INS IGHT

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 Africa region 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 ground
directly.
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.

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

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 when
structuring 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.

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