Expanding East? Know the Law!

Expanding East? Know the Law!

With many international markets being receptive to foreign franchise systems, it is no surprise that a large number of franchisors are looking to expand their franchise systems into developing and emerging markets, including the MENA region. It should not, however, be seen as a given that a franchisor’s general successes will be indicative of the franchise’s international appeal, or of its success in the Middle East region. The diverse legislative landscapes and the local franchise practices in the region will both have an impact on the cross-border appeal of a franchise considering granting franchise rights in the different countries of the Middle East.

Franchisors considering expansion to the Middle East should be aware of the religious laws, local customs, norms and traditions of the region, that are not generally found overseas. For instance, consumption of pork and pork products in the Middle East is prohibited by Islamic law and considered offensive to devout Muslims. The sale of pork is strictly controlled and typically allowed only in restaurants and hotels licensed to serve such items. Additionally, the sale and promotion of alcoholic beverages in the region is prohibited by Islamic law. In the UAE, the sale and consumption of alcohol is permitted subject to regulation at the Emirate level.

There have been several reported instances of brands and concepts not being approved for operation in the UAE because of inconsistency with these types of cultural sensitivities. A number of franchisors have also been forced to make changes to their standard trademarks, signage, logos or other components of their systems because of cultural sensitivities and in order to align the franchise with local customs and culture. Therefore, while the hallmark of franchising is uniformity and consistency, there may be a degree of adaptation and adjustment required, or recommended, in order for a franchise to be able to succeed in the UAE, or the Middle East in general.

In the Middle East, the franchise market is dominated by American and French brands, mostly in sectors such as fast-food and fashion retail. The scenario has started changing recently however, as many opportunities are emerging in diverse sectors of the economy and many other foreign franchisors are entering the market. Currently, franchises in the region operate in fast foods, dine-in restaurants, auto leasing, apparel, soft drink bottling, beauty products, hotels, toys, photography, jewellery, vending machines, dry cleaning, furniture, hardware stores, office supplies, natural health products, publications, quick printing, garden care and florists, sporting goods, retail/convenience stores, maid and personal services (among others). Today, the largest segment in this industry is fast food, with most major international fast food companies already having a presence in the region.

The UAE in specific has a pro-business environment, which becomes evident if one considers its infrastructure, corporate taxes, transfer of profits to home countries, entity ownership and availability of large pool of human resources. Businesses located in the multiple free zones also enjoy tax exemption. The franchise sector in the UAE also gets generous support from the government, which aims to promote the franchise sector in order to induce growth and development of small and medium size businesses in the country.

Due diligence

In many MENA jurisdictions, as in others, laws have been put in place in order to protect the franchisee. However, such protection is usually only available to nationals of the country in question (or companies owned wholly by those persons). Similarly to most jurisdictions in the GCC, only UAE nationals or corporations wholly owned by UAE nationals or those with a UAE partner or sponsor are permitted to carry out operations. Therefore, due diligence on the part of the franchisor, particularly as to local laws and selection of the local partner or sponsor, is vital when considering the MENA region.

By way of example, in the UAE the relevant statute is the Commercial Agency Law No. 18 of 1981, as amended by Federal Law No. 14 of 1988, Federal Law No. 13 of 2006 and Federal Law No. 2 of 2010 (‘Agency Law’), which regulates the appointment of franchisees, commercial agents, sales representatives, and distributors in the UAE. However, this Agency Law will only apply to agreements that are registered with the UAE Federal Ministry of Economy, and in order for registration to be possible, several requirements must be met by the franchisee entity, including UAE ownership.

As franchise businesses are becoming more and more important as an asset class in the MENA region, there are specific issues which counterparties need to be aware of and need to consider at an early stage, in order to ensure a smooth transaction. Some of these issues are summarized in the below list of questions, which both parties need to contemplate carefully before finalizing a franchise deal:

Must-Ask Questions Before Expanding to the Middle East

Is the license being granted as part of the franchise exclusive (i.e. granted to only one person), or non-exclusive?


Are there limitations to the license, such as territorial restrictions, and/or minimum sales/production requirements?


Who pays for prosecution and maintenance of any IP (patents, trade- marks, designs)?


How are any developments, modifications or improvements to the franchise system to be protected, and who owns them?


What are the conditions of and triggers for termination, and what happens once the agreement is terminated (for whatever reason)?

When are royalty or other payments due?

What happens if the registration of the trade mark which forms part of the license granted pursuant to the agreement is refused, or once registered, is infringed, opposed, revoked or other?


Is copyright a consideration?


How will any disputes be resolved?

What happens in the event of death of one of the parties?

What local laws and customs impact the agreement?


Franchisors considering expansion need to take in consideration Middle East’s legal landscape. A lawyer can help with these considerations; please contact us to find out how we can help you.



ABOUT THE AUTHORS

 
Bird & Bird is an international law firm servicing a unique service to its clients in the Middle East. Our international reach enables us to deal with multinational projects and issues, as well as to provide advice on local and international laws, policies and business practices. Melissa Murray is a partner and the head of our Commercial and IP practices in the Middle East, based in Dubai who specialises in all forms of strategic and operational franchise, agency, intellectual property, and commercial law governing franchise operations throughout the Gulf and Middle East. Eleonore Mayer is an associate in our Corporate Group experienced in advising clients on a variety of legal issues in the UAE. Ayah Abdin is a corporate paralegal well acquainted with both international legal proceedings and the legal structures in the UAE.

 

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