With many international markets being receptive to foreign franchise systems, it’s no surprise that a large number of franchisors are looking to expand their franchise systems into developing and emerging markets, including the MENA region. Although many brands have been highly successful in their expansion into the Middle East, there are a number of key considerations given the diverse legislative landscapes and the local franchise practices in the region. Many countries in the Middle East have no mandatory pre-contractual disclosure or mandated legal provisions to be included in the franchise documentation. There usually are no cooling-off periods, nor any government agencies specifically regulating franchising. In most countries, a franchise contract is not treated any differently from a regular commercial contract between the parties (except where agency laws can apply, as discussed further below).
FAST FOOD DOMINANCE
In the Middle East, the franchise market is dominated by American and UK 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.
CUSTOMISATION
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 is 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 United Arab Emirates (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 these 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 succeed in the UAE, or the Middle East in general.
PRO-BUSINESS ENVIRONMENT
The UAE in specific has a pro-business environment, with favourable infrastructure, corporate taxes, transfer of profits to home countries, entity ownership and the availability of a large pool of human resources. Businesses located in the multiple free zones also enjoy tax exemption. Many franchisors open a head office in such UAE free zones in order to manage their franchisees through-out the Middle East. Although the UAE currently has no applicable corporate or value added taxes, this is due to change with the implementation of VAT in the Gulf Cooperation Council, GCC countries being Bahrain, Qatar, Kuwait, Oman, UAE and Saudi Arabia. Although repatriation of funds from GCC countries to overseas franchisors is usually not an issue, in some countries such as Egypt, there can at various times be restrictions on the transfer of United States dollars and so this is a particular area where specific advice should be sought. The franchise sector in the UAE in particular also gets generous support from the government, which aims to promote the franchise sector in order to encourage growth and development of small and medium size businesses in the country.
TRADEMARK CONSIDERATIONS
Given that a critical aspect of franchising is the licensing of the brand, it is important to ensure the franchisor is the registered owner of the brand in the region. Most countries in the Middle East are ‘first to file’ jurisdictions, meaning that the first person/company to register the brand in the relevant trademarks register is deemed the owner. The time-frames for registering a trademark can be much longer, the processes for registering more burdensome, and the costs more expensive than in other western jurisdictions. This often comes as a surprise to international brands seeking to protect their marks in the Middle East. Given these factors, it is always recommended that franchisors undertake searches to see if their brand is available and if so, register their trademarks well in advance of discussions with any prospective franchisees so that their deals are not cancelled, put on hold or made conditional upon trademark registration.
AGENCY LAWS TO PROTECT REGISTERED FRANCHISEES
In many MENA jurisdictions, as in others, commercial laws have been put in place in order to protect a franchisee who registers the franchise agreement as a commercial agency agreement. 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. The UAE agency law currently overrides any governing law and arbitration clause and therefore, where the franchise agreement is registered as a commercial agency it can be extremely difficult to terminate and remove the franchisee.
EXPANSION CONSIDERATIONS
As franchise businesses are becoming more important as an asset class in the MENA region, there are specific issues which counter parties 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 following list of questions, which both parties need to contemplate carefully before finalizing a franchise deal:
Does the brand/franchise require substantial customisation for the local market – if so, who will do this, the franchisor or the franchisee?
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, trademarks, 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 or liquidation of one of the parties?
Are there any online aspects, either in terms of websites (and therefore is the franchisee entitled to any online sales for the region) or specific systems/software the franchisee may be required to use? As an example, the franchisor’s point-of-sale systems either must be customised or cannot be used due to the requirement in many countries of a customer receipt in Arabic.
Given these specific considerations and laws, it is important to speak to specialised franchise lawyers in the region early when considering expansion into the region.
KEY ISSUES
Cultural sensitivities – i.e. Is pork/alcohol a key component of your brand?
Trademarks – is the brand trademarked in the Middle East?
Agency law – who is your franchisee? Can the agency laws apply to protect the franchisee?
Repatriation of funds – seek advice on currency issues
VAT – watch out – coming soon to GCC!
ABOUT THE AUTHOR
Melissa Murray is head of the intellectual property team for Bird & Bird’s Middle East offices located in Abu Dhabi and Dubai. Qualified in Australia, she has practised law in the UAE for the past 11 years and specialises in assisting international brands expand into the Middle East. She is ranked as an international specialised franchising lawyer in many legal directories including Legal 500, Chambers and Partners and Who’s Who Legal.
