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The Gulf Cooperation Council (GCC) is the main target market for international franchise brands. Given the foreign ownership restrictions for companies wishing to trade in the region, overseas brands often opt for franchising in the region as the easiest way to enter the market.
While most jurisdictions that make up the GCC do not have franchise laws itself (Apart from Saudi Arabia’s New Franchise Law Effective 2020), they regulate franchising through the Commercial Agency Act. The purpose of these rules is to protect local franchisees from unjustified termination by foreign franchisors, making it difficult for foreign franchisors to switch local partners. To apply the commercial agency law, some form of registration with a local government agency is usually required.
A franchisee may have certain statutory rights under the Commercial Agents Act, including:
- Termination by the franchisor may be limited to material defaults.
- Loss of business opportunity due to termination or non-renewal may result in compensation to franchisees.
- Local law may overrule the law chosen for the contract, and local courts may have the power to rule on the franchisor’s claims, forcing foreign franchisors to sue abroad.
- In some countries, the franchisor is required to issue a notice of non-renewal even if the contract expires at the end of its term.
- When a relationship ends, it may be difficult to appoint a new local partner until the registration of the former franchisee is cancelled.
These regulations are not good for foreign franchisors, so until recently, many foreign franchisors have tried various means to avoid registration as a business establishment. Most franchise agreements expressly prohibit local registration, often with penalties. This method may no longer work. Given the changes in local legislation, franchisors need to reconsider this strategy in relation to some GCC countries and carefully study the effects and implications of registering as a business establishment.
Oman Commercial Agency Law
Before recent changes to its legislation, Oman was one of the regions where franchisees were advised to avoid registering as a business establishment and prohibited from registering in franchise agreements. This may no longer be a viable strategy since protocols that have not been registered are not enforceable locally. Franchisees urgently need to review their approach.
Compensation rights removed: Historically, franchisors have avoided registration because the franchisor is obliged to pay compensation to the franchisee if a registered contract is terminated or not renewed (except in certain limited circumstances). Termination of an agency or refusal to renew the agency when it expires is used to entitle the local agent to automatic indemnity without proof of default, negligence or negligence by the franchisor.
This is no longer the case, and agency contracts can now be terminated in accordance with their terms. The right to compensation has been removed from the legislation, and while it is still possible for courts to decide on appropriate compensation for registered commercial agents, compensation will only be awarded in limited circumstances, such as a franchisor who breaches a contract. Generally, Omani courts no longer offer compensation to registered commercial agents for non-renewal or termination (in the absence of breach of contract or abuse of rights) since the removal of the right to indemnity. Therefore, the main business reason for refusing registration no longer exists.
Do not update notifications: Nonetheless, the remaining provisions of Oman’s Commercial Agency Law make it difficult to renew the expiring agreement. They do this by imposing certain minimum notice period requirements as well as deregistration procedures for commercial establishments, which make breaking away from the relationship more time-consuming and challenging. The local franchisor must agree to have the agreement removed from the register, and only after the relationship has been removed from public records can a new local franchisor be appointed. For obvious reasons, this can make things difficult if the former franchisee doesn’t cooperate.
registration failed: However, it is worth assessing whether avoiding registration as a commercial establishment entails greater risks than the consequences of registration itself. Failure to effectively register an agreement means that the local court will not enforce the agreement locally. This also applies to any foreign awards or judgments obtained in reliance on such agreements. They will not be executed in Oman. This could pose problems for foreign franchisors if they wish to enforce any rulings on non-compete restrictions or liquidated damages locally.
Kuwait Commercial Agency Law
Without a local branch or a local (registered) commercial agent, it is impossible to carry out any business activity in Kuwait. This form of requirement effectively compels foreign franchisors to choose commercial agents as a means of entering the market. Similar to other jurisdictions in the Gulf, once registered, the commercial agent will have additional protections beyond the law applicable to the contract and its express provisions, including the right to indemnity at the end of the contract and the difficulty of terminating or not renewing the agreement.
Another major red flag in Kuwait is the potential tax liability on royalty income.
Draft Amendment to the UAE Commercial Agency Law
The UAE does not currently implement automatic registration of franchise agreements.
This means that provisions prohibiting registration may still be included in UAE agreements, but not without caution – franchise agreements should be scrutinized carefully. If a given relationship ticks all the “proxy boxes”, it must be registered. That won’t change if the new draft legislation comes into force.
Currently, only UAE nationals can register as business agents. This makes the risk assessment job easier when considering whether a franchise agreement might be registered locally. While business agents will remain primarily reserved for UAE nationals according to the draft legislation, certain exceptions are being considered for international companies, so business agent registration may be open to other franchisees.
In addition to the other implications discussed above, once a business establishment is registered in the UAE, the draft legislation stipulates that the franchise relationship must be exclusive – only one business agent is allowed for the entire UAE or a single emirate. In addition, the registered business agent will be eligible to register in the UAE Receive a commission on all transactions related to the brand’s business completed within its responsibility. While the draft law aims to facilitate the termination of a registered business establishment (which is currently very difficult, even if the fixed period expires), the former agent’s right to indemnity will remain, and in particular, compensation claims may be made by the withdrawing agent not only against the principal but also against new agent.
The above highlights summarize the main issues worth considering before franchising in the GCC.
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