Introduction
The United Arab Emirates (UAE) has emerged as a major market for international brands wishing to expand into the Middle East. Strong consumer demand, a developed retail market, and its role as a commercial hub in the region have encouraged the entry of many international brands into the country through franchise agreements. Global restaurant chains, clothing stores, hospitality organizations, and service providers usually adopt franchise arrangements to access the UAE market with the advantage of the operating experience and market insight of the domestic partners.
Franchising has been one of the ways by which many companies enter the UAE market. However, the UAE does not have a specific franchise legislation. Instead, franchising agreements are governed by a combination of commercial agency laws, general principles of contract law, intellectual property, and competition laws.
This absence of a single framework creates certain risks for the foreign franchisors. Sometimes, franchising operations may come under the scope of the UAE Commercial Agencies Law, which grants local registered agents legal protection. Thus, this can lead to significant legal problems in the case of termination or restructuring of the business in the UAE.
When international brands are planning to enter the UAE market, the legal framework governing the franchise arrangement must be understood. Thus, it is important to understand how franchising works in the UAE, what the legal and regulatory environment looks like, and what the key threats are that foreign brands must consider before entering the market.
Understanding Franchising
Franchising is a commercial agreement wherein an organization (the franchisor) grants another party (the franchisee) the right to operate a business using the brand, trademarks, and business model of the franchisor. The franchisee has to pay an initial franchise fee to the franchisor and a royalty payment monthly, which is often calculated based on the percentage of revenue. A business may seek to franchise its product and brand name when it wants to increase its market share or geographical coverage at minimal expense.
Franchising is widely applied to different industries in the UAE, including food and beverage services, retail services, hospitality services, education services, and health services. Many foreign brands operate on a master franchise basis, where they allow a local company to develop the brand in a specific region. The master franchisee can open multiple outlets or even to grant sub-franchise rights to other operators.
Legal and Regulatory Frameworks
Although there is no separate legislation that regulates franchising, it can be classified under the term ‘commercial agencies’ as provided under Federal Law No. 3/2022 on the Regulation of Commercial Agencies (UAE Agency Law), which supersedes the UAE Commercial Agency Law No. 18 of 1981. Under this, a franchising agreement comes under the term ‘commercial agencies’ if it satisfies the provisions listed under Article(2)(2) and is registered with the Ministry of Economy. Additionally, the other laws that also govern franchising in the UAE are:
® Federal Law no. 3 of 2022 on the Regulation of Commercial Agencies.
® Federal Law No. 5 of 1985 (the UAE Civil Transactions Law).
® Federal Decree Law No. 50 of 2022 (Commercial Transactions)
® Federal Decree Law No. 36 of 2021 (Trademarks)
® Federal Law No. 4 of 2012 (Competition Regulation).
Among these laws, the most significant law in relation to establishing the franchise relationships is the Commercial Agencies Law. Federal Law No. 3 of 2022 defines a commercial agency as the representation of a principal by an agent in the distribution, sale, or offering of goods or services in the UAE on commission or profit. This definition covers franchising deals where the franchisee is the sole distributor or agent of the products or services of the franchisor in a particular territory. Its wide definition gives the opportunity to treat franchise agreements that meet the statutory requirements as commercial agency agreements under the UAE law.
The most notable discrepancy in the UAE legal system is between registered and unregistered franchise agreements. In case of a franchise agreement, after satisfying certain legal demands, it can be registered with the Commercial Agencies Register, which is operated by the Ministry of Economy. The deal usually must be written in form and translated into Arabic, notarized, and must ensure that the franchisee is either a UAE national or a company owned at least half by UAE nationals. The agreement must also offer the franchisee exclusive rights to sell or distribute goods or services of the franchisor in a specific area. When the requirements are fulfilled, the agreement is treated as a registered commercial agency.
Registration has significant legal consequences. Once registered, the franchisee has the legal safeguards of the Commercial Agencies Law, which provides protection with regard to exclusiveness and termination. In the past, this system posed numerous obstacles to foreign principals who wished to seal agency agreements. The 2022 reform introduced compensation mechanisms upon termination and also allowed for termination upon the expiry of the contract.
In the case of franchise agreements that are not registered as commercial agencies, it is not subject to the Commercial Agencies Law. On the contrary, they are governed by the overall provisions of the contract law as stipulated in the Civil Code and the Commercial Transactions Law. Such a framework gives parties more freedom in stating the terms of their commercial relationship. The UAE contract law provides certain principles compulsory to be followed, and among them is the requirement that contracts must be executed in good faith. This doctrine allows the courts to analyze whether the parties have exercised their contractual privileges, such as termination, in a manner that is in line with fairness and business standards.
The competition law plays a crucial role in the regulation of the relationships between franchises. Federal Law No. 4 of 2012, together with Cabinet Resolutions No. 37 of 2014, No. 13 of 2016, and No. 22 of 2016 forms the primary sources of regulations of the competition regulations in the UAE. It aims for competition protection and discouraging monopolistic practices by regulating restrictive agreements and the misuse of dominant market positions. Restrictive agreements, e.g., those involving pricing and production limits, are not permissible except in case they satisfy some exception, e.g., low-impact agreements or registered commercial agencies. Moreover, organizations with substantial market share cannot engage in anti-competitive practices, such as imposing resale terms or discriminating against customers unfairly. These laws are important in ensuring the presence of a competitive market in the UAE. The law has certain exemptions, e.g., small and medium-sized businesses and those agreements that do not surpass certain market share proportions.
Intellectual property protection is a very important aspect of the franchise systems. The value of a franchise is greatly connected to the brand name of the franchisor, trademarks, and differentiated business practices. The rights to trademarks in the UAE are given according to the first-to-file principle as stated in Federal Decree-Law No. 36 of 2021 on Trademarks. The registration of the trademarks lasts a duration of ten years after the date of application and may be renewed for another ten years. Franchise agreements usually include trademark licenses whereby the franchisee is allowed to use the brand of the franchisor. Such licenses can be registered by the Ministry of Economy to increase the right to enforce and to demonstrate the rightful use of the trademark.
In general, when international brands are entering the UAE via franchising, they follow a systematic process of market entry.
Entering the Market Strategy:
Firstly, the franchisor must evaluate whether franchising is the best strategy to use to enter the UAE market as compared to other alternatives such as direct investment and joint venture. The reason why franchising is often selected is that it allows the rapid expansion without having to require a lot of money on the part of the franchisor.
Selecting a Franchise Partner:
The identification of the right local partner is a vital exercise. Many of these foreign brands join already established operators in the region that already manage different global franchise brands. These operators typically possess retail networks, supply chain facilities, and knowledge of dealing with local regulatory needs.
Franchise Agreement Negotiation:
Once a partner has been identified the parties start negotiating about the franchise agreement that governs the general commercial relationship. The most important provisions typically involve the right of territory, the exclusivity, the franchise payment, the standards of operation, the licence of the intellectual property, and the termination process.
Adherence to Regulatory and Licencing Standards:
The franchisee must obtain the required commercial licences to conduct business in the UAE. The mainland of UAE requires businesses to obtain licences with the relevant Department of Economic Development, and those located in the free zones receive licences with the corresponding free zone authority.
Management of Operations:
The business is operated at the local level by franchisees and franchisors usually offer supervision by use of training programmes, operational audit, and monitoring compliance to ensure that brand standards are maintained at all the points of franchise throughout.
Key Risks
UAE franchising offers a lot of business opportunities, yet international franchisors must be cautious of some of the legal risks arising due to the structure of UAE regulations. These risks are largely attributed to the manner in which a franchise deal is conducted with the UAE regulations on the commercial agencies, intellectual property, competition law and dispute resolution processes.
Possibility of being a Commercial Agency:
The main legal risk is the case when the relationship between franchisors and franchisees is defined as a commercial agency in accordance with Federal Law No. 3 of 2022. Provided that a franchise agreement meets the legal requirements to be registered at the Ministry of Economy, the franchisee will have the right to obtain the status of a registered commercial agent. Upon registration the franchisee is entitled to legal protections which can override the specifications contained in the franchise agreement.
These safeguards can include territorial privileges and disadvantages against termination. Practically, this means that the franchisor may not be able to add additional distributors within the same locality or may not be able to terminate the agreement without giving legally acceptable reasons. The 2022 reform provides termination mechanisms based on certain conditions but registered agents still enjoy a high level of legal protection compared to the usual contractual partners.
Thus, a structure that was originally intended to be a flexible franchise setup, ends up developing into a legally binding agency relationship, which in turn limits the commercial flexibility of the franchisor in the UAE market.
Termination and Exit Risk:
The problem of terminating relationships with franchises is inextricably tied with the categorization of agency risk. The dissolution of the franchise system would be difficult only on the provisions of the contract in case it is registered as a commercial agency. The termination may require the consent of the franchisee, or the involvement of the relevant authorities or courts to determine the existence of a valid reason to terminate.
In cases where a franchisee has made massive investments in establishment of franchised business, termination disputes may lead to demands of financial reimbursement. This may significantly impede the ability of the franchisor to change its distribution strategy or to drop a franchise partner that is not performing well. Subsequently, the UAE franchise market exit strategies must be put into consideration during the drafting of franchise contracts.
Threats of Intellectual Property and Brand Protection:
One of the major threats to international franchisors has to do with protection of intellectual properties. Trademarks, trade names, operational manuals, and proprietary business processes are very important in the franchise systems. The protection of trademarks in the UAE is based on first-to-file, i.e. lack of trademark registration before market entry may create significant legal threats to franchisors.
Cases have been witnessed where other local partners or third parties unrelated to the brand owners registered the trademarks of the international brands before the brand owner entered the UAE market. This can lead to complex legal disputes and the original brand owner of that trademark may not have access to its trademark in the jurisdiction. Thus, trademark registration before committing oneself to negotiations with a franchise can be considered a significant risk management technique.
Competition Law Risks:
There can also be a potential regulatory risk to franchise agreement when applied in the competition law. The UAE Competition Law prohibits contracts that restrict or distort the competition in the market in question. Some of the provisions that are commonly observed in franchise agreements such as resale price maintenance, exclusive supply, or the division of markets could become a problem in competition laws when they severely restrict competition in the markets.
Although the application of competition law in franchising has always been limited, the current regulatory system allows the relevant authorities to investigate anti-competitive agreements and impose financial fines in case of any violations that occur. The franchisors should make sure that the franchise agreements are made to meet the requirements of the competition law.
Jurisdictional and Enforcement risks:
International franchisors are faced with the challenge of enforcing franchise agreements across borders. Franchise contracts often have clauses that specify either foreign governing law or arbitration as a conflict resolution method. Nevertheless, the jurisdiction of UAE courts can still be in place when the contract is concluded in the country or when one of the parties is in the country.
Besides, the application of foreign verdicts or arbitral decisions can sometimes be procedural in the UAE legal system. Therefore many foreign franchisors include arbitration provisions or name conflict resolution centers, including DIFC Courts or UAE based arbitration centers.
Cultural and operational risks:
Besides legal factors, franchisors should also have cultural and regulatory issues to take into account because they affect the business in UAE. The marketing approach, product offerings, and the working styles might require some changes to suit the culture of the locals, religion, and the regulations.
An example is that firms must follow labor laws on the number of working hours during the Ramadan season and certain products might be limited depending on the nature of the business. As part of operational factors can influence performance of franchises and must be considered during formulation of franchise agreements and operational policies.
Conclusion
Franchising is a powerful marketing tool that international brands would use to capitalise on the dynamic consumer market in the UAE. However, the absence of a particular franchise law makes it so that the functioning of franchise agreements is characterised by a complex legal framework which incorporates the regulations of commercial agency, the principles of contract law, as well as the protection of intellectual property.
One of the biggest legal issues that international franchisors have is how to frame franchise agreements in a way that does not result in the unintentional establishment of commercial agency relationships. This classification grants relevant legal safeguards that may restrict the franchisor to terminate or alter the relationship to local partners.
These risks are mitigated and the international brands can take advantage of the commercial opportunities available by the UAE market by conducting extensive legal due diligence and properly drafting franchise agreements.
[1] Federal Law No. (3) of 2022 Concerning Regulating Commercial Agencies
[2] Firm, S. L. (2018, February 1). The Risk and Liability in Franchising - UAE & international overview. Franchising - United Arab Emirates. https://www.mondaq.com/franchising/669734/the-risk-and-liability-in-franchising-uae-international-overview
[3] Aikman, A. (2025, December 5). Operating a franchise in the UAE. Pinsent Masons. https://www.pinsentmasons.com/out-law/guides/franchising-uae
