It would seem that franchise and distribution agreements are nothing more than abstract commercial arrangements between parties. There is a significant underestimation of the prevalence and importance of franchise and distribution agreements in the UAE. A casual stroll through any busy street or shopping center in the country will reveal the impact of a wide range of franchise and distribution agreements. Almost any recognizable restaurant or café is likely part of a franchise agreement.
Most products, including groceries and medicines, will typically be distributed to consumers through one or more distribution agreements. How do franchise agreements and distribution agreements differ? A high level of complexity can often lead to a bit of confusion. In this article, we at GL International will clarify the difference between these arrangements and illustrate how they are implemented in the UAE.
Franchise agreements
The franchisor in a franchise agreement is the party that owns the brand and sells the rights to the franchisee, who will operate the business under the brand name. The franchise agreement will specify the royalties that will be payable to the franchisor in exchange for franchising the rights to a particular brand.
It is imperative to note that at present there is no specific franchise law in the UAE as yet. The legal framework in this area is made up of a combination of related laws, including UAE’s federal laws on Civil Transactions and Commercial Transactions, among others.
Distribution agreements
As the name suggests, the distribution agreement is often used to import and distribute goods within the UAE. The Commercial Transcation law and the UAE’s Civil Transactions Law regulate distribution agreements. However, UAE Commercial Agencies Law may also apply to distribution agreements, as a result there is added complexity that comes with distributor-supplier relationship.
There are a number of options available to foreign suppliers seeking to sell goods within the UAE. The company may need to set up a company in the UAE or enter into a distribution agreement with a third party to accomplish this. Until recently, a distributor had to adhere to local ownership regulations, which required that at least 51% of a trading company be locally owned. In a recent landmark amendment to its Commercial Companies Law, the UAE eliminated the requirement that trading companies be owned locally (with some exceptions in some sectors). Although some suppliers may wish to use local distributors or enter into joint ventures with local companies with market knowledge, some may still choose to use a local distributor.
Key differences
One of the main differences between the above arrangements is the know-how aspect. An essential element of franchise agreements is the franchisor’s know-how and branding, and the franchisee must execute these effectively. On the other hand, a company under a distribution agreement does not share its know-how with third parties; instead, it merely allows them to sell its products to third parties in the geographic area. Franchisees have, therefore, a greater degree of control over the practical execution of the franchise, whereas distributors are far less involved in a distribution agreement.
The primary difference between franchise and distribution agreements is the additional protection for distributors provided by the Commercial Agencies Law when a distribution agreement is registered with the UAE Ministry of Economy. Only under certain conditions may such an agreement be implemented, namely (1) the distributor must be a UAE national/company or wholly owned by a UAE national/company, (2) the agreement must be exclusive to the entire United Arab Emirates, 3) the agreement must be notarized.
In the case of distributors that are recognized as commercial agents under the Commercial Agencies Law, it becomes extremely challenging for the supplier to terminate the relationship. The distributor may enforce this exclusivity privilege, and the agreement may only be terminated with justification – this is a high threshold, and termination often requires the distributor’s consent.
Franchise agreements, as well as distribution agreements, can have a significant impact on businesses. In order to avoid additional problems and disputes in the future, it is critically important to obtain appropriate legal advice tailored to the industry and the specific parties.
Here at GL International, we are committed to helping you make these difficult decisions.