Buying a Franchise in the UAE: Reviewing the Dispute Resolution Clause

A dispute resolution clause may seem a remote concern when you are preparing to buy a franchise, but it determines how you can enforce your rights if the agreement is not performed as promised. In franchising, a good relationship with the franchisor is not enough if the contract makes bringing a claim costly or unclear. Review this clause before signing as part of assessing your investment costs and protecting business continuity, rather than treating it as just another legal paragraph at the end.

1. Start by identifying your contract’s legal framework

The UAE has no standalone federal law dedicated to franchising, nor a general federal regime requiring a standardised disclosure document before every franchise sale. Do not assume, therefore, that there is a mandatory disclosure period or automatic rights similar to those you may have heard about in other countries. Request the information you need in writing, and ensure that key obligations are recorded in the contract and its schedules.

Depending on its nature and the applicable law, the relationship is governed by the general rules of the Civil Transactions Law and Federal Decree-Law No. 50 of 2022 Issuing the Commercial Transactions Law, alongside relevant legislation on trade marks, competition and licensing. Arbitration under federal law is governed by Federal Law No. 6 of 2018 on Arbitration, as amended.

There is an important distinction: if the franchise arrangement meets the conditions for a registered commercial agency, it may fall under Federal Law No. 3 of 2022 Regulating Commercial Agencies. In that case, its specific provisions and the Commercial Agencies Committee may affect the dispute resolution process. Do not assume that a general arbitration clause automatically overrides them. Seek legal advice on eligibility for registration and its implications, rather than simply accepting reassurance that the agreement is labelled a ‘franchise agreement’.

If the contract is connected to the Dubai International Financial Centre or Abu Dhabi Global Market, ask for precise clarification of the relevant court system and legal framework. An address in a free zone does not, by itself, establish which law applies.

2. Distinguish between the governing law, the court and the seat of arbitration

A contract may specify UAE law while referring disputes to arbitration seated outside the country, with proceedings conducted in a foreign language. This is not necessarily contradictory drafting, but it may increase the cost and complexity of bringing a claim.

Distinguish between four elements before agreeing:

• Governing law: The rules used to interpret the parties’ obligations and substantive rights.
• Forum: The competent court or arbitral tribunal that will hear the dispute.
• Seat of arbitration: The legal home of the arbitration, which affects the procedural law and the courts supervising it—not merely the place where hearings take place.
• Language of proceedings: The language used for written submissions, evidence and oral arguments, and any resulting translation requirements.

If institutional arbitration is chosen, make sure the institution is named correctly and that its rules, the number of arbitrators and the appointment procedure are specified. Do not settle for wording such as ‘arbitration before a body to be agreed by the parties later’; this could trigger a further dispute over the choice of body itself.

Nor should you assume that arbitration is always better. Compare it with litigation in light of the value of your investment, the location of the franchisor’s assets, the need for urgent measures and the prospect of enforcing a judgment or arbitral award outside the UAE.

3. Test the cost of enforcing your rights

Ask your lawyer for an indicative estimate of the cost of bringing a claim in a realistic scenario: for example, the operating system supplied by the franchisor stops working and you incur documented expenses as a result. You do not need to predict the outcome of the case; you need to know whether pursuing the claim is economically viable.

The estimate should cover the fees for commencing proceedings, lawyers’ fees, institutional and arbitrators’ fees if arbitration is chosen, expert and translation fees, and enforcement costs. Also ask about payments required upfront and during the dispute, rather than looking only at the total cost.

Review clauses that allow one party to choose the forum after a dispute arises, or that impose broadly worded obligations on you to pay the franchisor’s costs. Discuss their validity and implications with your adviser, and seek a clearer, more balanced allocation of risk. Do not regard recovery of legal costs as guaranteed, even if the contract provides for it.

Also check the identity of the contracting party and the location of its assets. Winning a claim against a company with no assets available for enforcement may not remedy your loss. Request details of the company entering into the contract, and do not confuse it with the wider group operating under the same brand name.

4. Set out a clear process before escalation

Structured negotiation can preserve a franchise relationship, provided it does not become an open-ended delay. Negotiate a process that includes written notice describing the breach, an authorised representative for each party, a defined period for discussions, and then clearly drafted provisions for optional or mandatory mediation before referring the dispute to the agreed forum.

Specify the addresses for notices, the permitted methods of delivery and when notices are deemed received. Do not rely on day-to-day messages with an account manager if the contract requires notice to be sent to a different legal address. Keep a file containing the contract and its schedules, invoices, fault reports and correspondence, and document the problem’s effect on operations.

Ask for clarification that interim or urgent measures can be sought when needed, without the negotiation stage preventing this. Do not assume that negotiations suspend limitation periods or procedural deadlines; obtain legal confirmation. Likewise, avoid unilaterally withholding fees or suspending performance of your obligations without advice, as this could give rise to a counterclaim against you.

Practical takeaway: Before signing, request a summary sheet setting out the governing law, forum, seat of arbitration, language, likely costs and notice requirements. If you cannot clearly explain the process for enforcing your rights, the dispute resolution clause needs reviewing.