Franchise Agreement Lawyer Dubai: Disclosure, Fees & Termination

Under the UAE Federal Law No. 18 of 1981 (Commercial Agency Law) and its implementing regulations, franchisors must provide a pre-contract disclosure document, set out clear fee structures, and follow specific procedures for termination and renewal; these rules apply across the UAE mainland and, where relevant, in free-zone jurisdictions such as DIFC and ADGM that maintain their own regulatory regimes.

Related Services: Explore our Franchise Agreement and Non-Compete Agreement services for practical legal support in this area.

WHAT MUST A FRANCHISOR DISCLOSE BEFORE SIGNING A FRANCHISE AGREEMENT IN THE UAE?

A franchisor must deliver a written disclosure document that outlines the business model, financial obligations, intellectual-property rights, training and support services, and any material risks associated with the franchise. The document must be provided in Arabic or English and given to the prospective franchisee a reasonable period before execution of the agreement, allowing time for review and independent advice.

The disclosure requirement stems from Article 4 of the Commercial Agency Law, which obliges agents (including franchisors) to inform principals of all material facts that could affect the decision to enter the agency relationship. The document should contain:

• A description of the franchisor's business, including trademarks, patents, and know-how to be licensed.
• Details of initial fees, ongoing royalties, advertising contributions, and any other payments.
• Information on the territorial scope, exclusivity, and duration of the franchise right.
• Outline of training programmes, operational manuals, and ongoing provides.
• Disclosure of any litigation, bankruptcies, or regulatory sanctions involving the franchisor or its affiliates.
• Details of the franchisee's obligations, such as minimum performance standards, reporting requirements, and compliance with local laws.

If the franchisor fails to provide this disclosure, the franchisee may seek rescission of the agreement or claim damages for losses incurred due to lack of information. The law does not prescribe an exact number of days for delivery, but courts have regarded a period of at least fifteen days as reasonable in practice, giving the franchisee sufficient time to consult legal and financial advisors.

HOW ARE ROYALTY FEES AND OTHER PAYMENTS STRUCTURED IN UAE FRANCHISE AGREEMENTS?

Royalty fees in UAE franchise agreements are typically calculated as a percentage of gross sales, commonly ranging from 4 % to 8 %, although the exact rate is freely negotiated between the parties. In addition to royalties, agreements often include an upfront franchise fee, contributions to national or regional advertising funds, and fees for training, software licences, or audit services. All fees must be clearly stated in the agreement and comply with the prohibition on unfair contractual terms under the Commercial Agency Law.

The law requires that any fee arrangement be transparent and not impose undisclosed costs on the franchisee. For example, an advertising contribution must be linked to a specific marketing plan and accounted for separately from the royalty stream. If a franchisor wishes to amend the fee structure during the term, the amendment must be agreed upon in writing and cannot be imposed unilaterally unless the original contract expressly reserves such a right.

Typical components of a UAE franchise fee structure include:

1. Initial franchise fee - a lump-sum payment for the right to use the brand and receive initial training.
2. Ongoing royalty - a percentage of gross sales, payable monthly or quarterly.
3. Advertising/marketing fund contribution - usually a fixed percentage of sales (often 1 %-2 %) pooled for national or regional campaigns.
4. Technology or software fees - charges for point-of-sale systems, inventory-management tools, or online platforms supplied by the franchisor.
5. Renewal fee - a payment due upon extension of the franchise term, often lower than the initial fee.
6. Transfer or assignment fee - payable if the franchisee sells or transfers the franchise interest.

The agreement should specify the currency (usually UAE Dirhams), the basis for calculating gross sales (excluding taxes, returns, and discounts), and the audit rights of the franchisor to verify sales figures. Disputes over fee calculations are frequently resolved through expert determination or arbitration, as many franchise contracts include arbitration clauses referring to DIAC or DIFC-LCIA rules.

WHAT ARE THE LEGAL GROUNDS AND PROCEDURES FOR TERMINATING A FRANCHISE AGREEMENT IN THE UAE?

Termination of a franchise agreement in the UAE may occur for cause (e.g., breach of contract, insolvency, or loss of required licences) or, where permitted by the contract, for convenience upon notice. The Commercial Agency Law requires that termination for cause be preceded by a formal notice detailing the breach and providing a reasonable cure period, typically thirty days, unless the breach is irreparable.

Procedural steps include:

• Notice of breach - the aggrieved party must serve a written notice specifying the alleged violation and referencing the relevant contract clause.
• Cure period - the defaulting party is given a set time to remedy the breach; if the breach is not cured, the aggrieved party may proceed to termination.
• Termination notice - a second notice stating that the agreement is terminated effective upon receipt or a specified future date.
• Post-termination obligations - the franchisee must cease use of the franchisor's trademarks, return confidential information, and settle outstanding fees. The franchisor may retain the right to claim damages for losses suffered due to premature termination.

If the agreement includes a convenience termination clause, either party may end the relationship by giving the notice period stipulated in the contract (commonly six to twelve months) without needing to prove fault. However, such clauses must not contravene the principle of good faith embedded in the Commercial Agency Law; courts may scrutinise whether the notice period is reasonable and whether the termination is being used to avoid legitimate obligations.

Upon termination, parties often resort to DIAC or DIFC-LCIA arbitration to resolve disputes over outstanding payments, non-compete enforceability, or the return of proprietary materials. The arbitration award is enforceable under UAE Federal Law No. 6 of 2018 on Arbitration, which recognises both domestic and international awards.

HOW DOES RENEWAL OF A FRANCHISE AGREEMENT WORK UNDER UAE LAW?

Renewal is not automatic; it depends on the terms negotiated in the original contract. Most franchise agreements contain a renewal clause that specifies the notice period required to exercise the option, any renewal fee, and whether the franchisor may impose updated terms. Under the Commercial Agency Law, a franchisor cannot refuse renewal arbitrarily if the franchisee has complied with all obligations and the contract grants a renewal right.

Typical renewal provisions include:

• Notice period - usually six to twelve months before the expiry date, during which the franchisee must communicate its intention to renew.
• Renewal fee - often a reduced percentage of the initial fee, reflecting the continued use of the brand and support services.
• Updated terms - the franchisor may propose changes to royalty rates, territorial scope, or performance benchmarks, but any amendment must be agreed upon in writing.
• Performance criteria - some contracts tie renewal to the achievement of minimum sales targets or compliance with operational standards.

If the franchisee fails to meet the renewal conditions, the franchisor may decline to extend the agreement. Conversely, if the franchisor unjustifiably withholds renewal despite the franchisee's compliance, the franchisee may seek specific performance or damages through the UAE courts or arbitration, depending on the dispute-resolution clause in the agreement.

WHAT DISPUTE-RESOLUTION MECHANISMS ARE AVAILABLE FOR FRANCHISE CONFLICTS IN THE UAE?

Franchise agreements frequently incorporate arbitration clauses to provide a neutral, enforceable forum for resolving disagreements. The most common institutions are the Dubai International Arbitration Centre (DIAC) and the DIFC-LCIA Arbitration Centre. When parties elect arbitration, the proceedings are governed by UAE Federal Law No. 6 of 2018 on Arbitration, which recognises both domestic and international awards and facilitates enforcement across the Emirates.

In the absence of an arbitration clause, parties may litigate before the UAE civil courts. Litigation follows the Civil Procedure Code, and judgments are enforceable nationwide. However, court proceedings can be lengthier and may involve greater procedural formalities compared with arbitration.

Mediation is also encouraged, particularly under the DIFC Mediation Law (DIFC Law No. 1 of 2016) and the UAE's federal mediation initiatives. Mediation offers a confidential, cost-effective avenue to settle disputes before resorting to binding adjudication.

Regardless of the chosen mechanism, the agreement should clearly specify the governing law, the seat of arbitration or mediation, and the language of proceedings to avoid jurisdictional disputes.

HOW DOES THE DIFC REGIME DIFFER FROM UAE FEDERAL LAW FOR FRANCHISES?

The DIFC operates under its own common-law framework, principally the DIFC Contract Law (DIFC Law No. 1 of 2015) and the DIFC Arbitration Law (DIFC Law No. 4 of 2015). Franchise agreements governed by DIFC law are not subject to the UAE Commercial Agency Law; instead, disclosure, fee, and termination provisions are interpreted under DIFC regulations, which may impose different notice periods and remedy thresholds.

Key distinctions include:

• Disclosure - while the DIFC does not have a specific franchise-disclosure statute, general principles of pre-contractual disclosure and misrepresentation apply under DIFC Contract Law.
• Fee regulation - the DIFC does not prescribe caps on royalties; fairness is assessed through the lens of unconscionability and good faith.
• Termination - DIFC law emphasises reasonable notice and may allow termination for convenience more readily, provided the contract does not violate the duty of good faith.
• Arbitration - DIFC-LCIA rules are commonly selected, and awards are enforceable under the DIFC Arbitration Law and the New York Convention.

Businesses operating in the DIFC should therefore tailor their franchise agreements to align with DIFC-specific requirements while still considering any overlapping obligations that may arise under UAE federal law if the franchise has a mainland presence.

FREQUENTLY ASKED QUESTIONS

What law governs franchise disclosure in the UAE mainland?
UAE Federal Law No. 18 of 1981 (Commercial Agency Law) governs franchise relationships on the mainland, requiring franchisors to provide a pre-contract disclosure document that outlines material facts about the business, fees, and obligations. The Arabic text of UAE legislation as published in the Official Gazette prevails over any translation.

Are franchise fees subject to any caps or restrictions under UAE law?
The Commercial Agency Law does not impose a statutory cap on royalty percentages or fixed fees; however, it prohibits unfair or exploitative terms. Fees must be clearly disclosed, and any unilateral amendment during the term must be agreed upon in writing unless the original contract reserves such a right.

Can a franchisee terminate the agreement early without cause?
Early termination without cause is only permissible if the franchise agreement contains a convenience termination clause specifying a notice period. Absent such a clause, termination for convenience would constitute a breach, potentially exposing the terminating party to damages for losses suffered by the other party.

What happens to the franchisee's inventory after termination?
Upon termination, the franchisee must cease using the franchisor's trademarks and return or destroy all branded materials, proprietary software, and confidential information. Inventory of non-branded goods may be retained or sold, subject to any repurchase or buy-back provisions outlined in the agreement.

Is arbitration mandatory for franchise disputes in the UAE?
Arbitration is not mandatory unless the franchise agreement includes an arbitration clause. Many franchisors elect to embed arbitration provisions referring to DIAC or DIFC-LCIA rules to obtain a neutral, enforceable forum. In the absence of an arbitration clause, parties may pursue litigation before the UAE civil courts.

How does the DIFC regime differ from UAE federal law for franchises?
The DIFC operates under its own common-law framework, principally the DIFC Contract Law (DIFC Law No. 1 of 2015) and the DIFC Arbitration Law (DIFC Law No. 4 of 2015). Franchise agreements governed by DIFC law are not subject to the UAE Commercial Agency Law; instead, disclosure, fee, and termination provisions are interpreted under DIFC regulations, which may impose different notice periods and remedy thresholds.

If your matter involves franchise agreement lawyer in the United Arab Emirates, you are welcome to request a consultation with Nour Attorneys. Our team can assess your position under the law currently in force and outline the options available to you. Request a consultation

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