How Proper Franchise Agreement Structuring Saves Millions
What the parties to a UAE franchise never got round to defining - the local trade mark position, the royalty base, the edge of the territory, the day the relationship ends - is what they later pay lawyers to argue about.
A franchisee buys permission, and the fights start wherever that permission was left vague: marks registered abroad but not in the UAE, a royalty charged on "gross sales" that nobody defined against discounts and delivery-platform commissions, a territory described as a market rather than a boundary, an arrangement that behaves like a commercial agency, and de-identification nobody costed.
Reviewed by Mohamed Noureldin, Founder, Managing Partner & Senior Legal Consultant
What a franchisee acquires is permission: permission to use someone else’s trade marks, systems and know-how, in a defined place, for a defined time, on terms the franchisor wrote. Almost every expensive franchise dispute in the UAE comes from one of three things: the permission covered less than the franchisee assumed, the money terms were defined loosely, or nobody decided in advance what happens on the day the relationship ends. Each is a drafting problem, and each is far cheaper to solve before signature than afterwards.
Related: Our franchise agreement work covers both incoming international brands and UAE-based franchisors expanding regionally.
Register the marks before you license them
The asset at the centre of a franchise is the brand, and rights in a trade mark are territorial. An international franchisor whose marks are registered elsewhere but not in the UAE is granting rights it may not be able to defend here, and a franchisee paying for exclusivity is paying for something the franchisor cannot enforce against a third party using a similar name.
So the ownership and registration position should be checked and, where necessary, corrected before rights are granted. The agreement should then state who owns the marks and any local goodwill, who is responsible for maintaining the registrations, who may bring proceedings against infringers and who pays for them, and what the franchisee must do if it becomes aware of infringement. It should also record that any local registration made by the franchisee is held for the franchisor — a franchisee registering the brand in its own name is a recurring and difficult problem to unwind.
What the arrangement is called, and what it is
The label on the agreement does not determine how it is treated. A franchise that operates in substance as a commercial agency — a local party appointed to distribute or represent a principal in the UAE — can attract the protections that regime gives the local side, including on termination and renewal, which the contract itself cannot simply displace. Whether that applies depends on the structure of the arrangement and on whether it is registered as an agency.
This is worth resolving deliberately at the structuring stage rather than discovering it during a termination. It also affects the choice between models: a direct unit franchise, a master franchise with sub-franchising rights, a development agreement covering several outlets, or a corporate joint venture in which the franchisor takes equity alongside a local operator. Where the parties go the equity route, the joint venture agreement and the franchise agreement have to be read together, because a right granted in one and restricted in the other produces a dispute with no clean answer.
Ownership rules also matter less than they once did. Since the removal of the mandatory 51% UAE-national shareholding for mainland companies by Federal Decree-Law No. 26 of 2020, most mainland activities can be carried on with full foreign ownership, subject to the strategic-impact list. A franchisor that once needed a local shareholder as a matter of law may now be choosing one as a matter of commercial preference, and the documents should reflect that it is a commercial choice.
Related: See our contract and shareholders agreement drafting for the corporate side of franchise structures.
The money terms that produce the fights
Franchise disputes about money are almost never about the headline royalty rate. They are about definitions.
- What the royalty is calculated on. “Gross sales” needs a definition: whether it is before or after VAT, which is charged at 5%; how discounts, staff meals, refunds, loyalty redemptions and delivery-platform commissions are treated. Delivery aggregators in particular can take a substantial share of a headline sale, and an agreement that charges royalty on the gross platform price allocates that cost silently to the franchisee.
- The marketing fund. If franchisees contribute to a common fund, the agreement should say what it may be spent on, whether the franchisor may recover its own costs from it, whether it must be held separately, and what accounting the franchisees are entitled to see. Unaccounted marketing funds are one of the most common sources of franchisee grievance.
- Mandated suppliers. Where the franchisee must buy from the franchisor or a nominated supplier, the margin taken on those supplies is part of the real price of the franchise. It should be visible, and the agreement should say whether the franchisee may propose alternative suppliers meeting the same specification.
- Deductibility. Fees paid to a foreign franchisor are a cost in the franchisee’s accounts, and since corporate tax was introduced by Federal Decree-Law No. 47 of 2022 those accounts carry a tax consequence. Fees should be supported by the agreement, by invoices and by evidence that the services were actually provided.
Territory, exclusivity and the development schedule
Exclusivity should be defined by something a court or tribunal can apply: a named emirate, a mapped area, a list of malls or a radius. “The Dubai market” is not a boundary. The agreement should also address channels rather than only geography, because online ordering and delivery reach across any territory line that was drawn on a map.
Where exclusivity is tied to opening a stated number of outlets, the consequence of missing the schedule needs to be proportionate and stated. The workable answer is usually that exclusivity converts to non-exclusivity, or that development rights fall away, rather than that the whole agreement terminates. Termination for a missed opening is a remedy franchisors rarely want to use and franchisees rarely expect.
The end of the relationship, decided at the beginning
What happens on expiry or termination is the part of the agreement most often left thin, and it is the part that determines who is exposed.
De-identification needs to be specific: what signage, packaging, uniforms and digital assets must be removed or transferred, within what period, and who bears the cost. Leases matter, because the value of a food or retail franchise often sits in the site — whether the franchisor can take an assignment of the lease, or holds a right to do so, should be dealt with when the site is taken, not when the franchise ends. Employees remain employed under Federal Decree-Law No. 33 of 2021 regardless of what the franchise documents say, and end-of-service entitlements do not disappear because a brand does. Customer and loyalty data is personal data under Federal Decree-Law No. 45 of 2021, or under the DIFC or ADGM regimes where the entity sits there, and cannot simply be handed over because the agreement says so.
Post-termination restrictions should be drafted to be usable: a narrow, time-limited restriction on operating a competing concept from the same site has a far better chance of being enforced than a wide regional ban.
Where a dispute would be heard
Franchise agreements often involve a foreign franchisor and a local operating company, which makes enforcement the deciding factor in the dispute clause. The question to settle first is where the party likely to be pursued keeps the assets that would satisfy an outcome, because the answer decides whether a route is worth choosing at all.
The point specific to franchising is that a franchise is rarely one document. There is the franchise agreement, usually a guarantee from the franchisee’s shareholders, often a supply or licence contract, sometimes a lease. Each of them should carry the same dispute clause, pointing to the same forum in the same language. Where they point in different directions, one commercial argument becomes three separate proceedings, and the franchisor loses the ability to deal with the whole relationship in one place.
Related Services: Explore our Franchise Agreement services for practical legal support in this area.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal advice. Readers should seek professional legal advice tailored to their specific circumstances before making any decisions or taking any action based on the content of this article.
Nour Attorneys Team
