The Gulf Cooperation Council (GCC) is a major target market for international franchise brands. Overseas brands often opt for franchising in this region as the easiest way to enter the market in light of the foreign ownership restrictions for companies that wish to trade in the territory.

While most of the jurisdictions that form the GCC do not have franchise laws per se (except for the newly introduced Franchise Law in Saudi Arabia which came into effect in 2020), they regulate franchising through commercial agency laws. The aim of these rules is to protect the local franchisee from termination by the foreign franchisor without legitimate grounds, making it difficult for the foreign franchisor to replace the local partner. For the commercial agency laws to apply, usually some form of registration with a local government authority is required.

Under the commercial agency laws the franchisee may have certain statutory rights including:

• Termination by the franchisor may be limited to material breach.
• Compensation may be payable to the franchisee for loss of business opportunity on termination or upon non-renewal.
• Local law may overrule the chosen law of the contract and local courts may have jurisdiction to rule on claims from the franchisee, forcing the foreign franchisor to litigate abroad.
• In some countries, the franchisor needs to give notice of non-renewal even if the contract expires at the end of its term.
• When the relationship comes to an end, the appointment of a new local partner may be difficult until the registration of the former franchisee has been cancelled.

These provisions are not favourable to foreign franchisors and for this reason, until recently, many foreign franchisors sought to avoid registration as a commercial agency by various means. Most franchise agreements included an express prohibition of local registration, often coupled with penalties. This approach may no longer work. In light of changes to the local legislation, franchisors need to reconsider this strategy in relation to some GCC countries and take a closer look at the effect of registration as a commercial agency and its implications.

Oman Commercial Agency Law

Prior to a recent change in its legislation, Oman was one of the territories where franchisors would be advised to avoid registration as a commercial agency and prohibit the same in the franchise agreement. This is may no longer be a viable strategy, as an agreement that has not been registered is unenforceable locally. Franchisors urgently need to review their approach.

Compensation right removed: Historically, franchisors would avoid registration because a franchisor was obliged to pay the franchisee compensation if a registered contract was terminated or not renewed (other than in certain limited circumstances). Termination of an agency or refusal to renew the same upon its expiry used to give the local agent an automatic right to compensation without a requirement to prove a breach, fault or negligence on the part of the franchisor.

This is no longer the case, and the agency contract may now be terminated in accordance with its terms. The right to compensation has been removed from the legislation and while there is still the possibility that a court could decide the appropriate compensation due to a registered commercial agent, compensation would be awarded only in a limited number of scenarios, such as breach of contract by the franchisor. Generally, since the removal of the right to compensation, the courts in Oman no longer award compensation to registered commercial agents for non-renewal or termination (in the absence of a breach of contract or abuse of rights). Therefore, the main commercial reason for refusal to allow registration is no longer present.

Non-renewal notice: Still, the remaining provisions of the Commercial Agency Law in Oman continue to make it difficult to not renew an agreement that is due to expire. They do so by imposing certain minimum notice period requirements, together with a process of deregistration of the commercial agency, which makes it more time consuming and challenging to walk away from a relationship. The local franchisee must consent to taking the agreement off the register and only after the relationship is deleted from public records, may a new local franchisee be appointed. For obvious reasons, this can make things difficult if the former franchisee is non cooperative.

Failure to register: Nevertheless, it is worth assessing whether avoiding registration as a commercial agency does not lead to a greater risk than the consequences of registration itself. Failure to register an agreement effectively means that the local courts will not enforce the agreement locally. This also applies to any foreign awards or judgments obtained in reliance on such agreements. They would not be enforced in Oman. This could cause issues for the foreign franchisor if they wished to enforce any awards around non-competition restrictions or liquidated damages locally.

Kuwait Commercial Agency Law

It is not possible to undertake any business activity in Kuwait without a local branch or a local (registered) commercial agent. This formal requirement effectively forces foreign franchisors to elect commercial agency as their means of entering the market. Similar to other jurisdictions in the Gulf, once registered, a commercial agent gains additional protection overriding the governing law of the contract and its express provisions, including a right to compensation when the contract ends and difficulties with terminating or not renewing the agreement.

Another big red flag for Kuwait is the potential tax liability on royalty fee income.

UAE draft amendments to the Commercial Agency Law

The UAE currently does not impose an automatic registration for franchise agreements.

This means that provisions prohibiting registration may still be included in agreements for the UAE, but not without caution – a franchise agreement should be carefully reviewed. If a given relationship ticks all of the ‘agency boxes’, it must be registered. This is not going to change if and when the new draft legislation enters into force.

Currently, only UAE nationals may register as commercial agents. This makes the risk assessment exercise easier when considering whether a franchise agreement might be registered locally or not. While under the draft legislation, commercial agency will still be largely reserved for UAE nationals, certain exceptions for international companies are being considered, so commercial agency registration may become open for other franchisees.

In addition to other implications discussed above, once a commercial agency is registered in the UAE, the draft legislation provides that the franchise relationship will have to be exclusive – only one commercial agent will be permitted for the whole of the UAE or for an individual emirate. Additionally, registered commercial agents will be eligible to receive commission on all transactions in connection with the branded business concluded within their area of responsibility. While the draft law aims to facilitate the termination of registered commercial agency (which currently is very difficult, even if a fixed term expires), the right to compensation for the former agent will remain and, notably, a compensation claim may be made by the exiting agent not only against the principal but also against the incoming agent.

The highlights above provide a summary of the main issues worth considering before franchising in the GCC. If you would like to discuss how this may affect your existing or planned franchise relationship, please reach out to our team.