Discusses opportunities for U.S. franchisers and legal requirements in the market.
Local and international franchise brands continue to grow in the UAE across a variety of sectors including food and beverage, fashion retail, beauty, healthcare, education, and convenience stores. A combination of factors has spurred this growth, including: an attractive tax-free environment, world-class infrastructure, improved intellectual property legislation, UAE government efforts to diversify the economy, a growing population with a sizeable proportion of expatriates, changing consumption patterns, increasing penetration of international franchise and retail players, a large number of high net-worth individuals with a propensity for leisure and consumer spending, an increasing number of business and leisure visitors, the country’s positioning as a popular shopping destination, and Dubai’s designation as the host of the Expo 2020.
However, the economic slowdown in the region triggered by lower oil prices and geopolitical tensions has also impacted this sector. Franchisors tend to take a more conservative approach to the market. As an example, luxury department stores Macy's and Bloomingdale's have decided to pull out of Al Maryah’s Central mall set to open in 2019 in Abu Dhabi. The Macy’s store – scheduled to be spread across four floors – was set to be the brand’s first store outside the United States. The Bloomingdale’s store was also expected to be bigger than the one on Dubai Mall.
In addition, Dubai Entertainments PJSC indicated in February 2019 that the Six Flags theme park in Dubai had been put on hold as the financing for the project was no longer available.
In October 2017, the Abu Dhabi Chamber of Commerce and Industry established the Emirates Association for Franchise Development in a bid to boost franchising and also offer franchisers the opportunity to look at new promising sectors beyond the traditional Food and Beverage sector (i.e. healthcare, household equipment, banking, pet services, play care, etc.). The Abu Dhabi Chamber started free-of-charge awareness workshops for franchisees as of July 2018. It holds those workshops on a periodic basis for Emiratis looking to invest in international franchises.
Previously, only UAE nationals or corporations wholly owned by UAE nationals or those with a UAE partner or sponsor were permitted to carry out operations. The government is trying to attract investors, who can now establish their own businesses in the Emirates, without the need to have an Emirati partner or sponsor. However, the UAE government has published a list of company types that are not allowed to form under a 100 percent foreign ownership. This includes companies in the domains of: oil exploration and production, investigation, security, military, banking and financing activities, insurance, pilgrimage and umrah services, certain recruitment activities, water and electricity provision, fishing and related services, post, telecommunication and other audio-visual services, road and air transport, printing and publishing, commercial agency, medical retail (including pharmacies), blood banks, quarantines and venom/poison banks.
In addition to the recent changes, each of the UAE’s seven emirates have different regulations regarding franchising and establishing a business. For example, Ajman has its own free trade zone, low facility electricity and leasing prices that allows 100 percent foreign ownership of a business. As a result, businesses can explore the option of being established in other emirates as a first step.
Aside from the key provisions that are normally incorporated into franchising agreements, companies should pay particular attention to the period, area specification, third-party transfer rule, dispute resolution mechanisms, and termination mechanisms. Companies should ensure agreements adequately protect intellectual property (IP). In addition, companies must be sure to understand and pay special attention to Islamic dietary laws (halal meat/cosmetic products, prohibition of pork and alcohol content, etc.) as well as local dress and customs. Finally, companies must be aware of relevant trade barriers, such as the Arab League Boycott of Israel which bans any goods originating from Israel. A partner could potentially also request the company to sign a declaration that it has not/will not trade with Israel however Section 999 of the U.S. Internal Revenue Code makes it unlawful for American companies to comply with such agreements.
Regarding protection of trademarks and other IP, it is recommended that companies register all trademarks with the Ministry of Economy in advance of entering the UAE market. Registration will provide first-to-file priority, establish registered user rights, and ensure that franchisees are preempted from registering the trademark in their own name. For more information about trademark registration, visit the websites of the governments of Abu Dhabi and Dubai.
The UAE has no specific laws specifically governing franchising. As a result, general contract and commercial law are applicable to franchise agreements in the UAE. In addition, Sharia law applies to commercial transactions. All franchise agreements must be registered before a UAE court.
There are multiple laws which can apply to franchising relationships including the following:
- Federal Decree-Law No. (19) of 2018
- Federal Law No. 18 of 1981 on the Organization of Commercial
- Agencies (as amended by Law No. 14 of 1998) and Law No. 13 of 2006
- Federal Law No. 5 of 1985 on Civil Transactions
- Federal Law No. 18 of 1993 on Commercial Transactions
- UAE intellectual property laws for trademarks, copyright and patents
- Labor laws
- Local Municipality rules in relation to names and signage
- UAE general principles dealing with restraint of trade and assignment of the franchise back to the franchisor in the event of default
In order for the Agency Law to apply, the following must be considered:
- The agent must be a UAE national or a company wholly owned by UAE nationals
- The relationship must be exclusive
- The relationship between the agent and principal must be registered with the UAE Ministry of Economy
Helpful Tips for New-to-Market Franchisors:
- Conduct thorough due diligence to select the proper franchisee
- Understand the UAE Commercial Agencies Law and other relevant laws
- Consult with a local legal franchise expert
- Carefully draft the franchise contract and operations manual for the franchisee specifying the manner in which the franchise is to be operated
- Ensure the franchise agreement is prepared by a legal franchise expert, explicitly spells out the terms and operations of the franchise, and clearly states the rights and duties of the franchisor as well as the franchisee
- Take steps to protect IP by registering it with the Ministry of Economy, e.g., logos, trademarks, and business processes
International Franchise Show
Date: October 22-23, 2019
Venue: Abu Dhabi National Exhibition Center (ADNEC)
The Global Franchise Market (TGFM)
Date: November 5-6, 2019