Can a Franchise Agreement Choose Foreign Law and Courts? Understanding Cross-Border Franchise Disputes

Cross-border franchise agreements can give parties significant freedom to choose the law and forum governing their relationship, but mandatory local laws, jurisdictional rules and enforcement requirements can still shape how a dispute is ultimately resolved.

 

International franchising often involves parties, assets and obligations spread across several jurisdictions. A franchisor may be incorporated in the United States or Europe, the franchisee may operate through a company in the UAE, and the franchise business itself may involve premises, employees, customers, intellectual property and suppliers in the local market. When a dispute arises, the question is not simply which party is right. It is also where the dispute should be heard, which law should apply and whether the eventual judgment or arbitral award can be enforced.

 

These issues are usually addressed through the franchise agreement's governing law, jurisdiction and dispute-resolution clauses. Parties may agree to apply the law of one country while submitting disputes to courts in another, or they may choose arbitration seated in a third jurisdiction. Such arrangements can provide certainty, but they do not necessarily remove the application of mandatory rules in the country where the franchise operates.

 

For UAE-based franchise arrangements, this distinction is particularly important. A carefully drafted clause can reduce uncertainty, but it cannot automatically prevent local courts or regulators from applying mandatory UAE provisions where those rules are relevant.

 

Governing Law and Court Jurisdiction are Different

 

One of the most common misconceptions in cross-border contracts is that the governing law clause automatically determines where a dispute will be heard. It does not.

 

A governing law clause answers the question: which country's substantive law should be used to interpret the agreement and determine the parties' contractual rights and obligations?

 

A jurisdiction clause addresses a different question: which court or courts have authority to hear the dispute?

 

For example, a franchise agreement could provide that it is governed by English law but that disputes must be brought before the courts of Dubai. Alternatively, the parties could choose English law and the courts of England and Wales. They could also select English law but agree that disputes will be resolved through arbitration seated in Paris or Dubai.

 

The commercial consequences of these choices can be significant. A court applying foreign law may require evidence or expert testimony about that law. A foreign judgment may then have to go through an enforcement process in the country where the losing party or its assets are located.

 

For that reason, choosing a governing law and choosing a dispute forum should be treated as two separate but connected decisions.

 

Can UAE Franchise Parties Choose Foreign Law?

 

In principle, commercial parties can agree to the application of foreign law in their contractual relationship. However, that does not mean that every aspect of a franchise operation in the UAE can be removed from the reach of UAE law.

 

A franchise agreement may contain provisions governed by the law chosen by the parties, particularly on matters such as contractual interpretation, payment obligations, breach, indemnities and termination. But mandatory rules of the jurisdiction where the business operates may still become relevant.

 

This is particularly important where the dispute concerns matters regulated by local legislation or public policy. Questions involving employment, licensing, consumer protection, intellectual property registration, competition, commercial agency arrangements, data protection, tax or other regulated activities may involve rules that cannot simply be displaced by a contractual choice of foreign law.

 

The practical lesson for franchisors and franchisees is that a foreign governing law clause should not be viewed as a substitute for local legal compliance. A franchisee operating in the UAE still needs to assess the legal requirements applicable to its business in the emirate and sector in which it operates.

 

Choosing Foreign Courts Can Create Practical Problems

 

The parties may agree that disputes will be heard by courts outside the UAE, but agreeing to a foreign court is only one part of the dispute-resolution strategy.

 

Suppose a UAE franchisee signs an agreement with a foreign franchisor and agrees that disputes must be heard exclusively by courts in the franchisor's home country. If the franchisee later loses a case there and the franchisor seeks to recover money from assets located in the UAE, the foreign judgment may need to be recognised and enforced in the UAE. That can create an additional procedural stage.

 

The UAE has rules governing the recognition and enforcement of foreign judgments and orders. Consequently, the enforceability of the judgment in the jurisdiction where assets are located should be considered when the contract is negotiated, rather than only after litigation has begun.

 

This is one reason businesses often pay as much attention to enforcement as they do to the initial choice of court. A judgment is commercially useful only if it can ultimately be converted into recovery.

 

Why Arbitration is Often Considered

 

For international franchise arrangements, arbitration can offer an alternative to national courts. Arbitration allows the parties to specify the institution or rules governing the proceedings, the seat of arbitration, the language and, in many cases, the number and qualifications of arbitrators.

 

The UAE's Federal Law No. 6 of 2018 on Arbitration provides the principal federal framework for arbitration in the UAE. The law recognises the binding nature of arbitral awards, while requiring court confirmation for enforcement in the UAE.

 

The choice of the seat of arbitration is particularly important. The seat is not merely the physical location where hearings take place. It determines the legal framework supervising the arbitration and can affect challenges to the award and the courts that have supervisory authority.

 

Parties can therefore have hearings in one country while choosing another country as the legal seat. The distinction should be expressly addressed in the franchise agreement to avoid later arguments over the arbitration's legal framework.

 

The Arbitration Clause Needs More Than One Sentence

 

A poorly drafted arbitration clause can create almost as much uncertainty as having no dispute-resolution clause at all.

 

A franchise agreement should ideally identify the arbitration institution or rules, the seat, the language, the number of arbitrators and the scope of disputes covered. It should also be clear whether the arbitration clause applies to disputes concerning termination, intellectual property, unpaid royalties, post-termination restrictions and other obligations arising from the franchise relationship.

 

Parties should also consider whether urgent interim relief may be required. A franchisor dealing with alleged misuse of trademarks or confidential business information may need urgent measures before the final dispute is determined. The agreement should be structured with these possibilities in mind.

 

The UAE arbitration framework also provides grounds on which an arbitral award can be challenged or set aside, including circumstances involving the arbitration agreement itself.

 

Enforcement is the Real Test

 

The most carefully drafted dispute-resolution clause cannot guarantee a commercially successful outcome if enforcement has not been considered.

 

A franchise dispute can involve several categories of assets. The franchisor may have trademarks, bank accounts or other assets in its home jurisdiction, while the franchisee's principal assets, inventory, premises and bank accounts may be in the UAE.

 

Before selecting a court or arbitral seat, both parties should therefore consider where the likely assets are located and how an eventual judgment or award would be enforced there.

 

Arbitration can be attractive in international transactions because arbitral awards may benefit from international enforcement mechanisms. The UAE is a party to the New York Convention, which provides a widely used framework for recognition and enforcement of foreign arbitral awards.

 

That does not mean enforcement is automatic. The enforcing court will still examine the applicable legal requirements and any grounds for refusing recognition or enforcement. The arbitration agreement must therefore be drafted carefully and the proceedings conducted in a manner that protects the award from later challenge.

 

Mandatory Local Laws Can Still Matter

 

A foreign governing law clause does not create a legal vacuum around the franchise business. For example, a franchise agreement governed by the law of another country may still involve UAE rules concerning the operation of the franchise, employment of local staff, commercial licences, intellectual property registration, consumer dealings and other activities carried out within the UAE.

 

The same principle applies to contractual provisions that attempt to restrict the ability of a party to seek relief from local courts where mandatory jurisdictional rules apply.

 

This is why a cross-border franchise agreement should be reviewed from two perspectives: the law chosen by the parties and the mandatory rules of the country where the franchise operates.

 

Termination Disputes Require Particular Care

 

Termination is often the most contentious stage of a franchise relationship. A franchisor may claim that the franchisee has failed to pay royalties, breached brand standards or misused intellectual property. The franchisee may argue that the franchisor failed to provide support, wrongfully terminated the agreement or breached exclusivity obligations.

 

The dispute-resolution clause can determine where these issues are litigated or arbitrated, but the consequences of termination may extend beyond the contract itself.

 

A dispute may involve the continued use of trademarks, possession of premises, employees, customer databases, inventory, confidential information and outstanding payments. Some of these matters may require action in the country where the business is physically located even if the principal contractual dispute is being determined elsewhere.

 

The agreement should therefore anticipate the possibility of parallel legal issues rather than assuming that a single foreign court or arbitral tribunal will resolve every practical consequence of termination.

 

What Franchisors and Franchisees Should Check

 

Before signing a cross-border franchise agreement, both sides should examine the dispute-resolution provisions alongside the commercial terms.

 

They should establish whether the governing law is appropriate for the transaction, whether the jurisdiction clause is exclusive or non-exclusive, and whether the chosen court is likely to accept jurisdiction. If arbitration is selected, the parties should identify the seat, rules, institution and language and understand how an award would be enforced where the counterparty's assets are located.

 

The parties should also identify provisions that may be subject to mandatory local law. A UAE franchisee, for example, should not assume that selecting foreign law means UAE regulatory requirements can be disregarded.

 

It is equally important to examine the agreement's termination, intellectual property, confidentiality, payment, indemnity and post-termination provisions together with the dispute-resolution clause. A dispute rarely concerns only one clause of a franchise agreement.

 

Drafting for the Dispute You Hope Never Happens

 

Cross-border franchise agreements are often negotiated with the expectation that the relationship will remain commercially successful. The governing law and dispute-resolution provisions may receive less attention than royalties, territory or marketing obligations. That approach can prove costly when the relationship breaks down.

 

The better approach is to treat dispute resolution as part of the commercial architecture of the franchise from the outset. The parties should decide not only which law they want to govern their contract, but also which forum is most practical, where evidence and witnesses are likely to be located, where assets may be found and how an eventual decision will be enforced.

 

For UAE franchise businesses, the central question is therefore not simply whether a contract can choose foreign law and foreign courts. It is whether that choice will produce a predictable and enforceable result when a dispute crosses borders.

 

A well-drafted agreement should make those consequences clear before the parties sign. Once a dispute has started, changing an inconvenient choice of law or forum can be considerably more difficult.

 

Dr. Sunil Ambalavellil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. A seasoned legal adviser, he has advised and supported the international growth of numerous global brands, helping them navigate the legal complexities of cross-border expansion.
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