Legal restrictions on franchise contracts and the relationship between the parties
Franchise relationship laws
Are there specific laws regulating the ongoing relationship between franchisor and franchisee after the franchise contract comes into effect?
As there is no specific franchise law, the relationship between the parties and their on-going obligations to each other will be determined by the franchise agreement.
Operational compliance
What mechanisms are commonly incorporated in agreements to ensure operational compliance and standards?
The failure to follow the franchisor’s operational requirements is always set out as a material breach of the franchisee’s obligations, giving the franchisor the right to claim termination of the franchise agreement and damages.
Franchisors may also stipulate financial penalties for non-compliance, which aims to ensure that the franchisee does not deviate from (breach) the operational standards and processes set by the franchisor.
Ongoing training obligations are also set by franchisors to ensure the franchisees are kept up to date with the operational developments implemented by the franchisor.
The right to inspections of the franchisees business premises and reporting documentation (records) is also a key mechanism used by franchisors to monitor compliance by the franchisee.
Amendment of operational terms
May the franchisor unilaterally change operational terms and standards during the franchise relationship?
Yes, this is possible and is a standard term of the franchise agreement. The key and obvious requirement is that reasonable and proper notice of any changes is given to the franchisee to ensure the franchisee is able to effectively implement the changes.
Other laws affecting franchise relations
Do other laws affect the franchise relationship?
Reference is made to the laws listed under question 24.
Policy affecting franchise relations
Do other government or trade association policies affect the franchise relationship?
There are no other government policies or trade association policies that would affect the relationship in general.
There are specific policies and regulations established for certain industries and certain categories of products. For example, educational institutions will have regulations regarding the number, qualification of teachers and guidelines as to the curriculum and standards to be adopted. It is, therefore, very important for any potential franchisee to establish the requirements for the industry in which the business is to be carried out.
Termination by franchisor
In what circumstances may a franchisor terminate a franchise relationship? What are the specific legal restrictions on a franchisor’s ability to terminate a franchise relationship?
If a franchise agreement is registered in terms of the Commercial Agency Law, the termination provisions are as follows:
The principal shall not be entitled to terminate the agency contract, unless there is a valid reason for termination, regardless that the period of agency contract is fixed. The agency may not be reregistered in the trade agencies register in the name of another agent, unless the first agency has been terminated by mutual agreement between the principal and agent, or there are essential reasons accepted by the ministerial committee.
Unregistered franchise agreements will be subject to the Civil Code which in terms of article 267 provides that:
If a contract is valid and binding, it shall not be permissible for either contracting party to resile from it, nor to vary or terminate it, save by mutual consent or by an order of Court, or under a provision of the law.
It is, therefore, evident that as a general rule, under the UAE Federal law a party to a franchise agreement (or any commercial agreement) may not unilaterally terminate the agreement. The termination is affected either by the parties’ mutual consent or by way of an order of Court.
The position is different under the contract law of the DIFC, which under specific circumstances, allows a party to terminate an agreement if the other party is breach of its obligations (subject to the requirements of the parties’ agreement).
The circumstances, which would justify a claim seeking termination of the franchise agreement by the franchisor would include:
- non-payment of the royalty or licence fees;
- termination of the franchisee’s lease agreement;
- termination of the franchisee’s trade licence;
- other material breaches of the franchisee’s obligations (eg, misuse of the trade name or failure to comply with the operating manuals);
- advertising or marketing that is not approved by the franchisor and that may damage the reputation of the franchise brand.
Termination by franchisee
In what circumstances may a franchisee terminate a franchise relationship?
The general principles of contract law would govern the franchisee’s right to file a claim for the termination of a franchise agreement.
The specific grounds or circumstances relating to franchise agreements would include the following:
- the franchisor losing its rights to the brand (IP rights);
- failure of the franchisor to comply with its obligations (material breach). Specifically, this could be not providing the marketing and operational support required in terms of the franchise agreement;
- any breach of the territorial exclusivity granted to the franchisee; and
- the imposition of guidelines or business practices, which would cause the franchisee to contravene any government or municipal regulation.
Renewal
How are renewals of franchise agreements usually effected? Do formal or substantive requirements apply?
The renewal of a registered agreement (in terms of the Commercial Agency Law) takes place automatically. The renewal right or procedure of any other franchise agreement would be determined by the terms of the franchise agreement or if the agreement has a fixed term, a new agreement would be required.
Refusal to renew
May a franchisor refuse to renew the franchise agreement with a franchisee? If yes, in what circumstances may a franchisor refuse to renew?
The principle of fixed term contracts is recognised and applied in the UAE. There is, therefore, no automatic right of renewal, and any such right and the provisions for how such right is exercised needs to be set out clearly in the franchise agreement.
An exclusion to this general provision would apply in terms of the Commercial Agency Law, which provides that such registered agreements are renewed automatically until terminated (in terms of the provisions of the said law) set out in question 32.
Transfer restrictions
May a franchisor restrict a franchisee’s ability to transfer its franchise or restrict transfers of ownership interests in a franchisee entity?
Yes, franchise agreements invariably provide that any assignment of the franchisee’s rights or any change of ownership or control of the franchisee legal entity can only be done with the consent of the franchisor. This provision protects the franchisor from having to deal with a new franchisee who it may not wish to do business with. It is a recognised and protected principle that the licence of the franchise rights is personal to the franchisee.
Fees
Are there laws or regulations affecting the nature, amount or payment of fees?
There are no such restrictions placed on the parties by any laws or regulations.
Usury
Are there restrictions on the amount of interest that can be charged on overdue payments?
Yes, the limit of interest is determined in terms of the Commercial Transactions Law, with the following principles/limits applied:
UAE law sets the maximum rate of interest payable on amounts due under contracts to 12 per cent per year if the rate is not agreed. However, the parties are free to agree on another rate that will apply instead of the standard 12 per cent.
Foreign exchange controls
Are there laws or regulations restricting a franchisee’s ability to make payments to a foreign franchisor in the franchisor’s domestic currency?
There are no general restrictions placed on the parties’ use of a foreign currency.
Confidentiality covenant enforceability
Are confidentiality covenants in franchise agreements enforceable?
Yes, confidential information is provided protection under the UAE Civil Code and is an enforceable contractual right.
The remedies available to a party in addressing a breach are likely to be limited to a claim for damages against the party breaching the confidentiality.
If the breach of confidentiality is accompanied by any element of intent, the breaching party may also face a penal sanction for disclosing a third party’s secrets to the detriment of that party.
Good-faith obligation
Is there a general legal obligation on parties to deal with each other in good faith during the term of the franchise agreement? If so, how does it affect franchise relationships?
Article 246 (1) of the UAE Civil Code sets out a clear obligation for contracting parties to execute an agreement in ‘good faith’. The article states:
The contract must be performed in accordance with its contents and in a manner consistent with the requirements of good faith.
Article 249 also provides that a Court shall have the discretion to amend or moderate any obligation in a contract, which through circumstances that could not have been envisaged at the time the contract was concluded, are oppressive to one of the parties to the extent that he risks suffering extreme damages if such obligation were to be enforced. The parties may not waive their right to the protection offered by this provision in the contract.
The DIFC contract law also provides that the interpretation of the parties’ obligations to a contract is to take into account implied obligations that arise from:
- the nature and purpose of the contract;
- practices established between the parties and usages;
- good faith and fair dealing; and
- reasonableness.
Franchisees as consumers
Does any law treat franchisees as consumers for the purposes of consumer protection or other legislation?
If goods and services are provided by the franchisor to the franchisee under a franchise agreement, the UAE Federal Law No 24 of 2006 regarding Consumer Protection (Consumer Protection Law) may concern the franchisee in the UAE.
Language of the agreement
Must disclosure documents and franchise agreements be in the language of your country?
Yes, if the franchise agreement is required to be filed or registered with any government authority it will require to be in Arabic. If there is no filing or registration requirement the agreement can be in the language chosen by the parties.
If the franchise agreement becomes the subject of a dispute and is required to be filed with the court (other than the DIFC courts or Abu Dhabi Global Market courts) it will need to be translated into Arabic.
Restrictions on franchisees
Describe the types of restrictions placed on the franchisees in franchise contracts.
Franchise Agreements as standard practice include restrictive covenants on the franchisee. These include non-compete restrictions during the term and extensive restrictions post-termination.
The post-termination restriction period is typically 12 months, during which the franchisee (any shareholders holding more than 5 per cent of the shares) agree not to be involved in any similar or competing business, not to trade from the same premises and not to solicit any employees from the franchised business.
There is also a standard indefinite restriction on using any of the franchisor’s know-how in any other similar or competing business.
Restrictive covenants are enforceable provided they are reasonable in respect of the period, the geographical area and the activity restricted.
Competition law
Describe the aspects of competition law in your country that are relevant to the typical franchisor. How are they enforced?
The Federal competition laws in the UAE applicable are:
- UAE Federal Law No. 4 of 2012 (the Competition Law);
- Cabinet Decision No. 37/2014 which is the implementing regulation of the Competition Law;
- Cabinet Decision No. 13/2016 which provides the ratios and controls related to the application of the Competition Law; and
- Cabinet Decision No 22 of 2016 On the Standard Definition of Small and Medium-size Projects and Enterprises (SME Decision).
Compliance with the provisions of the Competition Law is regulated by the Ministry of Economy. The main aim of the Competition law is to boost competition in the economy by regulating the following areas:
- restrictive agreements: When drafting the franchise agreement, the parties need to ensure that the provisions are not in breach of the Competition Law. The Competition Law prohibits agreements or arrangements that directly or indirectly fix the price, manipulate goods or services supply in the market, grant exclusivity with respect to products or geography or other market division and involve collusion in tenders or offers. Registered agreements governed by the Commercial Agency Law are exempt from the provisions of the Competition Law;
- abuse of dominant position: The franchisor may not use its dominant position in the market for anticompetitive purposes. The main concern is those who take undue advantage of their market dominance, which ultimately affects both the competitors and the consumers by way of imposing discriminatory pricing and unfair trading practices; and
- merger control: Approval of the Ministry of Economy is required for merger and asset transfer deals. The Ministry of Economy assesses whether such deal will result in direct or indirect market control which will adversely affect competition in the market, or where activities of the merger or acquisition will exceed 40 per cent of the total transactions in the market.
Article 4 of the Competition Law limits its applicability by listing certain businesses that are exempt from its provisions. The Competition Law is not applicable to businesses operating in sectors of telecommunications; finance; cultural activities (readable, audible and visual); oil and gas; production and distribution of pharmaceutical products; postal services including the express mail service; activities related to production, distribution and transportation of electricity and water; activities on the treatment of sewage, waste disposal, hygiene and the like, in addition to supportive environmental services thereof; and land, marine or air transport, railway transport and services related thereto.
Government-owned entities, small and medium establishments (as defined) and weak-impact agreements that control a market share of 10 per cent or below of the total transactions in the relevant market are exempt from the provisions of the Competition Law.
Penalties for violation of the provisions of the Competition Law can include:
- fines ranging between 500,000 dirhams and 5 million dirhams for entering into restrictive agreements or abusing market dominance; and
- fines ranging between 2 per cent to 5 per cent of the entity’s annual revenue for a failure to notify the Ministry of Economy of a potential merger or acquisition transaction.
Courts and dispute resolution
Describe the court system. What types of dispute resolution procedures are available relevant to franchising?
In the case of a registered franchise agreement, under the Commercial Agency Law, a dispute is first referred to the ministerial committee, which is mandated to assess the dispute an make a ruling. A party not satisfied with the decision may refer it to the relevant courts of the Emirate in which the parties are situated, which will apply UAE law in dealing with the dispute.
The UAE is a federal state, and thus its legal structure comprises a dual system. The Federal Judiciary with the Federal Supreme Court acting as the highest judicial authority and the local judicial departments of the Emirates. The judicial departments of the Emirates are independent and with jurisdiction in matters not assigned to the Federal Judiciary by the Constitution.
If a franchise agreement is not one registered under the Commercial Agency Law, the parties may choose a foreign law to govern the terms of their agreement provided the foreign governing law does not violate UAE public policy or morality. Choosing a foreign court does not prevent the UAE courts from assuming jurisdiction if the agreement was performed in the UAE or if one of the parties is domiciled in the UAE.
Parties may also choose the DIFC courts or the ADGM courts to hear their disputes. These courts comprise a court of first instance and a court of appeal, and their procedure is based on that of the courts of England and Wales.
There are memoranda of understanding signed by the DIFC and ADGM courts with other courts both nationally and internationally (eg, Abu Dhabi Judicial Department, the Peoples’ Republic of China courts, etc) allowing reciprocal enforcement of judgments and cooperation in legal and judicial matters.
A dispute may also be resolved by arbitration if agreed by the parties either prior to the dispute arising or at any time thereafter. Arbitrations, excluding those seated in the DIFC or the ADGM, will be governed by the UAE Federal Arbitration Law No. 6 of 2018. Each of the Emirates have designated arbitration centres (in Dubai, the Dubai International Centre), and there is also the option of the DIFC-LCIA or the ADGM arbitration centre that is modelled on the UNCITRAL model law. Both can be chosen by parties irrespective of their connection with the DIFC or ADGM. An arbitration agreement in respect of a registered agreement, under the Commercial Agency Law, will not be enforceable as any disputes fall under the exclusive jurisdiction of the courts.
Arbitration – advantages for franchisors
Describe the principal advantages and disadvantages of arbitration for foreign franchisors considering doing business in your jurisdiction.
For a franchisor, arbitration proceedings have a number of advantages. The most important is the confidentiality it ensures for the parties. Both arbitral awards and arbitration proceedings are private, unlike court proceedings which are held in public. As such, the franchisor and franchisee can protect the reputation of the brand and the integrity of their customer base.
Arbitration, also, presents a neutral alternative to litigation as the seat and location of the arbitration is chosen by both parties. The parties are also free to agree on how the arbitration will take place, the applicable procedural rules and how the arbitral tribunal is comprised.
While the rules to enforce a foreign court judgment may be complex when there is no applicable bilateral treaty, it is possible to enforce the arbitral award in over 150 countries according to the New York Convention. The ADGM arbitration centre and the DIFC have multi-lateral and bilateral treaties with certain countries; and memoranda of understanding with leading international common law jurisdictions. The DIFC-LCIA rules are said to be ‘universally applicable and compatible with both civil and common law systems, offering the international community, international lawyers and arbitrators a comprehensive a modern set of rules and procedures’.
National treatment
In what respects, if at all, are foreign franchisors treated differently from domestic franchisors?
Before any Court, judicial authority or arbitration centre the parties are treated equally and there is no difference as to whether the franchisor is foreign or domestic.
