The Franchisor’s Manual To Operating In The UAE: Commercial Agency Law
The UAE has been famous for birthing countless success stories, a reason why investors from around the globe rush to it, as they look to expand their commercial horizons, many choosing to take the franchising path. Demand for a product or service elsewhere is seen as a positive indicator that it will also be successful in the UAE. But when it comes to business, one shouldn’t let their eagerness cloud out sound legal understanding. Naiveté in the legalities of franchising can lead to, at best, wasted time, and, at worse, costly legal and business complications. The UAE market is fertile ground for franchisers, but assuming that its laws are identical to those of other nations can add risk to your endeavors. One of the most common unfamiliarity franchisors find themselves in is the subject of the Commercial Agency Law, which may complicate the path of those who act without incorporating it into their business decisions. In this article, we explore the specifics of this law and discover the ways in which a franchisor can accommodate it to prevent themselves from being affected by circumstances it could present
Eligibility for Protection under the Commercial Agency Law
At its core, the Commercial Agency Law is perceived to be the only governing law in franchising that provides UAE-national franchisees with legal protection under all circumstances (more on the specifics of these later). However, simply being a franchisee from the UAE does not automatically enable one to gain protection under this law; a number of conditions must also be met simultaneously, namely:
- the franchisee must be a UAE national (or a company owned 100% by UAE national(s));
- they must have been granted exclusive rights within the UAE; and
- the franchise agreement must be notarized by a Notary Public.
If any one of these conditions is not met, then the franchisee will not have the right to be protected under the Commercial Agency Law. If all of these conditions are met, the franchise agreement is eligible to be registered with the Ministry of Economy(MoE).
Before we proceed, it is important to highlight that the Commercial Agency Law comes with a very specific set of requirements that must be met in order for the franchisee to even be eligible for protection. The UAE has seen a massive influx of a variety of different citizens entering since the implementation of this law, meaning franchisors have a vast pool of candidates they can choose from, both local and foreign. Franchisors can easily avoid the applicability of the Commercial Agency law by selecting franchisees that are tailored to their specific requirements.
Key Rights under the Commercial Agency Law
Nevertheless, let us assume that that all of the abovementioned conditions have been met, and the franchise agreement has been registered with the MoE; what kind of legal protections would this law offer the commercial agents (i.e. the franchisees)? In general, there are three key protections afforded under this law:
- Protection from termination or non-renewal of the franchise agreement – Perhaps this is the most significant issue faced by franchisors affected by the Commercial Agency Law. This entitles commercial agents the protection from both termination as well as non-renewal of the franchise agreement. The Commercial Agency Law makes mutual termination mandatory, and the only way a franchisor can terminate the agreement is by proving that there is a “material reason” to do so. What exactly constitutes “material reason” does not have a clear cut definition and cases are judged by the Committee of Commercial Agencies, which makes its decisions on a case-by-case basis.
- Ability to block the importation of goods –If your franchisee has registered the franchise agreement at the MoE, then they may be able to block your goods from entering the UAE, legally. This is because the registered franchisee has the right to block the importation of any products that it is the registered agent of, into territories it is registered in, by instructing the ports and customs authorities. One scenario that you could possibly face as a franchisor could be this: say your business is in hard times, and you happen to be in a dispute with your franchisee; your situation could take a worse turn if the franchisee happens to be registered for a certain good that could be vital to profits, and chooses to block it from entering the specified territory.
- Compensation for termination – This means that not only can it be extremely difficult to terminate the franchise agreement, but you may have to pay an additional amount of money to the franchisee after termination. Following termination, the franchisee has the right to claim compensation for the loss suffered as a result of the termination of the franchise agreement. The more losses the franchisee claims have piled up, the higher the compensation amount paid by the franchisor, and these losses can include expenses incurred by the franchisee, contribution to establishing the franchise in the UAE, arrangements the franchisee may have disregarded while presuming renewal, and general losses suffered by the franchisee as a result of the termination.
Considering the Commercial Agency Law, as a franchisor, you could potentially face some unpleasant scenarios. You might find it difficult to enter the market because your goods are held up in customs, or because you’re unable to act without the mutual consent of your franchisee to terminate your contract. That said, you could finally receive mutual consent or file an appeal to the Committee of Commercial Agencies (which can prove to be costly if seeking legal representation) but still be stuck with a massive compensation fee. However, it should be said that this is the upmost extreme scenario, as the two parties in franchising tend to look out for one another since a healthy relationship between the two is a vital ingredient for prosperous enterprise.
Setting Up a Franchise in the UAE
Now that we have given you a rundown of the specifics of the Commercial Agency Law, let’s discuss the viable options that could be available to the franchiser when establishing a franchise in the UAE, regardless of the fact that franchiser entering into an arrangement with a local or foreign/expat franchisee.
- Drafting of a Watertight, Legally Binding Franchise Agreement
As previously mentioned, disputes between the franchisor and franchisee are heard by the Committee of Commercial Agencies, who judge matters regarding termination based on “material reason”. Therefore, tightly drafting a franchise agreement may provide you with the basis needed to argue for the existence of material reason. It is best to seek the guidance of a law firm in order to ensure that the legal details are flawless.
For instance, defining and protecting your intellectual property rights as a franchisor is imperative, as a business’ intellectual property is itself considered an asset. This means that your franchise agreement has to be very specific about IP rights, and what exactly the franchisee can use.
- Legal Structures and Set-up in UAE
- Forming a Joint Venture
One route that can be taken as a franchisor is the formation of a joint venture. In this method, you, as a franchiser, could incorporate a company with the potential franchisee, allowing both parties to be shareholders in the company. Then, instead of executing a franchise agreement directly with the potential franchisee, it can now be agreed upon between the franchisor and the newly incorporated company.
In this scenario, the newly incorporated company would not be eligible for protection under the Commercial Agency Law, since this entity is not owned 100% by UAE national(s). Furthermore, the franchiser could gain the advantage of overseeing the operations of the joint venture company and also maintain control over its management.
- Incorporating a Holding Company
Franchisors can also choose the holding company route, which usually entails incorporating a holding company, with the franchisor being a 100% shareholder. The main difference that distinguishes this option from the last is that the shareholders of the joint venture are the franchisee and the holding company, rather than the franchisee and the franchisor. This would mean that as a franchisor, you are protected from the legal and financial burdens that come along with being a shareholder of a joint venture, since you have no direct link to it. Under this scenario, the Commercial Agency Law is unlikely to be applicable since the entity is not 100% owned by UAE national(s).
So, what should you do? The approach you take as a franchisor depends on the franchisee you are dealing with. In some cases, a franchisee may not be willing to go through the hassle of forming a joint venture, and in other cases you may completely trust that the franchisee will keep their word. As with any business venture, ensuring that you are working with the right partner is absolutely vital. Remember, there will always be legal differences in the operation of a franchise from country to country, so to have a successful business, one must always work with full knowledge of, and in full accordance with, local laws and customs.
Authors of the article namely:
- Kokila Alagh
- Hiba Khan
- Adel Khalil Ahmad