The United Arab Emirates (UAE), an economy growing at a fast pace and with rich citizens, has become the choice of many entrepreneurs and established brands. Most established brands rely on franchising mechanisms whenever they think of entering a new market.
Your franchise’s success is highly dependent on one document; the franchise agreement. It is a legal contract that outlines the relationship between you as well as your responsibilities and rights, which serve as the foundation for any business partnership.
We will look into franchising in the UAE in this section. Reviewing these clauses can help you navigate this fast-moving market with confidence.
What does Franchising involve?
Franchising refers to a method used in business expansion where a franchisor licenses its brand, intellectual property and business model to a franchisee who then operates their own business under the franchisor’s name and system for which they pays an upfront fee and ongoing royalties. This arrangement allows franchisors to expand their brand and income without having to spend on opening locations while also providing the benefits of operating within an established effective model to franchisees
The Franchising Landscape in the UAE
There is no clear definition of franchising in UAE law. Due to the lack of a specific franchise law, normal commercial rules and the franchise agreement signed by the parties essentially govern franchise partnerships in the United Arab Emirates. The term “franchising” refers to a method of product or service distribution whereby a franchisor creates a business system and trademark for the brand, and a franchisee pays an initial fee and a royalty to have the right to use the franchisor’s name and system for their business.
To be considered valid, franchise agreements are not required to be registered with the UAE Ministry of Economy. If the franchise agreement is registered in the Commercial Agencies Register with the UAE Ministry of Economy, the franchisee enjoys certain rights and privileges.
However, the protection and privileges granted to the franchisee by registration are offered only to UAE nationals and entities entirely owned by UAE nationals. It is important to note that public joint-stock companies with 51% UAE national shareholding would qualify, as well as international companies subject to approval by the Cabinet upon the recommendation of the Minister.
In reality, often, those participating in franchising arrangements are not UAE nationals and therefore, few franchise agreements are able to avail of the benefits provided by the above-mentioned registration process. As a result, it has become common practice for franchise agreements to be entered into and, if governed by the laws of the United Arab Emirates, interpreted in accordance with Civil Transactions Law and Commercial Transactions Law. The parties’ relationship will be governed by the terms of the contract and the implied terms of the above-mentioned laws.
What does a franchise agreement entail?
Both parties benefit from a franchise agreement. The franchisor can therefore easily penetrate new markets at lowered risks by allowing the franchisee to handle operations and capital investments. It also allows the franchisor to generate additional revenues through fees and royalties.
The franchise agreement is an extensive legal document that describes in detail the specific obligations, rights and responsibilities of both parties involved in the contract; thus, both the franchisor’s and franchisee’s interests must be balanced when reviewing and deciding on the terms of this document.
Franchise contract essential elements
- Products and Territory: Within the franchise agreement, there should be clear mention of the specific goods or services being franchised and a geographical area within which the franchisee is permitted to operate in. Through this, it could be possible to negotiate for exclusivity agreements that can help protect the capital invested by these franchisees.
- Duration and Renewal: The initial duration as well as any renewal options must be included in the agreement. Often, franchisors include clauses in their agreements that allow them to terminate if performance goals are not met by the franchisee.
- Ordering, Pricing, and Payment: How orders are placed for products sold by both franchisor and franchisee, what they cost and how payment is done including any upfront charges, royalties or sales targets must all appear in the contract.
- Support from the franchisor: To ensure franchisees’ success; marketing support; administrative support; technical support; and training are usually provided by franchisors
- Intellectual Property: The franchisor’s intellectual property comprising trademarks, copyrights patents etc., must be protected under this agreement while at the same time setting out how the same can be used by franchisees.
- Financial Performance Metrics: In terms of financial performance metrics like sales targets or profitability that a franchisor will use to evaluate whether or not a certain franchisee has succeeded, these need to be set forth in writings like this agreement.
- Quality Control: The franchisor usually sets standards for quality control and conformity to operating procedures.
- Site Selection and Development: Agreements might cover franchisor involvement in site selection and development.
- Insurance Requirements: A franchisee may have to carry certain types of insurance.
- Termination and Dispute Resolution: This should include clear provisions regarding termination and clauses setting forth a method of settling disputes, such as arbitration or choice of law.
- Non-Competition and Confidentiality: The franchisee may be prohibited from selling competing products and must keep the franchisor’s proprietary information confidential.
- Indemnification: This will also contain indemnity provisions shielding the franchisors from losses or claims resulting from the actions of franchisees.
- Force Majeure: The agreement may acknowledge how performance may be affected by unforeseen events that neither party has control over.
- Exit Strategies: In this regard, the agreement should provide reselling options for franchises as well as transfers including buy-backs, rights of first refusal etc.
Legal Compliance and Protection.
It is important to ensure that all relevant regulatory requirements are met when drafting a franchise agreement due to the complexity of UAE laws. Profitability and growth potential can be immense in franchising in the UAE; however, it requires more than a good business model. The cornerstone of a successful franchise model lies in well-thought-out franchise agreements that prevent any legal problems from arising and create smoother business relationships for both franchisors and franchisees.
We at Nour & Attorneys draft and review custom-made franchise agreements so as to meet individual client’s needs. We have skills that will help you navigate through the law if you are either a franchisor wishing to expand your brand or a prospective investor- eager to invest in an already proven business concept.
For professional advice on drafting or reviewing your franchise agreement, please get in touch with us today. Allow us to assist you lay down a strong foundation for your business success within UAE.
