The concept of a franchise arrangement is not recognised under a separate law in the United Arab Emirates. There is no legal definition or specific law governing franchising. There are no legal requirements or compliance procedures imposed on the franchisor prior to offering franchises in the UAE. There are no disclosure requirements under UAE Law for franchisors. There is no specific government agency which regulates the offer and sale of a franchise.

All agreements, including franchise agreements, are governed by the Federal Law No. 5 of 1985 on Civil Transactions (as amended) ("Civil Code") and/or Federal Law No. 18 of 1993 on Commercial Transactions (as amended)(“Commercial Code”). In general terms, these laws recognize the right of parties to contract with each other on such terms as they may agree. Certain aspects of a franchise agreement are also governed by the UAE intellectual property laws (Including Law No. 5 of 1973 on Commercial Register, Federal Law No. 37 of 1992 on Trademarks amended by Law No. 19 of 2000 and Law No. 8 of 2002, Federal Law No. 7 of the Year 2002 Concerning Copyrights and Neighboring Rights, Federal Law No. 24 of 2006 Concerning Consumer Protection) as in most cases the main elements of franchise agreement involve the transfer know how and intellectual property rights such as trademarks, logos, business processes, etc.

While there are no disclosure laws, franchisors need to be mindful of information provided to franchisees as pursuant to the Civil Code, as a franchisee may be able to nullify the contract based on misrepresentation. Misrepresentation occurs when one of the parties "deceives the other by means of fraud, by word or deed, which leads the other to consent to what he would not otherwise have consented to". Omission may also constitute misrepresentation where it is deliberate. It does not include statements made innocently or negligently. Any reference to "misrepresentation" in a UAE law contract should be carefully considered in light of this key difference. This is particularly the case given that it is also not possible under UAE law to exclude liability for fraud due to public policy considerations.

The concept of "good faith" is further applicable under UAE Law. It is, in effect, a requirement not to use the terms of a contract to abuse the rights of the other contracting party, not to cause unjustified damage to that other party and to act reasonably and moderately. It is implied into UAE law contracts (pursuant to the Civil Code) that "a contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith". Decisions of the Dubai Court of Cassation have ruled that a bad faith action of the other contracting party may provide a cause of action in itself for the other. The effect of good faith on the terms of a contract is, therefore, wide reaching and may have a significant impact on the outcome of a dispute.

A franchise may fall under Federal Law No. 18 of 1981 on the Organisation of Commercial Agencies (as amended by Federal Law No. 14 of 1988, and further amended by Federal Law No. 13 of 2006 and Federal Law No. 2 of 2010) (the "Commercial Agencies Law") if certain conditions are met. The Commercial Agencies Law only applies to contracts that are registered with the UAE Federal Ministry of Economy (the "Ministry"). In order for a contract to qualify for registration with the Ministry there are a number of criteria which must be met, including the following:

The franchisee must be a UAE national or an entity that is wholly owned by UAE nationals;
The franchise agreement must grant exclusivity over all or a part of the UAE; and
The franchise agreement must be notarized.

The Agency Law however tends to favour agents/franchisees rather than franchisors and therefore in the context of international brands looking to expand into the UAE market, consideration needs to be given to whether it is appropriate to have the agreement registered with the UAE Ministry of Economy. For franchisees often the decision often depends solely on whether they are UAE nationals (or their company is wholly owned by UAE nationals).

If an agreement qualifies as a commercial agency, franchisees generally prefer to register an agreement with the Ministry. Termination of a registered agency agreement is usually difficult. Substantial compensation could be awarded to the agent upon termination (or failure to grant a further “term” by the franchisor) and the agent is entitled to commissions from sales made by others in their designated territory. In addition, once the agency agreement is registered, it can be difficult for principles to appoint a replacement agent in the event of termination or failure to renew the agreement.

The main consequences of registration are set forth below.

The agreement cannot be terminated by the franchisor without the franchisor being able to show "justifiable cause", which would include the franchisee no longer being appropriately licensed to undertake the franchised activity in the UAE, repeated material breaches of the terms of the franchise agreement and/or gross negligence, and dealing with competitive products where this is clearly prohibited under the terms of the franchise agreement. In practice, the circumstances surrounding the termination of a registered franchise agreement will be considered in view of assessing what would be an appropriate compensation payment, if any, to be awarded to the franchisee as a result of the termination of the agreement. If a justifiable cause is found to exist then it may be that the commercial agencies committee (or court on appeal) will find that no compensation is payable to the franchisee.

The franchisee is able to instruct the UAE ports and customs authorities to prohibit any products in respect of which it is the registered agent entering the UAE without its consent. This will restrict franchisor from access to the UAE market, either by way of itself establishing a licensed presence in the UAE or by appointing an alternative franchisee, until the case has been finally determined or settled and the agreement de-registered. A final determination, if a decision of the commercial agencies committee is appealed to the local courts, could take up to 3 years and in some cases, longer.

The factors that the commercial agencies committee and the courts (if applicable) will take into account when assessing the level of compensation payable to a registered franchisee upon termination of the arrangement include the performance of the franchisee, how long the arrangement has been in place and whether the franchisee has incurred significant expenditures in establishing the business (with more weight being given to more recent expenditures).

Given the disadvantages that a registered agency can have for franchisors, there are a number of methods that can be used in order to attempt to mitigate the effects of the UAE Agency Law from applying to a franchise relationship depending on the specific terms and conditions of the franchise agreement being negotiated. Legal advice should be taken on the specific terms and conditions to ensure the franchisor is aware which terms may be enforceable.