Ever dreamt of your favourite local café popping up in every other Emirate across the UAE? Or have you ever wondered how that popular restaurant multiplied into a chain so fast?
The secret often lies within the terms and conditions of a legally binding, commercial relationship which must be properly documented in a ‘Franchise Agreement’- so that a business owner (“Franchisor”) is able to expand and further monetise the established business’s brand identity and brand value through another eager and motivated entrepreneur or investor (“Franchisee”). This underlying contract should meticulously establish the rules of engagement between the Franchisor and the Franchisee- clearly defining the roles, responsibilities and obligations of each party.
Let’s explore the franchise models and legal framework in relation to franchising in the food and beverage sector in the UAE.
The structure of this economic partnership may vary depending on factors such as exclusivity and degree of operational control retained by the Franchisor- with two popular models often adopted in the UAE:
- ‘Franchisee-Owned Company-Operated’ model (“FOCO Model”); and
- ‘Franchisee-Owned Franchisee-Operated’ model (“FOFO Model”).
Legal & Commercial Considerations
Whilst there is no standalone legislation governing franchising relationships in the UAE, it is necessary to discuss the various facets of the intended commercial arrangement between the Franchisor and Franchisee with a qualified legal professional – so that a Franchise Agreement is entered into not just in order to define the rights and obligations of the parties but to also ensure that the primary governing legal document really satisfies the requirements of applicable laws and regulations in the UAE.
At the outset, maybe not surprisingly, Federal Law No. 3 of 2022 On Regulating Commercial Agencies (“Commercial Agencies Law”) could be applicable to a franchise arrangement- where the underlying contract may or may not be registrable under the UAE Ministry of Economy –depending on the language of the contract and whether or not the Franchisee is a UAE national or a company with UAE national shareholders. Simply speaking, the Commercial Agencies Law would not be applicable to a franchise arrangement to be established between foreign franchisors and foreign franchisees (who are not UAE nationals!). Further, to prevent the possibility of any disputes, the intention of the parties must be clearly written in the contract from the perspective of applicability of the Commercial Agencies Law.
Having said this, a Franchise Agreement must be drafted and executed by the relevant parties in accordance with the essential principles of contract formation, performance of obligations, good faith, duration and termination of contract as per the UAE Civil Code (UAE Federal Law No. 5 of 1985).
Drafting a Franchise Agreement demands careful attention to several key legal and commercial considerations. For instance, clearly defining the Franchisee’s geographical extent and operational territory (the “Authorised Outlet”) is essential. This prevents future conflicts, especially if the Franchisor plans to expand with more franchisees in the same city or Emirate. Because the Franchisor’s intellectual property – trademarks, trade names, patents, and copyrights – is central to the brand value of the business, the Franchise Agreement must clearly stipulate the Franchisee’s rights and obligations regarding the use of the intellectual property whilst operating the Authorised Outlet. This is very important so as to avoid misuse or damage to the Franchisor’s brand identity and established brand value.
In addition to the customary contractual provisions and the specific financial arrangements of the franchise relationship, a Franchise Agreement must also clearly state the following:
- the franchise term or duration and the renewal term
- the franchise fee, royalty fee, marketing and advertising fee
- how profits will be shared
- the specific requirements for maintaining the Franchisor’s brand, including quality standards and any specific interior design
- insurance coverage and indemnification
- default and termination
- carefully drafted dispute resolution mechanism
- training and operational assistance from the Franchisor
- the social media and digital marketing guidelines that the Franchisee must follow for the Authorised Outlet.
Franchising Models in the UAE
Let’s now look at the two most popular franchise models in the F&B sector in the UAE—FOCO and FOFO models—and how they differ in structure, control, and efficacy.
The decision between FOCO and FOFO franchise models in the UAE would depend on franchising objectives, management willingness, franchise brand strength and operational stability.
The FOCO model is essentially a franchising business arrangement where a Franchisee invests capital in owning an Authorised Outlet, yet a Franchisor would maintain the full authority to manage the day-to-day operations of an Authorised Outlet. The Franchisor enjoys the advantage of preserving uniform brand standards through this structure, so as to ensure that the Authorised Outlet delivers consistent service quality and satisfactory customer experience. This FOCO franchise model works best for business owners wanting strict operational control and centralized decision-making processes. However, the FOCO model restricts the Franchisee’s operational autonomy, although the Franchisee bears the financial risk in terms of the capital invested to set up the Authorised Outlet.
Of course, setting up the Authorised Outlet would involve securing the necessary business license from the relevant department of an Emirate (for example, in Dubai, the necessary trade license would have to be obtained from the Department of Economy & Tourism or DET)
Under the FOFO model, a Franchisee makes a substantial initial investment to set up and operationalise the Authorised Outlet. The Franchisee is responsible for managing all aspects of the business operations at the Authorised Outlet, including staffing, inventory, marketing, and customer service, whilst committing to adhere to the brand format and guidelines established by the Franchisor. The Franchisor allows business use of its brand through licensing while offering extensive training, operational procedures, and marketing strategies, yet refraining from daily management of the Authorised Outlet. The Franchisee is primarily responsible for the success and profitability of the Authorised Outlet whilst maintaining strict compliance with Franchisor brand standards to protect their reputation.
One potential drawback of the FOCO model is its reduced appeal for an investor (Franchisee) who is seeking a more involved operational role on a daily basis. By contrast, from the Franchisor’s perspective, the FOFO model may not seem to be quite so attractive if the Franchisee is inexperienced or does not take care to maintain the necessary brand format, brand standards and quality at the Authorised Outlet.
Final thoughts:
Whether you are a Franchisor or a Franchisee- at the outset, it is necessary to discuss and understand the type of franchise structure and your expected role and obligations!
Once you reach a consensus on the nature of the franchise relationship and the specific commercials, it is then paramount that all relevant terms and conditions are comprehensively documented in a properly drafted, legally robust agreement- such a Franchise Agreement must be drafted and executed by the Franchisor and Franchisee in accordance with the applicable laws and regulations prevailing in the relevant jurisdiction.
Disclaimer: This blog provides general information and does not constitute legal advice. For bespoke legal advice for a particular transaction, please consult with a qualified legal professional.
At James Berry & Associates, we possess substantial legal expertise to advise and assist clients with all facets of commercial and business law. Should you wish to seek specific legal advice and assistance, please click here to contact our Corporate and Commercial department.
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Legal Consultant