Oman American Business Centre: Legal Framework for Franchising in Oman by Clyde & Co.

Oman American Business Centre: Legal Framework for Franchising in Oman Joycia Young, Partner, Intellectual Property 7 April 2019

Gulf News reported in October 2018: The IMF has observed that the oil exporters from the Middle East region, with the exception of Iran, are expected to have a positive impact on their economic growth in 2018 and 2019.

Specifically in the GCC, Oman’s 2019 estimated GDP growth of 5.05 per cent is the highest in the region.

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The economic landscape 혰Decreasing dependence on oil dependence and the need to diversify economies. 혰Move from a focus on physical asset base to an intangible asset base. 혰By 2020, GCC population is forecast to grow to about 57 million, and reaching 61 million by 2025. The vast majority will be under 25. 혰Optimism prevails: US franchisors are still increasingly looking to the Gulf region for franchising and growth opportunities.

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Key issues for franchising

Development Rights/Rights Granted Clarity is essential:

Exclusive/Nonexclusive

Exclusive/Nonexclusive Objective standards for compliance

Use of intellectual property

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Term

Corporate structure

Guidance and assistance What assistance will the Franchisor provide to the Franchisee?

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Training

Store preparation and opening assistance

Onsiteassistance

Provision of operating manual and systems documentation

Development and opening of Stores What are the Franchisor's requirements in terms of the premises? 혰 Concept designs/architectural drawings? 혰 Internal design, layout, equipment, furniture, fixtures, signage. 혰 Franchisor may also consider retaining a right to inspect and sign off of the premises prior to initial opening. 혰 Also, consider how many stores are to be developed and a suitable development schedule timetable.

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Fees Development fee Store approval/ operating fees

Marketing approval fees

Typical payments to a Franchisor may include:

Royalties on sales Licence fees for trade mark use 7

Marketing and advertising funds

Marketing and Promotion Who will be responsible for marketing the brand in the territory? 혰 The role of an advertising fund. 혰 The question of control. 혰 Franchisor may wish to consider placing Franchisee under a positive obligation to undertake any and all advertising as is necessary. 혰 Franchisor may also seek to retain a right to review any advertising before its release and subsequent right of veto if necessary.

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Transfer How can the Franchisee’s rights be transferred, or the franchised business sold to a third party?

Restriction on Franchisee transferring the rights and duties granted by the Agreement should be included. This is used to protect the Franchisor's brand.

Franchisor may wish to retain the right to buy the franchised business (where possible).

Franchisee may also be asked to pay the costs of transfer.

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Legal framework in Oman

Legal framework

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Arabic language, no official translations of laws into English

Ability to enforce trade marks through Customs and other authorities

Lack of specialist IP court

Clear infringement provisions in regional IP laws

Civil law, difficulties obtaining previous judgements

Ratification of major IP treaties

Limited availability of injunctions

Overriding Sha’ria principles

Applicable Laws Agency laws Commercial codes Companies law Civil Codes Judicial Procedural Codes Trade marks law Trade secrets/unfair competition law Employment law Other laws which regulate import of goods, labelling

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Commercial Agency Law in Oman

Commercial agency laws in Oman The Commercial Agency Law (Royal Decree No. 26 of 1977 (as amended)) in Oman covers any arrangement in which a foreign company is represented by an individual or company in Oman to “sell, promote or distribute goods and products or provide services, whether in his capacity as an agent, a representative or an intermediary in exchange for profits or commissions”.

Franchise, supply and distribution agreements are often construed as a commercial agency. The CAL provides for mandatory registration of a franchise agreement with the Ministry of Commerce and Industry.

Multiple, non exclusive franchisees can register as an agent against the same franchisor

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Registration of store franchise agreements In order for a store franchise agreement to be registered under the Commercial Agency Law, the following conditions need to be fulfilled: —the commercial agent must be an Omani National or a company majority (at least 51%) owned by Omani Nationals; —the commercial agent must be licensed by the MOCI to engage in commercial agency activities; and —the agreement must be notarised, legalised and legally translated to Arabic.

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Implications of Registration Failure to register the agreement is more likely to be a concern for the franchisee as local Courts will refuse to hear a dispute in relation to an unregistered agreement.

Fine of between 500-10,000 OMR for failure to register, closure of the franchisee’s business relating to the franchise.

The Franchisee has a right to claim compensation for termination or non-renewal unless the Franchisor can demonstrate breach by the Franchisee

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Corporate structures

Local ownership requirements Maximum percentages of ownership in the share capital of a corporate franchisee by GCC nationals and foreigners in each country:

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KSA

UAE

Oman

Bahrain

Qatar

Kuwait

% of GCC Ownership of Franchisee

100%

100%

100%

100%

100%

100%

% of Foreign Ownership of Franchisee

0%

49%

70%

49%

49%

49%

Termination

Termination Triggers Material breach by either party

Failure by Franchisee to substantially comply with its requirements (i.e. standard less than material breach)

Misrepresentation by Franchisee in its application to take the franchise Unauthorised use by Franchisee of any intellectual property

Insolvency of Franchisee

Non-permitted assignment by Franchisee

Non payment of fees

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Rights and obligations of the parties following termination Post termination obligations to consider:

Phase out period

Payments owed to the Franchisor

Cease use of intellectual property

Cease use of confidential information

Return of Materials

Non competition requirements

Franchisor's right to purchase assets etc.

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Dispute Resolution Commercial negotiations

Injunctive relief

Arbitration

Options Governing law of the Agreement

Formal Court proceedings Forum for resolving disputes

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Governing law and dispute resolution

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Foreign governing law is acceptable provided there is an arbitration clause

Courts will apply that law unless inconsistent with Islamic/Shari’ah law, public order or morals

Local law should govern agreements which need to be to registration in Oman such as IP licence agreements

Dubai International Financial Centre arbitration using LCIA rules

Enforcement of Foreign Arbitral Awards Enforcement of foreign arbitral awards under New York Convention:

All GCC countries are party to the New York Convention on foreign arbitral awards

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However, the enforcement of foreign arbitral awards has not been tested in relation to franchise disputes

Courts will enforce a foreign award only if the award does not conflict with public order, morals (including Shari'ah)

Countries that are party to the New York Convention

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IP considerations

Trade Marks What trade marks are to be licensed?

What steps has the Franchisor taken to register the trade marks in Oman?

What will be the terms of use?

The Franchisor may wish to consider entering into a separate trade mark licence with the Franchisee to protect its rights in Oman.

How will trade mark infringement be addressed?

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Registration of Trade Mark Licences

The primary purpose of registration is so that the licence may be enforced against third parties The registration of a trade mark licence is not necessary for the agreement to be enforceable between the parties

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To register a trade mark licence in GCC countries, the agreement must be signed by both parties, translated to Arabic and legalised.

Trade and corporate names 혰 Trade names are corporate, or business names registered by entities often as a legal prerequisite to carrying on business. 혰 In any given jurisdiction, the ownership and registration of identical trade marks and trade names may vest in different parties. Companies need to protect both. 혰 In Oman, the trade marks register is maintained separately to the company/trade names register within the Ministry of Commerce and Industry. No cross checking. 혰 Trade marks registered in service classes (eg retail services) are often used to challenge opportunistic trade name registrations.

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Any questions?