Franchise Agreements: A Franchisor's Perspective

Under Omani law franchise relationships fall under the ambit of the Commercial Agencies Law (the “CAL”) promulgated by Royal Decree No. 26 of 1977 (as amended). This is because the CAL states that “every agreement to which a manufacturer or supplier outside the Sultanate entrusts to one merchant or more, a commercial company or more in the Sultanate, the sale or promotion, or distribution of goods and products, or provision of services whether as an agent, or representative, or broker of the principle producer or supplier, who has no legal existence in the Sultanate,” is bound by the CAL. It should be noted that franchise agreements can be made subject to a non-Omani law, if coupled with an arbitration clause.

Registering the franchise

The CAL provides that agency contracts (which include franchise relationships) must be registered in the Register of Commercial Agencies at the Ministry of Commerce and Industry. Registration is extremely important to a franchisee because if there is a failure to register a franchise, in the event of any dispute concerning the franchise relationship, the franchise shall not be recognised by the Oman Courts and any Omani court case in relation to it will not be heard. Similarly, despite the fact Oman is a party to the New York Convention of 1958 on the Enforcement of Foreign Arbitral Awards (the “New York Convention”), if the agency is not registered, a foreign arbitral award in relation to the agreement may not be enforced in Oman.

Content of the franchise agreement

The exact content of a franchise agreement will depend on the type of franchise. Typically, a franchise agreement will include a grant of certain Intellectual Property (“IP”) rights and the protection of such IP, obligations of the parties, payment provisions, duration, and termination provisions. From the perspective of the franchisor, negotiation of exclusivity, termination and duration clauses of the agreement are especially important and are briefly discussed below.

Exclusivity

Ideally, a franchisor should include a non-exclusivity clause in the franchise agreement. This would prevent the agent (franchisee) from being the sole individual/company selling or distributing goods or providing the service of the franchisor’s business in Oman. However, the CAL provides that a foreign principal (franchisor) is prohibited from directly selling or distributing his goods or services in Oman.

Termination and duration

For the franchisor, it is recommended that provisions permitting the franchisor to terminate the agreement if the franchisee performs inadequately are contained in the agreement. This is important to the franchisor because the franchise relationship permits the third party to use its name, concept, business format and experience; the franchisor should therefore be able to protect its business by terminating the agreement in the event of any wrongdoing on the part of the franchisee.

It may also be suggested that duration of an agreement be for a fixed term. This is especially important for the franchisor. However, the CAL stipulates that where a principal refuses to renew the term of the agency contract, unless the principal can justify his refusal to renew the contract, compensation is payable to the agent. Accordingly, in the absence of being able to prove fault by the agent that justifies termination or non-renewal, there is an obligation on the principal to renew the term or to pay the agent appropriate compensation. In this regard, a franchise agreement which places significant responsibilities on the agent is beneficial to the franchisor in that there may be more likelihood of being able to prove material breach and thus terminate the franchise without paying compensation.

Enforcement of foreign arbitral awards

As mentioned above, the parties of a franchise set up in Oman are not obligated to apply the CAL. Instead, the parties are free to choose a foreign law as the governing law and such choice will be upheld by the courts of Oman if there is an arbitration clause.

Conclusion

This article has highlighted the significance of some of the clauses of a franchise agreement. When entering into a franchise relationship, the parties should decide which law is most appropriate to govern the agreement. Significantly, Oman’s CAL is very protective of the interests of Omani franchisees. For further information pertaining to franchises and specifically regarding the franchisee, please refer to our previous article entitled Franchise Agreements from May 2012.