Overview: Franchising 2020

Franchising 2020

1. Is there a specific law governing franchise relationships in this jurisdiction?

The primary pieces of legislation with regard to franchise arrangements in Bahrain are the Commercial Agency Law, Bahrain Law No. 10/1992, as amended (the Agency Law) and its Implementing Regulation, Bahrain Regulation No. 2/1993 (the Implementing Regulations).

2. Are there other laws which can be relevant to a franchising in Bahrain?

Certain provisions under the Bahrain Law of Commerce, Bahrain Decree-Law No. 7/1987 as amended (the Law of Commerce) and the Civil Code, Bahrain Decree-Law No. 19/2001 (the Civil Code) also govern a Bahraini franchising relationship significantly.

3. Is there a specific legal definition of what constitutes a franchise in Bahrain?

While Bahraini law has never issued a categorical definition of a franchise, Chapter 2 of Bahrain Law No. 10/1992 regarding the Regulation of the Commercial Agency Agreement delineates the legalities underlying a Bahraini franchise, its registration and functioning.

4. Are franchise agreements required to be registered in Bahrain - and if so which agency is responsible for their registration and regulation?

Article 13 of Bahrain Law No. 10/1992 states in no uncertain terms it does not recognise an unregistered agency and no suit may be instituted in respect thereof. The Commercial Agency Law and the Implementing Regulations therefore apply solely to locally registered distributorship or agency agreements. Under Article 13, the franchise agreement should be registered with the Industry, Commerce and Tourism Ministry (MOICT).

However, while failure to register would bar any action under the Commercial Agency Law, this does not mean the action itself is barred. A claim can be made in general terms for contracts which fall under the Civil Code and to a certain extent, the Law of Commerce.

5. Are franchise agreements required to be exclusive within the Kingdom of Bahrain - and if so are there any particular considerations around product or area of exclusivity?

Unlike other similar jurisdictions, Bahrain does not require exclusivity for commercial agency agreements.

6. Are there any particular aspects around the regulation of franchise agreements in Bahrain which would surprise those new to the jurisdiction?

N/A.

7. Are there any restrictions on who can be a franchisee in Bahrain?

To be eligible for registration in the Commercial Agency Directorate of the MOICT and so have a dealer agreement registered as a commercial agency, the Bahrain territory dealer must be a registered entity in Bahrain possessing the necessary features required by law, including a minimum of 51% ownership by a Bahraini.

8. What steps are needed to register a franchise agreement in Bahrain?

Under Article 17 of Bahrain Law No. 10/1992, the registration and renewal application must be submitted in the prescribed form prepared by the relevant department at the Commerce Ministry. The application should be submitted with the identification documents.

On submission, under Article 18 of Bahrain Law No. 10/1992 the relevant department at the Commerce Ministry will come to a decision with regards to the application for registration or renewal within thirty days of the application date. They will then provide the agent, at their request, with a signed certificate evidencing registration or renewal in the Register.

It is critical to note the directorate is well within its rights to reject the application for registration or renewal, stating the

grounds for rejection. It will notify the relevant party with a copy of the rejection decision by registered mail. The relevant party may appeal the decision to the Commerce Minister within 30 days from the date of publication of the decision in the Official Gazette, or the date of notification of it to the relevant party. Finally, the decision with regard to the appeal will be made within 30 days of the date of submission of the appeal.

Article 16 says the franchise registration is to be renewed within two months from the end of the first two years of its registration, or the last renewal date of the agency.

9. What conditions are required for a franchisor to terminate a franchise agreement in Bahrain?

The franchise relationship will terminate on the expiry of the prescribed period, unless renewed by the agreement of the two parties. The relevant department at the Commerce Ministry may, in the event of disagreement on renewal, cancel the registration of the agency. It can also re register it in the name of another merchant who the franchisor makes an agreement with. Where the franchisor wants to terminate the franchise relationship before the expiry of the fixed period, the consent of the franchisee must be obtained before the registration of the agency is cancelled, or re registered in another name. The franchisee will be entitled to claim compensation from the franchisor in the event of agreement termination before the expiry of the contractually-established period.

Article 8 of Bahrain Law No. 10/1992 states the franchisee will, despite any agreement to the contrary, be entitled to claim compensation from the franchisor in the event of termination of the franchise relationship before the expiry of the fixed period, if the efforts exerted by the franchisee led to evident success in the promotion of the franchisor's products, or to the expansion of its customer base. They will be eligible for compensation if, on account of the franchisor's refusal to renew the agency agreement, the franchisee was unable to receive the commission they had earned.

10. What conditions are required for a franchisee to terminate a franchise agreement in Bahrain?

A franchisee in a franchise agreement made for an indefinite period may not withdraw untimely or without reasonable cause from the agency. If they do, they will have potentially have to compensate the franchisor for the damage resulting from the withdrawal.

Under Article 24 of Bahrain Law No. 10/1992, the franchisee or their legal representative will, on the repudiation of the franchise agreement or the expiry of it, apply to the relevant department at the Commerce Ministry for the termination of the agreement. The application must be submitted within one month of the date of repudiation or expiry and must be accompanied by supporting documents.

11. Under what conditions (if any) can a sub-franchise be set up?

N/A.

12. Are there specific duties for the franchisor?

N/A.

13. Are there specific duties for the franchisee?

N/A.

14. Which form of business entity do franchisee's generally adopt in this jurisdiction?

The most commonly used business vehicles franchisees employ in Bahrain are the closed joint stock company (CJSC) and limited liability company, which is known as a WLL in Bahrain but is synonymous with an LLC. This is because of their flexible corporate structures.

Foreign companies have absolute leeway to set up a branch, agency or offices, without being subject to the same provisions which are required for the formation of companies. Shelf companies may also be established and while it may be sold, its activities need approval from the Ministry.

15. Are there specific steps the franchisor would need to take to protect their trademark and other IP rights?

Under Article 3(e) of Bahrain Law No. 10/1992, the trade names and trademarks of the products subject to the agency must be specified.

Bahrain is one of only a handful of countries in the MENA region in which it is possible to file a trademark either directly at a national level or internationally through WIPO via the Madrid Protocol. Trade mark registrations are obtained through the Trade Mark Office at the Industrial Property Office, which forms part of the Trade and Industry Ministry.

Applications which are accepted by the Registrar are published in the Official Gazette for opposition purposes for 60 days. During this time, any interested party may file an opposition. If no opposition is filed, then the application will proceed to registration and a registration certificate will be issued.

16. Can franchises be sold on? And if so under what conditions?

In the event of the sale of the company or establishment through which the franchise operations are conducted, the franchise agreement will continue to be valid towards the franchisor provided the purchaser, or the merging company or establishment agree to the continuation of the franchise agreement. The purchasing individual or establishment will be liable for all the obligations of the previous franchisee. The liability will include, towards the purchaser, seller, merging and merged companies or establishments, all obligations provided for by Article 22 of Bahrain Law No. 10/1992.

Article 22 states the agent to who the franchise is transferred, in the event of a sale, will purchase all the stocks of goods covered by the agency from the previous franchisee for the market price, in addition to 5% of the price unless the parties agree otherwise. The new franchisee and the franchisor will be jointly responsible for all the obligations of the previous franchisee towards a third party. This liability will be limited to the market value of the goods or services, if the liability was originally outlined for goods or services.

In the event the principal company or corporation are sold or they merge with another company or corporation and they refuse to continue to be bound by the agency agreement, the agent will be entitled to claim compensation from the purchasing or merging company or from the new agent, if any, for any damage resulting from the discontinuation of the agency, subject to the provision of Article 22 of Bahrain Law No. 10/1992.