In a rapidly changing business landscape, where business models and practices are continually growing, companies must proactively adapt to stay competitive. With new technologies emerge and consumer preferences shift, businesses face increasing pressure to innovate and improve their offerings and they not only need to enhance their existing operations but also explore new avenues for growth. A franchise agreement is one of the main business practices that facilitates the growth and expansion of a business brand. By allowing franchisees to operate under the franchisor’s established name and business model, brands will be able to reach new markets and customers more efficiently.
A franchise agreement is a legal contract between a franchisor and a franchisee. In this agreement, the franchisor grants the franchisee the right to operate a business using the franchisor’s brand, trademarks, and business model. The franchisee, in return, agrees to pay certain fees, either one-time or periodic, as mentioned in the franchise agreement.
The key purpose of the franchise agreement is to shield the franchisor’s intellectual property, while ensuring that each franchisee operates consistently with the franchisor’s trademark and business practices. A thoughtfully designed franchise agreement lays the groundwork for a successful partnership, therefore, understanding the key components of this agreement is considered essential.
It is important to note that that exploring the key components of a franchise agreement will help potential franchisees making well-versed decisions and establish a solid foundation for their business. Key components of a franchise agreement would typically include the franchise granted which outlines the rights to use the franchisor’s trademarks and business objects; the quality standards that specify the requirements established by a franchisor that franchisees must follow to uphold these standards; the payments structure which gives information on the initial franchise fees, operational and advertising costs, ongoing royalties, and any other financial obligations; the duration of the franchise agreement and terms for its renewal; the intellectual property protection that underlines the provisions to safeguard the franchisor’s intellectual property, including trademarks and proprietary information; the termination clause which includes the conditions under which the agreement can be terminated by either party; and the transferability which specifies the conditions by which the franchisee can transfer their rights and obligations to another party while honouring the franchisor’s requirements.
In the United Arab Emirates “UAE”, which become an attractive hub for businesses looking to grow through franchising, a fertile ground for expansion has been offered, especially with its active economy and strategic location. The UAE Government’s proactive support for foreign business practices and investors facilitates the entry into the UAE market and also fosters a welcoming atmosphere for international brands.
It is worth noting that in the UAE, laws do not establish a separate legislation for franchise agreements; instead, the UAE Commercial Agency Law, Civil and Commercial Transactions Laws and Trademark Law serve as a parallel statutory framework for this practice. It is important to note that when a foreign company is represented by an agent in the UAE for the distribution and sale of branded products or services for a fee, this type of arrangement falls under the UAE Commercial Agency Law.
Further, and to ensure the enforceability of a franchise agreement in the UAE, franchisees and franchisors must meet several administrative, regulatory, and legal obligations. A key requirement is registering the franchise agreement with the Ministry of Economy, particularly when it qualifies as a commercial agency arrangement under the UAE Commercial Agency Law. This registration grants the franchisor exclusive rights over the brand’s operations in the UAE, adding crucial legal protection.
Additionally, the UAE Commercial Agency Law stipulates that only UAE nationals or entities fully owned by UAE nationals may act as commercial agents. However, with the introduction of Federal Law No. 3 of 2022, effective June 16, 2023, public joint-stock companies with at least 51% UAE national ownership are also eligible to serve as agents. Further, international companies may be permitted to engage directly in commercial agency activities for their products if no registered agent exists and the arrangement is new.
Franchisees are also expected to uphold quality standards and safeguard the franchisor’s intellectual property, ensuring brand consistency and compliance with UAE Trademark Law. Also, adherence to the UAE’s Civil and Commercial Transactions Laws is required to solidify enforceability and protect against liabilities. Meeting these obligations is vital for maintaining the legal validity of the franchise agreement, securing the franchisor’s rights, and ensuring robust market operations in the UAE.
In fact, having a comprehensive and well-constructed franchise agreement will enable franchisees to navigate challenges efficiently while upholding the integrity of the brand, with the franchising landscape continues to evolve. It should be highlighted that a strong franchise agreement not only safeguards rights of parties involved but also contributes to the long-term success and sustainability of the franchise.