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Franchising in Kuwait

Franchising in Kuwait

Franchising in Kuwait

Introduction

Franchising is a business relationship based on a licensing agreement between two companies. The two main forms of franchising include product distribution and business format. Product distribution franchising is whereby the franchiser sells products to the franchisee who can resell them using the franchisor’s name and trademark (Gillis & Castrogiovanni 2012, p. 75). In contrast, business format franchising involves a firm expanding its market base by providing owners or franchisees with an established enterprise including the name, trademark, and a business operating system (Gillis & Castrogiovanni 2012, p.75-76). In return, franchisees pay a fee at the start and royalties going forward.

The main reason for franchising is resource scarcity, whereby small firms expand rapidly by overcoming three scarce resources which are local market knowledge, managerial skills, and financial capital. Small companies have limited resources to establish stores.  As such, franchising allows them to expand into foreign markets without renting, buying, or building stores. Also, local business owners have a better knowledge of the market thus allowing them to perform well. Thus, companies use franchising because it allows them to benefit from the vast knowledge of the market in which franchisees operate. Lastly, franchising allows companies to benefit from the managerial skills of the local business owners. Franchisees are skilled on how to run a business and the strategies to use to achieve optimal performance since they are established in the market. As such, companies need not hire and train managers to run their businesses in new markets. The Kuwait marketplace, similar to other regions throughout the world, has distinct laws that guide franchising.

Franchising under the Kuwait Law

Kuwait is one of the countries with a high level of franchising activities. The most common franchising method practiced in Kuwait is direct franchising. In this case, the franchisor and the franchisee enter into an agreement by detailing the specific site to establish the business and the operational logistics (Walker & Walugembe 2017, para 4). However, there are cases in which a local franchisee is granted regional franchise rights that cover the Gulf C-operation Council Countries (GCC). The decision on the franchising model adopted by a company depends on its commercial needs as opposed to the requirements by the local laws. Currently, there is no definition of a franchise under the Kuwaiti law. However, since franchises are business organizations, their definition falls under commercial agency, which is defined under the Commercial Agencies Law (Walker & Walugembe 2017, para 6). As such, the requirements that pertain to commercial agencies as stipulated under the Commercial Agencies Law and the Executive Regulations apply to franchises.

How the Kuwaiti Law Regulates Franchising Agreements

Kuwait lacks a specific law to regulate franchise agreements. However, issues such as the registration of franchise agreements, distribution agreements, and agency agreements are addressed under the Executive Regulations and Commercial Agencies Law (Walker & Walugembe 2017, para 6). In addition, the Law of Commerce regulates distribution and agency agreements. However, while the Law of Commerce does not explicitly address the issue of franchise agreements, the justice system and relevant authorities in Kuwait have displayed a bias towards treating commercial agencies and franchises equally in applying this regulation (Walker & Walugembe 2017, para 7). The implication is that franchises and agents and exclusive distributors enjoy certain protections under the Law of Commerce equally such as entitlement to compensation on termination or expiration of the relationship between agencies or distributors. Also, the general laws that govern contracts in Kuwait regulate franchising which includes Civil Code and the Law of Commerce.

Requirements of the Commercial Agencies Law

The Commercial Agencies Law is the primary rule that regulates franchising in Kuwait. The law requires commercial agency agreements to include the name of the dealer or agent, the name and country of origin of the principal, the product or service that will be traded, the rights and responsibilities of the parties involved in the agreement, and the degree of the principal’s liability for the agent’s responsibilities and obligations (Walker & Walugembe 2017, para 10). In addition, the agreement should indicate the territory that the agent will operate in, the duration of the agreement between the agent and principal and the mode of renewal, and other terms that the parties involved agree on provided they do not contravene the Commercial Agencies Law (Walker & Walugembe 2017, para 10). These requirements also apply to franchise agreements. Parties can agree on the terms and conditions that will guide a franchise agreement and these are enforceable provided they do not contradict the public policy. Although the laws that apply to commercial agencies also guide franchises, it is important to consider the restrictions applicable to foreign ownership under the Kuwaiti law. The Kuwaiti law requires foreign companies within the nation to conduct their business activities through a Kuwaiti partner or agent (Walker & Walugembe 2017, para 11). There are various exceptions to the highlighted restrictions, for example, if a company acquires a license under the Foreign Direct Investment Law (Walker & Walugembe 2017, para 11). As such, a company cannot establish a franchise in Kuwait unless it uses an agent or partner or acquires a license under the stated exceptions.

Intellectual Property

Franchisees in Kuwait have non-exclusive rights to use the franchisor’s intellectual property for the sake of the business. The Kuwaiti law excludes the ownership of intellectual property by the franchisee and the right to license its use to a third party (Walker & Walugembe 2017, para 14). However, the law does not restrict the franchisor from limiting the franchisee from using confidential information and intellectual property for the franchised business and imposing restrictions on the rights granted (Walker & Walugembe 2017, para 14). Therefore, the franchisor can make decisions concerning the extent to which they want the franchisee to use the company’s intellectual property. The franchisor can decide to bar the franchisee from using its intellectual property completely.

Market Entry

Franchising is one of the market entry strategies that companies use to explore new marketplaces.  Most foreign companies enter the Kuwaiti market through franchising because the strategy reduces restrictions imposed on foreign firms by the Commercial Agency Law. The law dictates that only Kuwaiti citizens and companies can operate as commercial agents (HG.org. n.d., para 4). Foreign individuals and companies, excluding those from GCC nations, are prohibited from engaging in commercial activities except through local agents. However, there are cases in which a company may acquire a license under the foreign direct investment law and other exceptions that allow it to establish its operations in Kuwait. As such, foreign companies can enter the Kuwaiti market only by entering into franchise and agency agreements or acquiring a license to operate under the provided exceptions.

Registration

Similar to intellectual property, the Commercial Agencies Law guides the registration of a franchise agreement. The Commercial Agencies Law highlights the procedure to follow while registering an agency agreement, which also applies to a franchise agreement. According to the law, an agency agreement is enforceable if it has been registered by the Ministry of Commerce and Industry in the Commercial Agencies Register (HG.org. n.d., para 18). Also, the law stipulates that the application for registration for agency and franchise agreements should take place within the first two months of the agency or franchise creation. A franchisor and franchisee must register their agreement with the Kuwait Chamber of Commerce and Industry before they apply to the Ministry of Commerce and Industry (HG.org. n.d., para 18). Moreover, only a Kuwaiti agent can apply for the registration of an agency agreement. In franchising, this requirement dictates that only the franchisee can apply for the registration of the franchise agreement. The application for the registration of the agency agreement must be in two copies for the Ministry of Commerce and Industry. The documents that should accompany these application forms include the original copy of the agency agreement, a translation of the agency agreement into Arabic, and a copy of the agent’s (franchisee) commercial licenses (HG.org. n.d., para 18). Other accompanying documents include a certification of registration from the Kuwait Chamber of Commerce and Industry and a copy of the franchisee’s nationality document.

The Kuwaiti consulate and an official authority at the franchisor’s location must confirm the original agreement in cases whereby the franchise agreement was carried out overseas. According to the Commercial Agencies Law, the Ministry of Commerce and Industry should provide the franchise with a copy of the application and publish the registration in the official gazette upon registration of the franchise agreement (HG.org. n.d., para 19). If the parties involved in a franchise agreement seek to make amendments to the agreement, they must register the alteration. Moreover, a terminated agreement is removed from the register completely. Lastly, the Commercial Agency Law imposes specific obligations on the franchise (HG.org. n.d., para 19). The law imposes financial penalties on a franchisee that fails to perform the set obligations.

Foreign Exchange and Tax

Currently, Kuwait lacks regulation that guides foreign exchange in the nation. As such, both locals and foreigners can buy and sell foreign currencies in the country. However, while there lack laws on foreign exchange, the government regulates taxation on such businesses (RSM 2017, p.11). The existing laws require foreign companies operating in the country to pay income tax. Another significant law on taxation is the Executive Rule number 9 of Law number 2 of 2008. The law requires banks and investment companies that manage funds or portfolios to deduct 15 percent of profits and dividends from foreign companies and deposit the deductions with the tax department (RSM 2017, p.12). The deposit should take place within 30 days from the deduction date. In addition, the law includes provisions on tax retentions. The Kuwaiti law requires that contractors and subcontractors should not receive their financial payment until they settle their tax liabilities (RSM 2017, p.12). The final payment should be less than five percent of the total contract. Since franchises are practically local companies, the tax requirements that focus solely on foreign corporations do not apply to franchise agreements. Kuwait and other Gulf Cooperation Council countries, which include Saudi Arabia, Bahrain, Qatar, Oman, and the UAE, formed a Customs Union that came into effect on 1st January 2003 that eliminated customs duties among these nations (RSM 2017, p.13). As such, foreign businesses from the member countries are exempted from customs duties. Nonetheless, these requirements do not affect franchise agreements since franchises operate as local companies.

Trademark Regulations

The Trademark Law regulates company trademarks. The law indicates that the Kuwaiti legislator is responsible for regulating the protection of trademarks. Some of the issues addressed under the Trademark Law include trademark definition, registration procedures, and offenses concerning trademarks.  

Trademarks and the registration procedures

The Kuwaiti Trademark Law defines a trademark as anything that assumes a distinctive form in words, signatures, symbols, letters, seals, or other mark used to distinguish products with the aim of indicating that they belong to a particular owner in regards to manufacturing, trading, or selection (Trademark Law of 1980, p.1). The Trade Law highlights items that cannot be considered as trademarks, for example, marks that lack a distinctive character cannot be trademarked. The law indicates that there shall be a register in the Register of Trademarks upon registration whereby all marks with names shall be entered. An individual who seeks to use a particular mark to distinguish their products must apply for its registration in line with the requirements of the Trademark Law (Trademark Law of 1980, p.2). According to the law, an individual who registers a trademark is considered to be its exclusive owner. In a situation in which two or more individuals apply for the registration of similar or closely identical trademarks at a time, the Kuwaiti law requires the registrar to suspend the applications until the situation is resolved either by the involved parties agreeing on who should be assigned the trademark or the concerned authorities issue a final judgment in favor of one party (Trademark Law of 1980, p.3). Other provisions of the Kuwaiti Trademark Law concerning the registration of trademarks indicate that the Registrar has the authority to impose restrictions or modifications they consider necessary for clarifying and defining a trademark. Also, an applicant has the right to appeal the decision by the Registrar to refuse or suspend the registration of a trademark. Moreover, the Registrar should publish a registered trademark in the official gazette and hear and decide on any opposition raised against the registration.

Offenses and penalties on trademark

The Kuwaiti Trademark Law highlights the offenses that parties are likely to commit and the applicable penalties. Some of the offenses include counterfeiting lawfully registered trademarks, a company or individual using a trademark owned by another party on their product, and an individual or company selling or circulating products that bear a counterfeit mark (Trademark Law of 1980, p.8). The law provides that offenders should pay a fine not exceeding KD 600 or face imprisonment. Trademark regulation is unlikely to apply to a franchise or franchise agreements since they are carried out by established companies. Nonetheless, the trademark of the franchisor should undergo scrutiny to ensure it complies with the national regulation (Trademark Law of 1980, p.2). Trademark regulations only apply to franchisees in situations whereby they decide to use the franchisor’s trademark to sell products absent in the agreement.

Brand Protection  

Kuwait lacks a law that addresses the issue of brand protection. However, other Kuwaiti laws such as the Trademark Law addresses brand protection concerns significantly. It is noteworthy that intellectual property and trademarks are among the elements that define a brand. Other elements that define a company’s brand include the name, packaging, and quality. Nevertheless, the element protected under the law is the brand name (Trademark Law of 1980, p.2). Companies cannot use the names of other companies for their products. In Kuwait, this requirement is provided under the Trademark Law, which indicates that a name defines a company’s trademark (Trademark Law of 1980, p.2). In franchising, the franchisee can use the franchisor’s brand name. However, the challenge arises in how the franchisor protects their brand while allowing its use by the franchisee. The Commercial Agency Law addresses this problem by requiring the franchisor to draft and register a franchise agreement that details the terms and conditions of brand name usage. Therefore, the franchisor is responsible for protecting the brand name against misuse by highlighting the conditions that the franchisee should follow in the franchise agreement. The Commercial Agency Law requires the franchisee to adhere to the provisions in the franchise agreement in which case violation attracts a financial penalty.

Dispute Resolution between the Franchise Contractual Parties  

There is no legal framework that guides dispute resolution in Kuwait. However, in practice, disputes between franchise contractual parties are directed to courts or arbitration for resolution. In the court, the resolution centers on the contractual agreement made between the parties involved in the franchise. For instance, the court analyzes the issue based on the conditions provided in the agreement to determine the dispute and determine resolution options (Walker & Walugembe 2017, para 69). However, in some cases, the franchise agreement indicates the dispute resolution process and terms. In other cases, the agreement requires contracting parties to negotiate in good faith and try to resolve a dispute before resorting to the courts or arbitration. The Kuwaiti law states that in the conflict resolution process, the franchisor can choose a foreign governing law and jurisdiction (Walker & Walugembe 2017, para 69). However, the law is only enforceable if it does not contravene the Kuwaiti morality or public policy. In addition, the selection of a foreign court does not bar the Kuwaiti courts from deciding on the dispute, especially if the franchise agreement took place in Kuwait.

Comparison with GCC Countries

The laws that guide franchising in GCC countries are relatively similar. For example, other GCC nations, similar to Kuwait, lack specific laws that govern franchising (Murray 2018, para 19). The GCC countries have agency laws that allow foreign companies to enter into franchise contractual agreements. Regarding foreign exchange and tax, the currencies of GCC countries, except Kuwait, are pegged on the US dollar (Murray 2018, para 11). In addition, the states, including Kuwait, have no restrictions on the transfer and remittance of funds. The search for protected trademarks in GCC countries takes place through registered law firms and trademark agents to ensure the protection of intellectual property. Also, GCC countries use the first-to-file trademark protection system instead of the first-to-use approach that is common in the U.S. (Murray 2018, para 13). As such, a company may fail to use a trademark but it will remain protected provided it was registered first. GCC countries rely mainly on the courts to enforce laws regarding the contractual agreement between franchise parties and trademark protection. However, in the case of agreements, arbitration and mutual negotiations are encouraged. The lack of franchise-specific laws in the GCC countries implies that the governments subject franchise agreements to agency laws, which are significantly similar (Murray 2018, para 19). The similarity of the business laws among the countries is due to the agreement to conduct business together and remove barriers that prevent companies from engaging in trade within their borders.

Conclusion

Franchising is one of the strategies used by companies to enter foreign markets. The expansion strategy helps firms to overcome business barriers such as the shortage of resources, lack of market knowledge, and lack of managerial skills to operate in foreign markets. Kuwait and other GCC states lack specific laws that guide franchise agreements; however, these nations use general laws that apply to franchise agreements. For instance, in Kuwait, the Common Agency Law highlights the formulation and registration of a franchise agreement. Also, the Trademark Law ensures that a company does not use a counterfeit or another firm’s trademark in conducting business operations within the nation. However, the Trademark Law does not affect franchise agreements significantly, considering that a franchise must use the franchisor’s brand name, image, and trademark to operate. Furthermore, Kuwait lacks a specific law to guide conflict resolution between contractual parties in a franchise agreement. However, the disputing parties can negotiate in good faith, use arbitration, or resort to a court of law.

Reference List

Gillis, W & Castrogiovanni, GJ 2012, ‘The franchising business model: an entrepreneurial

growth alternative.’ International Entrepreneurship and Management Journal, 8(1), pp.75-98. Accessed from <http://seipa.edu.pl/s/p/artykuly/91/916/Franchise%20business%20%20model%202012.pdf>

HG.org. n.d., ‘The Commercial Agency Law in Kuwait.’ HG.org Legal Resources. Accessed

from <https://www.hg.org/legal-articles/the-commercial-agency-law-in-kuwait-6987>

Murray, M 2018, ‘The Franchise Law Review: GCC Overview.’ The Law Reviews. Accessed

from <https://thelawreviews.co.uk/editorial/1159193/gcc-overview>

RSM 2017, Doing business in Kuwait. Accessed from

<https://www.rsm.global/kuwait/sites/default/files/media/news/Publications/doing_business_in_kuwait.pdf>

Trademark Law: Articles 61-95 of Trade Law: Law no. 68 of 1980, Accessed from

<https://www.wipo.int/edocs/lexdocs/laws/en/kw/kw005en.pdf>

Walker, D & Walugembe, C 2017, ‘Domestic and international franchising, master franchising,

and regulation of franchise agreements in Kuwait. Overview.’ Practical Law. Accessed from <https://uk.practicallaw.thomsonreuters.com/8-631-5764?transitionType=Default&contextData=(sc.Default)&firstPage=true&comp=pluk&bhcp=1>

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