>
<li>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.&nbsp; 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.&nbsp; 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.&nbsp; 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.&nbsp;</li>
<li>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).</li>
</ul>
<p>As a result, franchisors generally consider it preferable not to have their  agreements registered.&nbsp; 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.<br /><br /><strong>Recent developments regarding the UAE Commercial  Agencies Law</strong><br /><br />By way of background, the UAE Commercial Agencies  Law was amended in 2006 to make it more favourable to principals and less  protectionist towards local registered agents.&nbsp; The key changes made at that  time were (i) the abolition of the commercial agencies committee (a committee  established under the auspices of the Ministry and whose role was to hear  disputes between registered agents and principals) with the result that disputes  were to be referred directly to the UAE courts (who were generally considered at  that time to be less sympathetic to local agents than the commercial agencies  committee had been), and (ii) allowing principals to unilaterally deregister  fixed term registered agreements upon the expiry of their term (and the practice  of the Ministry at one stage extended to allowing principals to de-register  agreements by notifying the Ministry of their intention to give notice of  non-renewal of agreements that contained automatic renewal  provisions).<br /><br />However, in 2010 the Commercial Agencies Law effectively  reverted to the pre-2006 position with the reintroduction of the commercial  agencies committee and the removal of the right of principals to de-register  agents upon the expiry of a fixed term agreement.&nbsp; The UAE&rsquo;s reaction to the  economic crisis was to become more protectionist with regard to local agents.&nbsp;  The commercial agencies committee has only just started to accept disputes and  it remains to be seen what the committee&rsquo;s general approach it will be and how  successful it is in providing a considered and fair forum for the resolution of  disputes between registered agents and principals.<br /><br /><strong>A few other  issues&hellip;..<br /><br /></strong>By way of conclusion, I thought it may be helpful to  mention a few other UAE specific matters that I have come across when dealing  with franchise arrangements in the UAE.&nbsp;<br /><br />I am often asked if an agreement  has to be in Arabic and/or notarized to be valid.&nbsp; As mentioned above, if an  agreement is to be registered then it must be notarized (and in order to be  notarized it must be translated into Arabic).&nbsp; However, if an agreement is not  registered then there is no need for it to be notarized or translated into  Arabic to be valid.<br /><br />I&nbsp;have also come across certain cultural issues such  as a clause regarding uniforms being amended to include a reference to "giving  due regard to cultural sensitivities".&nbsp; While Dubai is reasonably relaxed when  it comes to dress requirements other Emirates and countries in the region have  stricter requirements and, for example, it is always considered appropriate for  female employees to wear conservative clothing.&nbsp; There are also issues regarding  restrictions on serving pork products and alcohol and this may also need to be  provided for in the franchise agreement (for example, in the context of the  franchisor being entitled to determine menu items in restaurant  franchises).<br /><br />I&nbsp;am sure that franchising will continue to play a major  role in the UAE economy going forward and franchisors should not be afraid to do  business here.&nbsp; However, there are certain UAE law specific issues that do need  to be dealt with over and above the standard issues that arise in the context of  negotiating franchise agreements and it is always advisable to get local law  advice before entering into any franchise arrangement.<br /><br />Marcus Wallman is  a partner in Al Tamimi &amp; Company&rsquo;s Commercial Advisory practice which  provides a comprehensive range of advice in the areas of General Commercial  &amp; Advisory; Joint Ventures; Commercial Agencies; Consumer Protection &amp;  Competition and Anti-Corruption.</p>