At Kearney 2014 Global Retail Index

7/25/2019 At Kearney 2014 Global Retail Index

1/5

Franchising in the Middle East: taking advantage of opportunity, carefully

September 4, 2013 |Written by Joycia Young and Ben Smith

The Middle East presents a tremendous opportunity for businesses looking to expand in

a challenging global economic environment. The Global Intelligence Alliance reports that

the Middle East and North Africaregion has a combined gross domestic product of over

USD 1.4 trillion and an expanding population of 315 million people. This update focuses

on some of the legal and regulatory risks that potential franchisors should consider when

looking to award a franchise (or multiple franchises) in the GCC.

For many potential franchisors and franchisees, the affluent consumer base and (relatively) business friendly

environment in the member states of the Gulf Cooperation Council proves a particularly attractive destination in

the Middle East region.

The GCC is a confederation comprised of six member states, including Bahrain, Kuwait, Oman, Qatar, Saudi

Arabia and the United Arab Emirates. The franchising model finds a natural home in the retail, hospitality and

food and beverage sectors. In the GCC, each of these sectors has experienced significant growth in recent years.

While presenting an exciting and potentially lucrative opportunity, expansion into GCC markets also poses a

number of challenges that need to be approached carefully and with measured caution. Some of these

challenges are faced by businesses looking to expand into any new geography, others are regionally specific.

Franchising continues to be a popular model for regional expansion for many good reasons; a franchisor can

expand its business quickly into a growing economy while mitigating some of the commercial risks and significant

capital investment that are often associated (and justifiably so) with establishing a presence on the grounddirectly.

This update focuses on some of the legal and regulatory risks that potential franchisors should consider when

looking to award a franchise (or multiple franchises) in the GCC. There are, of course, fundamental commercial

factors that franchisors will need to consider; finding the right franchisee, ensuring that the business model can

support expansion into the GCC market and understanding regional cultural sensitivities are a few of the many

commercial factors that a franchisor will need to address.

Structuring arrangements

The corporate licensing regime in the GCC is relatively complex. Foreign ownership is often restricted and

companies in the GCC are often subject to licensing restrictions which can limit the scope of their operations. The

potential risk and exposure to franchisors that do not structure their arrangements in the GCC to take account of

regionally specific issues can be significant.

INSIGHT
http://www.clydeco.com/insight/updates/view/franchising-in-the-middle-east-taking-advantage-of-opportunity-carefully/printhttp://www.clydeco.com/insight/updates/view/franchising-in-the-middle-east-taking-advantage-of-opportunity-carefully/print


2/5

Many franchisors hoping to secure multi-outlet commitments will look to identify a single franchisee which will be

able to commit to a schedule of expansion throughout the GCC. In practice, and in light of corporate licensing

restrictions, such arrangements have to be carefully structured to ensure regulatory compliance. Master franchise

arrangements, pursuant to which a master franchisee will sub-franchise rights in jurisdictions in which it cannot

operate, are common. Such arrangements present franchisors with a number of issues, including how, and the

extent to which, they exercise control on the appointment, operation and termination of sub-franchisees. These

issues can be, and commonly are, addressed in the contractual arrangements entered into by franchisors,

master franchisees and sub-franchisees.

Legislation

There are not, at present, specific franchise laws in force in any of the member states of the GCC (although draft

franchise laws have been circulated in the past). There are, however, a number of laws applicable in each of the

GCC member states that have a significant impact on franchise arrangements. Addressing the issues presented

by these laws is often of such fundamental importance to franchisors that negotiations with franchisees can

collapse if those franchisees will not accept certain franchisor requirements.

Commercial agency legislation is in place in each of the GCC member states. While the nuances of the agency

legislation applicable in each of the GCC member states differ, the principles of the legislation are broadly similar.

In essence, a franchisee will often be considered as an agent for the purposes of the legislation. Commercial

agency legislation in the GCC states provide agents with a number of statutory rights which often include, among

other things, the right to an exclusive appointment and the right to receive compensation in the event that

agreements with principals terminate or expire. The amount of that compensation can often be substantial.

Many franchisors are not willing to accept the potential risks and liabilities that can arise under the various

commercial agency laws in the GCC if certain criteria are satisfied by franchisees. As such, franchisors should

consider carefully how they structure their arrangements to ensure that, where possible, risk and exposure to

commercial agency legislation is managed appropriately and to the extent possible.

In addition to commercial agency legislation, franchisors also need to be mindful and cognisant of the broader

legislative environment in the GCC. Labour and company legislation will impact the granting and operation of a

franchise in each of the GCC states. Tax legislation may be relevant in some of the GCC states. And a large

number of other laws, regulations and decrees may be relevant depending on the nature of the franchise being

granted, the identity and corporate structure of the franchisee and the specific location(s) in which the franchisee

is granted rights.

Intellectual property

For franchisors, trade marks and trade names are at the forefront of brand protection. Franchisors need to be

acutely aware of the nuances associated with protecting and enforcing their brands in the GCC. While most of

the member states of the GCC are party to key international treaties for the protection of IP, the enforcement of IP

rights must be addressed at a national level.

In their haste to secure a franchise and establish a foothold in the GCC, franchisors often allow franchisees to

register trade marks and trade names in advance of the franchise documentation being agreed. While

commercial expediency is the obvious driver in these circumstances, this practice poses serious risk, even in

circumstances where franchise arrangements are subsequently formalised and appropriately documented. In

many GCC states, trade marks cannot be assigned until they are registered and franchisors often struggle to

wrest control of a registered trade name away from a franchisee, irrespective of whether that trade name is

internationally known and associated with the franchisor.

Franchisors considering multi-country franchise operations in the GCC are faced with a number of competing


3/5

concerns which will affect their brand protection strategies. These include identifying key markets and structuring

arrangements such that the use of a brand by a franchisee will accrue to the franchisor. The costs associated

with securing trade mark registrations in the GCC are among the highest in the world. As such, it is crucial for

franchisors to develop an effective regional strategy for trade mark registration and brand protection at the outset

of their expansion into the region.

A well defended IP portfolio is only as strong as its foundations and brand protection issues will directly impact on

the ability of franchisors to properly capitalise on the opportunities presented in the GCC.

Enforcement

The effective enforcement of rights, judgments and awards poses a number of challenges in the GCC. As a

result, franchisors should conduct rigorous legal, commercial and financial due diligence on prospective

franchisees. Franchise agreements should be carefully drafted in an effort to ensure that choice of law provisions

are acceptable to franchisors and appropriate for the arrangements contemplated. Of perhaps more importance

is identifying a dispute resolution forum that allows for proceedings in a convenient location and language and

effective enforcement against wayward franchisees.

A prudent franchisor should be aware of, and understand, the legal and regulatory environment in the GCC whenstructuring and negotiating its arrangements with franchisees. Taking legal advice as early as possible in the

franchising process will, on the basis of past experience, save a franchisor time and costs that may otherwise be

incurred in renegotiating franchise agreements once signed, or settling disputes with franchisees.

The opportunities for franchisors that structure arrangements with franchisees in the GCC carefully, appropriately

and in the context of regionally specific requirements are tremendous.

If you would like further information on any issue raised in this update please contact Joycia Young.

08 SEPTEMBER, 2010

Franchising in the Middle East

Franchising continues to be the preferred model by

which international businesses can quickly expand

into the rapidly developing economies in the

25 JANUARY, 2013

Laws, Regulations and Sanctions: Foreign Oiland Gas (article 3 of 3)

The Libyan Ministry of Oil has recently announced

that they are contemplating improving the terms of the

exploration and production contracts for IOCs

Similar stories
http://www.clydeco.com/insight/updates/view/franchising-in-the-middle-easthttp://www.clydeco.com/insight/updates/view/laws-regulations-and-sanctions-foreign-oil-and-gas-article-3-of-4http://www.clydeco.com/insight/updates/view/franchising-in-the-middle-east-taking-advantage-of-opportunity-carefully/%7Bpage_18%7Djoyciayoung


4/5

26 MARCH, 2013

Egypt new law threatens hotels and other

international investment in Sinai

28 APRIL, 2013

Libya: regulation of foreign currencies

Libyan Central Bank Governors Resolution No. (1) of

2013 on the Regulation of Foreign Currencies Trading

and the Determination of the Powers

03 MAY, 2013

Libyan infrastructure sector

Libya is not an easy market; the security situation

remains a challenge and the government is focusing

much of its efforts on creating a safe and

14 MAY, 2013

Libya: A new frontier

Clyde & Co Partner Adrian Creed discusses the

challenges and opportunities for the first international

law firm to enter Libya since Gadafis fall from power.

Authors

More by the authors

Categories

Services

Franchising

Locations

Middle East & Africa

Joycia YoungPartner

No safe harbour for IP licences in the UAE

10 essential tips for customers entering into IT contracts

Managing IT risk in the supply chain
http://www.clydeco.com/insight/updates/view/egypt-new-law-threatens-hotels-and-other-international-investment-in-sinaihttp://www.clydeco.com/insight/updates/view/libyan-central-bank-resolution-regulation-of-foreign-currencieshttp://www.clydeco.com/insight/updates/view/libyan-infrastructure-sectorhttp://www.clydeco.com/insight/updates/view/libya-a-new-frontierhttp://www.clydeco.com/insight/updates/list/any/all-regions/any/any/any/14910http://www.clydeco.com/insight/updates/list/any/middle-east-africahttp://www.clydeco.com/insight/updates/view/no-safe-harbour-for-ip-licences-in-the-uaehttp://www.clydeco.com/insight/updates/view/managing-it-risk-in-the-supply-chain-1http://www.clydeco.com/insight/updates/view/managing-it-risk-in-the-supply-chain

Documents

At Kearney 2014 Global Retail Index