Franchise Law in Saudi Arabia

The Franchise Law in the Kingdom of Saudi Arabia consists of a set of rules that regulate franchise activities in the Kingdom. It was issued by Royal Decree on October 8, 2019, and comprises twenty-seven articles.

Franchise is defined as a right granted by a franchisor to a franchisee to run a franchise business on his own account under the trademark or under the brand name of the franchisor or the person licensed to use the same. This includes transferring technical expertise and specifying the manner of operation. Such right may be granted for a financial or non-financial consideration, excluding the amounts the franchisee pays to the franchisor in return for goods or services.

The Franchise Law aims to promote franchise activities in the Kingdom by setting a legal framework that regulates the relationship between the franchisor and the franchisee and emphasizes the principle of freedom to contract and the principle of transparency; provide the necessary protection for the franchisor and the franchisee, particularly upon expiry of the franchise agreement; ensure the disclosure of rights, duties, and risks relating to the franchise to assist a prospective franchisee in making informed investment decisions; and improve the quality of goods and services provided in the Kingdom and ensure their sustainability. The law applies to any franchise agreement executed in the Kingdom.

For the purpose of applying the law, a concession granted or issued pursuant to a Royal Decree; an agreement or contract subject to the Law of Commercial Agencies applicable in the Kingdom; and an agreement or contract limited to the sale of goods or provision of services carrying certain trademarks, or to the use of a trademark or any copyrighted material of any good or service are not deemed a franchise agreement.

An arrangement where the franchisor fully owns the franchisee, either directly or indirectly, as well as any other agreements or arrangements specified by regulations, is also not considered a franchise agreement.

Article Five of the Franchise Law specifies several conditions for granting a franchise. It stipulates that a franchise may not be offered nor granted until the franchised business, as per the franchise business model, has been practiced for a period not less than one year in at least two different points of sale or by at least two persons, one of whom may be the franchisor or any of his associates.

If a franchisor does not practice in the Kingdom the franchised business on his own account, the master franchisee, who has the right to sub-franchise, may not sub-franchise or offer the same until he or any other franchisee practices the franchised business in the Kingdom for a period not less than one year. The minister may amend the periods stipulated in this article.

The Implementing Regulations of the Franchise Law stipulate that franchise agreements and disclosure documents must be registered with the ministry. The regulations specify the registration procedures and the required documents and information. The franchisor must provide the franchisee with a copy of the disclosure document, as prescribed by the regulations, at least fourteen days prior to concluding the franchise agreement or from the date of any payment made by the franchisee in relation to the franchise, whichever occurs first.

A disclosure document must be drafted in Arabic. If drafted in another language, a certified Arabic translation must be provided. It must also be clear and precise. If the franchisor submits to a prospective franchisee any information relating to the previous or projected financial performance of a franchised business owned by him or by any of his associates, the franchisor must include such information in the disclosure document, ensuring that the information meets the requirements and provisions prescribed by the regulations.

According to Article Eight of the Franchise Law, and unless otherwise agreed in writing with the franchisee, the franchisor determines the rights granted to the franchisee with respect to the franchise, and specifies the franchise business model in detail, including the criteria and instructions the franchisee must follow in order to operate and manage the franchised business, as well as provide the franchisee with operation manuals.

The law requires the franchisor to train the franchisee’s personnel, provide technical and marketing expertise and any other expertise required by the nature of the granted franchise, and provide the franchisee, whether directly or through a third party, with the franchise goods or services during the validity of the franchise agreement, except for goods and services the franchisee is permitted to purchase from a third party.

The law also emphasizes that the franchisor maintains the confidentiality of the accounting and financial information and data relating to the franchisee's business, provides the franchisee, upon request, with details on amounts paid or to be paid with respect to operating the franchised business; and refrain from establishing any establishment that engages in a business activity similar to that of the franchisee within the geographical area defined in the franchise agreement, or granting a third party the right to do the same, during the validity of the franchise agreement.

Article Nine of the law stipulates that, unless otherwise agreed in writing with the franchisor, the franchisee obtains the franchisor’s approval prior to any change in the goods, services, or manner of operating the franchised business; provides the franchisor with the franchised business data necessary for developing the franchise business model, including financial and accounting data; enables the franchisor or his representatives to inspect the facilities used for operating the franchised business, provided that such inspection does not result in disruption or harm to the business; and obtain the franchisor’s approval prior to changing the place of operating the franchised business.

The Franchise Law stipulates that a franchise agreement be drafted in Arabic and signed by the parties. If drafted in another language, a certified Arabic translation must provided. In addition to the provisions agreed upon by the parties, a franchise agreement must include the franchised business and its description, as well as the franchise agreement’s term, manner of amendment, and geographical scope.

The franchise agreement must also include amounts to be paid by the franchisee to the franchisor, including the initial franchise fee, the expenses for the franchisee’s personnel training, if any, and the technical support, as well as the method for calculating payments made by the franchisee to the franchisor or any of the franchisor’s associates in return for goods or services.

The parties abide by the training of the franchisee’s personnel by the franchisor. The franchisor abides by providing the franchisee with the technical and marketing expertise, and any other expertise required by the nature of the granted franchise. The franchisee complies with the instructions and marketing and display methods, and to preserve the identity of the franchise.

The franchise agreement must include the franchisor's obligations relating to the provision of goods or services to the franchisee, as well as the franchisee’s obligations relating to the receipt of such goods or services from the franchisor, directly or through a third party, in accordance with the franchisor’s instructions.

The regulations stipulate the franchisee’s right to use any trademark or any other intellectual property right relating to the franchised business, as well as the liabilities of the parties in case of infringement of intellectual property rights and damages arising therefrom, as well as the manner of resolving any dispute arising from the franchise agreement. The provisions relating to the advertising and marketing of a franchise are determined by the regulations.

As per Article Thirteen of the Franchise Law, unless otherwise provided for in the franchise agreement, the franchisor’s approval must be obtained prior to changing the person controlling the franchisee or assigning the franchise agreement. If the franchisor grants his approval, he may not revoke it nor object to the change or assignment, except in the following cases:

If the assignee is unlikely to have sufficient funds to carry out the obligations borne by the franchisee under the franchise agreement. If the assignee is unable to meet the franchisor’s reasonable requirements with respect to the assignment of the franchise agreement and franchised business. If the assignee fails to meet the franchisor’s criteria for the selection of franchisees. If the assignee does not agree, in writing, to bear the franchisee’s obligations under the franchise agreement from the date of its assignment. If the franchisee does not pay the franchisor any due amounts. Any other case specified by the regulations.

Article Fifteen of the Franchise Law stipulates that unless otherwise provided for in the franchise agreement, a franchisee seeking to renew or extend the franchise agreement notifies the franchisor in writing within a period not less than 180 days prior to its expiration. The franchise agreement may be renewed or extended for a term similar to the term originally agreed upon and under the same terms and conditions, except in the following cases:

If the franchisor and franchisee agree on new terms and conditions; if any of the cases provided in Article Eighteen of this law occurs; if the franchisee fails to pay amounts due under the franchise agreement; if, prior to the expiry of the agreement, the franchisor approves the franchisee's assignment of the franchise agreement and franchised business to a third party who fulfills the franchisor’s criteria for granting the franchise; if the franchisor ceases to engage in franchising or in granting franchises in the Kingdom; if the franchisee does not conclude the franchise renewal or extension agreement prior to the sixty days preceding the expiration of the franchise agreement despite the franchisor’s reasonable requirements.

Article Eighteen of the Franchise Law stipulates that the franchisor may not terminate the franchise agreement prior to its expiration without the franchisee’s written approval, unless the termination has a valid reason. Any of the following cases are valid reasons for termination:

If the franchisee fails to fulfill his fundamental obligations under the franchise agreement and does not rectify the situation within a period not exceeding fourteen days from the date of the franchisor’s written notice; and if the franchisee is liquidated or dissolved, or if he assigns the franchised business or its usufruct to his creditors, or disposes of the assets of the franchised business for the benefit of a third party.

Other cases include: If the franchisee abandons or voluntarily discontinues to operate the franchised business for more than ninety consecutive days; if the franchisee repeatedly fails to abide by the terms and conditions of the franchise agreement or any other franchise-related agreement concluded with the franchisor or franchisor’s associates despite being notified in writing by the franchisor to fulfill his obligations; if the franchisee's operation of the franchised business poses a threat to public health and safety; if the franchisee loses any of the licenses necessary for operating the franchised business; if the franchisee commits a substantial violation of any of the laws in force in the Kingdom which undermines the reputation of the franchised business; if the franchisee commits a fraudulent act while operating the franchised business; if the franchisee infringes upon the franchisor's intellectual property rights during the validity of the franchise agreement; and any other case the franchise agreement deems a valid reason for termination.

Under Article Nineteen, if the franchisor substantially breaches the disclosure or registry obligation stipulated in the law and its regulations, the franchisee may claim damages for such breach without terminating the franchise agreement.

Any agreement by which the franchisee waives or relinquishes any of the rights he is entitled to under the law is deemed null and void, unless such agreement is part of a final settlement with the franchisor or is authorized under the law.