Legal Overview

Franchising Issues in the Gulf Co-operation Countries

Outline:

• The legal framework for franchising
• Foreign ownership restrictions
• Agency laws and registration issues
• Governing law and dispute resolution
• Trade and corporate name protection
• Protecting and enforcing IP assets
• Other nuances of franchising in the region

The Middle East Region

• The six Gulf Co-operation Countries (GCC)
• United Arab Emirates
• Kingdom of Saudi Arabia
• Kuwait Bahrain
• Qatar
• Oman
• Egypt
• Levant (which currently includes Jordan, Lebanon, Syria, and the Palestinian territories of West Bank and Gaza)
• North Africa — including Algeria, Morocco, Tunisia

Applicable Laws

• Agency laws
• Commercial codes
• Companies law
• Civil Codes
• Judicial Procedural Code
• Trade Mark law
• Trade secrets/unfair competition law
• Employment law
• Other laws which regulate import of goods, labelling

Local ownership requirements

Maximum percentages of ownership in the share capital of a corporate franchisee by GCC nationals and foreigners in each country:

Exemptions

Oman:
100% foreign ownership of an entity is permitted if the paid up share capital is no less than Omani Flials 500,000 (USS 1,300,000) and the objects of the company aim to develop the national economy.

Qatar (subject to government approval):
100% foreign and GCC ownership of entities is permitted for certain activities including agriculture, marketing, advertising, technology, education, tourism, healthcare, industrial, or manufacturing projects.

KSA:
Proposals to allow GCC nationals to own 100% require enactment by implementing regulations
Proposal to allow foreigners to own 75% are subject to final approval by Saudi Arabia General Investment Authority (SAGIA)

Agency laws in the GCC

With the exception of KSA (where non-exclusivity is allowed), agency laws cover any arrangement in which a foreign company is exclusively represented by an agent to ‘distribute, sell, offer, or provide goods or services within geographically defined limits for a commission or profit’.

Franchise, supply and distribution agreements are often construed as a commercial agency. Except for KSA, failure to register a franchise or supply agreement, is not an offence and it is preferable for the franchisor if the franchise or supply agreement is not registered. (see later slide headed “Implications of Registration”)

Failure to register the agreements in GCC countries may affect their enforceability against third parties but not the contracting parties. However, in KSA, failure to register the franchise agreement is considered an offence and local Courts will refuse to hear a dispute in relation to an unregistered agreement.

Implications of registration

Registration grants certain statutory rights to commercial agents which cannot be waived or excluded by contract (except in KSA where non-exclusivity is allowed):

• the agent’s right to territorial exclusivity;
  the agent’s presumptive right to compensation in the event of termination even if the term has been limited by agreement (this may apply to KSA);
• the agent’s right to receive commissions on sales of the products in their designated territory irrespective of whether such sales are made by or through the agent;
• the agent may prevent the import of products into the GCC country where the agent is not the consignee; and effective inability to appoint another agent or for the franchisor to supply directly until the dispute is resolved and the existing agency deregistered.

Where Franchise Agreements Contain Provisions on Arbitration

Enforcement of foreign arbitral awards under New York Convention:

All GCC countries are party to the New York Convention on foreign arbitral awards.

However, the enforcement of foreign arbitral awards has not been tested in relation to franchise disputes.

Courts will enforce a foreign award only if the award does not conflict with public order, morals (including Shari’ah) and in KSA, local laws.

Countries that are party to the New York Convention

Trade and corporate names

– Trade names are corporate, or business names registered by entities often as a legal prerequisite to carrying on business. In any given jurisdiction, the ownership and registration of identical trade marks and trade names may vest in different parties. Companies need to protect both.

– In the UAE, the trade marks register is maintained at a Federal level while trade names may be registered with authorities within each of the seven Emirates. ln Dubai, separate, unconnected trade name registers are maintained by DED, JAFZA and DAFZA.

– Trade marks registered in service classes (eg retail services) are often used to challenge opportunistic trade name registrations

Protecting and enforcing IP assets

– 7 Emirates in the UAE and different government agencies within each Emirate may enforceDownsides of litigationtime, cost, no judicial expertise,
reluctance to award damages

– Limited availability of injunctions

– No link between trade mark and trade name registers

– Need corporate presence to protect company and trade names

Other nuances of franchising in the GCC

• Enforceability of exclusivity and non-compete provisions
• Local law treatment of:
  indemnities
  charging of interest
  force majeure
  Limitation of liability
  language
  injunctions