In light of Vision 2030, the Kingdom seeks to become an international investment powerhouse by stimulating the Saudi economy, diversifying income sources, and enhancing the investment and business environment in the Kingdom (1). Franchise agreements, or commercial concessions, are considered among the most important tools for business expansion in the Kingdom, as they allow companies to transfer their successful business model to other entities in exchange for fees or a percentage of profits.
These agreements play a significant role in economic development and the promotion of entrepreneurship. In this regard, the Franchise System was issued by Royal Decree No. M/22 dated 9/2/1441 H, to encourage franchise activities in the Kingdom by establishing a regulatory framework governing the relationship between the franchisee and the franchisor, while upholding the principle of freedom of contract, establishing foundations for this relationship based on the principle of transparency, providing necessary protection for the franchisee and franchisor, particularly upon the termination of the franchise agreement, ensuring disclosure of the rights, obligations, and risks associated with franchise opportunities to assist potential franchisees in making sound investment decisions, and finally, to elevate the quality of goods and services offered in the Kingdom and ensure their continuity (2).
Definition of Franchise Agreements (Commercial Concessions):
A franchise or commercial concession is a contractual system in commercial relations whereby a person referred to as the franchisor grants the right to another person referred to as the franchisee to conduct the business – the subject of the franchise – for its own account, in connection with the trademark or trade name owned by the franchisor or licensed for its use, including providing technical expertise and know-how to the franchisee and stipulating the method of operating the franchise business, in return for a financial or non-financial consideration, excluding amounts paid by the franchisee to the franchisor for goods or services (3).
The franchise agreement (commercial concession) is concluded between the franchisor, a natural or legal person who grants the franchise, including the master franchisee in relation to its relationship with the sub-franchisee (4), and the franchisee, a natural or legal person who is granted the franchise pursuant to the agreement, including the sub-franchisee in relation to its relationship with the master franchisee (5).
The Legislator has excluded certain agreements and contracts from the scope of franchise agreements (commercial concessions) due to their specific nature or their regulation under other systems, namely the following agreements and contracts:
- Concessions granted or issued by virtue of Royal Decrees.
- Agreements or contracts subject to the Commercial Agencies System in the Kingdom.
- Agreements or contracts limited to the purchase and sale of goods, or the provision of services bearing a specific trademark, or the use of a trademark or any other intellectual property rights for any good or service.
- Arrangements whereby the franchisee is wholly owned, directly or indirectly, by the franchisor.
- Any other agreements or arrangements specified by the Regulations (6).
The Executive Regulations of the Franchise System have added the following agreements and contracts:
- Agreements or arrangements concluded by the franchisor with the franchisee regarding the implementation of the franchise agreement, including the following: agreements or arrangements concluded between a lessor and a lessee, between a lessee and a sub-lessee, agreements or arrangements concluded between partners or shareholders, loan agreements or arrangements concluded between creditors and debtors, and finally, agreements or arrangements concluded between an employer and an employee regarding their employment relationship.
- Agreements or arrangements whereby a non-profit entity purchases goods for its affiliates, provides them with services, or assists them in purchasing goods or benefiting from services.
- Licenses or permits granted by a government entity (7).
Regulations Governing Franchise Agreements (Commercial Concessions) in the Kingdom:
The Franchise System stipulates several conditions and controls that must be adhered to in franchise agreements concluded in the Kingdom, namely:
- The franchise agreement must be written in Arabic and signed by both parties. If drafted in a language other than Arabic, it must be translated into Arabic by a certified translation.
- The franchise agreement must include – in addition to what is agreed upon by the parties – the following:
a. The franchise business and its description, the term of the franchise agreement, the method of its amendment, and its geographical scope. - Any consideration payable by the franchisee to the franchisor, including the financial consideration for the franchise, the financial consideration for training the franchisee’s employees (if any), technical support, and the mechanism for calculating any amount paid as consideration for goods or services provided to the franchisee by the franchisor or any person within its group.
- The obligations of both parties regarding the training of the franchisee’s employees by the franchisor.
- The obligation of the franchisor to provide technical, marketing, and other expertise required by the nature of the granted franchise.
- The obligation of the franchisee to adhere to instructions, methods of marketing and presentation, and to maintain the identity of the franchise.
- Any obligation on the franchisor related to supplying any goods or services to the franchisee, and the obligation of the franchisee regarding obtaining such goods or services directly from the franchisor or through another party based on the instructions of the franchisor.
- The rights of the franchisee to use any trademark and any other intellectual property rights related to the franchise business, and the obligations of both parties in case of infringement of intellectual property rights and the resulting compensations.
- The mechanism for settling any dispute related to the franchise agreement.
- The entitlement of the franchisee to grant a sub-franchise to a third party, and the provisions thereof.
- The consequences of any change in the ownership of the franchisee or the franchisor or the person controlling either of them.
- Any other clause specified by the Regulations (8).
The Legislator has also mandated the registration of the franchise agreement and its disclosure via the Disclosure Document (9), which is a document containing the disclosure of the most prominent rights, obligations, and material risks associated with the franchise opportunities (10). This is to be done with the Ministry of Commerce and Investment.
Obligations of the Franchisor and the Franchisee
The Franchisor shall be obligated – unless otherwise agreed in writing with the Franchisee – to the following:
- Define the rights granted to the Franchisee concerning the Franchise.
- Specify the Franchise business model in detail, including stating the standards and issuing instructions that the Franchisee must adhere to when operating the Franchise business, enabling the Franchisee to operate said business, and providing the Franchisee with operating manuals.
- Train the employees of the Franchisee.
- Provide the technical, marketing, and other expertise required by the nature of the granted Franchise.
- Supply the Franchisee – whether directly or through another party – with the goods or services specific to the Franchise throughout the term of the Franchise Agreement, except for those goods and services which the Franchisee is permitted to purchase from third parties.
- Maintain the confidentiality of information and accounting and financial data related to the Franchisee’s business.
- Respond to the Franchisee’s request to provide details of the financial consideration due from or paid by the Franchisee concerning the operation of the Franchise business.
- Refrain from establishing any facility that engages in an activity similar to that of the Franchisee within the geographical area specified in the Franchise Agreement, or from granting the right to a third party to do so, during the term of the Agreement (11).
The Franchisee shall be obligated – unless otherwise agreed in writing with the Franchisor – to the following:
- Obtain the Franchisor’s approval for any change in the goods or services or the method of operating the Franchise business.
- Provide the Franchisor with data related to the Franchise business that enables the Franchisor to develop the Franchise business model, including financial and accounting data related to said business.
- Enable the Franchisor or its representatives to inspect the facilities used in operating the Franchise business, provided that this does not disrupt the Franchisee’s business or cause harm to it.
- Obtain the Franchisor’s approval when changing the location of the Franchise business operations (12).
Termination and Expiry of the Franchise Agreement
- Bankruptcy, Death, and Loss of Capacity:
The Franchise Agreement shall expire upon the commencement of liquidation proceedings against the Franchisee (if a natural person) pursuant to the Bankruptcy Law, or upon their death, loss of legal capacity, or the emergence of a health impediment preventing them from operating the Franchise business. If the Franchisee is a legal person, the Franchise Agreement shall expire upon the issuance of a resolution for its voluntary liquidation or the opening of any liquidation proceedings against it pursuant to the Bankruptcy Law or upon its dissolution. The conversion or merger of the Franchisee into another legal person shall not cause the Agreement to expire (13), unless the Agreement stipulates that merger is not permitted.
- Franchisor’s Breach of Disclosure and Registration Obligations:
In the event of a material breach by the Franchisor of the disclosure or registration obligations stipulated in the Franchise System and its Implementing Regulations, the Franchisee has the right, before the expiry of one year from the date of becoming aware of the breach or before the expiry of three years from the date the breach occurred, whichever is earlier, to terminate the Franchise Agreement – by providing written notice to the Franchisor – without compensating the Franchisor for such termination (14).
- Termination of the Franchise Agreement for a Legitimate Cause:
The Legislator has exclusively enumerated some legitimate causes for which the Franchisor may terminate the Franchise Agreement before the expiry of its term without the written consent of the Franchisee, namely:
- If the Franchisee breaches its material obligations under the Franchise Agreement and fails to remedy the breach within a period not exceeding (fourteen) days from the date the Franchisor serves a written notice to that effect.
- If the Franchisee is liquidated or dissolved, or assigns the Franchise business or its benefits to its creditors, or disposes of the assets related to the Franchise business to a third party.
- If the Franchisee voluntarily abandons or ceases to operate the Franchise business for a period exceeding (ninety) consecutive days.
- If the Franchisee repeatedly fails to comply with the provisions of the Franchise Agreement or any other agreement concluded with the Franchisor or a person within its group concerning the Franchise, despite the Franchisor having notified it in writing to perform its obligations.
- If the Franchisee’s operation of the Franchise business poses a risk to public health and safety.
- If the Franchisee loses any of the licenses necessary to operate its business.
- If the Franchisee commits material violations of any applicable regulations in the Kingdom that negatively affect the reputation of the Franchise business.
- If the Franchisee commits an act of commercial fraud while operating the Franchise business.
- If the Franchisee infringes upon the intellectual property rights of the Franchisor during the term of the Franchise Agreement.
- Any other case stipulated in the Franchise Agreement as constituting a legitimate cause for termination (15).
How does the Saudi Franchise System define a franchise or commercial concession?
According to the Saudi Franchise System, a franchise or commercial concession is defined as a contractual system in commercial relations where a franchisor grants a franchisee the right to conduct a specific business for their own account.
This definition includes several key components:
- Brand Connection: The business must be connected to a trademark or trade name owned by or licensed to the franchisor.
- Operational Support: The franchisor must provide technical expertise and know-how and stipulate the specific method of operating the franchise business.
- Consideration: The rights are granted in return for a financial or non-financial consideration. However, this does not include standard amounts paid by the franchisee to the franchisor for goods or services.
The parties to this agreement can be natural or legal persons. The system also clarifies that master franchisees act as franchisors in relation to sub-franchisees.
It is important to note that the law specifically excludes certain arrangements from this definition, such as:
- Agreements subject to the Commercial Agencies System.
- Contracts limited strictly to the purchase and sale of goods or the use of a trademark without the broader operational system.
- Arrangements where the franchisee is wholly owned by the franchisor.
- Specific agreements related to employment, leases, or loans between the parties
What specific mandatory clauses must be included in every franchise agreement regarding the business description, term, and geographical scope?
According to the sources, the Saudi Franchise System mandates that every franchise agreement must include several specific clauses to be valid. Regarding the specific areas you mentioned, the agreement must include:
- Business Description: A clear definition and description of the franchise business itself.
- Term: The duration or term of the franchise agreement.
- Geographical Scope: The specific geographical area where the franchise rights are granted.
In addition to these, the law requires the agreement to specify the method for amending the contract. It must also be written in Arabic; if it is originally drafted in another language, it must be accompanied by a certified Arabic translation.
Beyond these structural details, the agreement must also cover several operational and financial areas, including:
- Financial Terms: All payable considerations, such as franchise fees, training costs, and technical support fees, along with the mechanism for calculating costs for goods or services.
- Obligations: Specifics regarding training for the franchisee’s employees and the franchisor’s obligation to provide technical and marketing expertise.
- Intellectual Property: The franchisee’s rights to use trademarks and how both parties will handle potential IP infringements.
- Conflict Resolution: A defined mechanism for settling any disputes that may arise from the agreement.
- Operational Control: Provisions regarding the right to sub-franchise and the legal consequences of any change in ownership for either party.
The agreement and its accompanying Disclosure Document must be registered with the Ministry of Commerce and Investment.
Overview of Franchise Agreements in the Kingdom of Saudi Arabia
The text outlines the regulatory framework governing franchise agreements in Saudi Arabia, an initiative designed to bolster the national economy under Vision 2030. These regulations, established by Royal Decree No. M/22, define the legal relationship between franchisors and franchisees while ensuring transparency through mandatory disclosure documents and formal registration. The system details specific contractual requirements, such as language standards and operational obligations, to protect both parties and maintain service quality. Additionally, the text clarifies exceptions to the law and identifies legal grounds for terminating or expiring an agreement, such as bankruptcy or material breaches of contract. Ultimately, this legal structure aims to foster a secure investment environment by standardizing how commercial concessions are granted and managed within the Kingdom.
Sources:
- Executive Summary of the Updated Investment System for the year 1446H corresponding to 2024, published on the official website of the Saudi Ministry of Investment.
- Article 2 of the Franchise System issued by Royal Decree No. M/22 dated 9/2/1441H.
- Paragraph 5 of Article 1 of the Franchise System.
- Paragraph 6 of Article 1 of the Franchise System.
- Paragraph 7 of Article 1 of the Franchise System.
- Article (4) of the Franchise System.
- Article (2) of the Implementing Regulations of the Franchise System issued by the Minister of Commerce’s Decision No. (00591) dated 18/9/1441H.
- Article (11) of the Franchise System.
- Article (6) of the Franchise System.
- Paragraph Twelve of Article 1 of the Franchise System.
- Article (8) of the Franchise System.
- Article (9) of the Franchise System.
- Article (16) of the Franchise System.
- Article (17) of the Franchise System.
- Article (18) of the Franchise System.
