The Kingdom of Saudi Arabia seeks to become a global force in investment by stimulating the Saudi economy, diversifying sources of income, and supporting the business environment in the Kingdom (1). Commercial franchise agreements (franchising) are among the most important tools of commercial expansion, as they enable companies to transfer their successful business model to other entities in return for fees or a percentage of profits. The Saudi Franchise Law was issued by Royal Decree No. M/22 dated 9/2/1441H to regulate franchising activities in the Kingdom.
A franchise agreement is a contractual regime in commercial relations under which a person known as the franchisor grants to another person known as the franchisee the right to carry on the business, the franchised business, for its own account, in association with the trademark or trade name owned by the franchisor or licensed to it for use, including the provision to the franchisee of technical expertise and know-how and the determination of how the franchisee is to operate the franchised business, in consideration of a financial or non-financial consideration, excluding amounts paid by the franchisee to the franchisor in return for goods or services (2).
This definition includes single-unit franchise agreements, under which the franchisee is granted the right to operate and exploit the trademark for only one branch or unit. It also includes those agreements relating to multiple units, under which the franchisee is granted the right to exploit several branches or units together within a specified geographic area or within a particular country.
- Controls Governing Multi-Unit Franchise Agreements (Master):
The Saudi regulator did not differentiate between the controls applicable to granting a franchise for a single unit and those applicable to a multi-unit franchise. The Franchise Law set out several conditions and controls that must be complied with in franchise agreements concluded in the Kingdom generally, namely:
1- The franchise agreement must be in writing in the Arabic language and signed by both parties; if it is drafted in a language other than Arabic, it must be translated into Arabic by an accredited translation.
2- The franchise agreement must include, in addition to what is agreed between its parties, the following:
A- The franchised business and its description, the term of the franchise agreement, the method of its amendment, and its geographic scope.
B- Any consideration that the franchisee must pay to the franchisor, including the franchise fee, the 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.
C- The obligations of both parties regarding the franchisor’s training of the franchisee’s employees.
D- The franchisor’s obligation to provide technical and marketing expertise and any other expertise required by the nature of the granted franchise.
E- The franchisee’s obligation to comply with the instructions, the method of marketing and presentation, and to preserve the identity of the franchise.
F- Any obligation of the franchisor relating to the supply of any goods or services to the franchisee, and the franchisee’s obligation regarding obtaining such goods or services directly from the franchisor or through a third party pursuant to the franchisor’s instructions.
G- The franchisee’s rights to use any trademark and any other intellectual property rights relating to the franchised business, and the obligations of both parties in the event of infringement of intellectual property rights, and the compensation arising therefrom.
H- The mechanism for settlement of any dispute relating to the franchise agreement.
I- The extent to which the franchisee is entitled to grant a sub-franchise to others, and the provisions governing that.
J- The effects arising from any change in the ownership of the franchisee or the franchisor, or the controlling person of either of them.
K- Any other provision determined by the Implementing Regulation. (3)
The regulator also required the registration of the franchise agreement and disclosure thereof through a disclosure document (4), being a document that includes disclosure of the principal rights, obligations, and material risks relating to franchise opportunities (5). This is to be filed with the Ministry of Commerce and Investment.
- Obligations of the Franchisor and the Franchisee.
The Saudi regulator did not differentiate, as to the obligations imposed, between franchisors and franchisees in single-unit franchises and those in multi-unit franchises, notwithstanding the difference in the nature of the parties in the two types. In a multi-unit franchise agreement, franchisees are typically investors with the financial capacity and experience that enable them to expand their use of the trademark and generate profits from sub-franchise fees, and in some cases to develop the trademark itself.
The regulator provided that the franchisor must—unless otherwise agreed in writing with the franchisee—comply with the following:
1- To specify the rights granted to the franchisee in respect of the franchise.
2- To specify the franchise business model in detail, including stating the standards and issuing the instructions with which the franchisee must comply when carrying on the franchised business, in a manner that enables it to operate such business, and to provide it with operating manuals.
3- To train the franchisee’s employees.
4- To provide technical and marketing expertise and other expertise required by the nature of the granted franchise.
5- To supply the franchisee—either directly or through another party—with the goods or services specific to the franchise throughout the term of the franchise agreement, except for goods and services that the franchisee is left to purchase from third parties.
6- To maintain the confidentiality of information and accounting and financial data relating to the franchisee’s business.
7- To respond to the franchisee’s request to provide it with details of the financial consideration payable by it or paid by it in relation to carrying on the franchised business.
8- Not to establish any facility carrying on an activity similar to the franchisee’s activity within the geographic area specified in the franchise agreement, nor to grant others the right to do so, during the term of the agreement (6).
The franchisee must also, unless otherwise agreed in writing with the franchisor, comply with the following:
1- To obtain the franchisor’s approval upon any change in goods or services or the method of carrying on the franchised business.
2- To provide the franchisor with data relating to the franchised business that enables it to develop the franchise business model, including the financial and accounting data relating to such business.
3- To enable the franchisor or its representatives to inspect the facilities used in carrying on the franchised business, provided that this does not result in disruption of the franchisee’s business or cause harm to it.
4- To obtain the franchisor’s approval when changing the location of carrying on the franchised business (7).
However, the Saudi regulator set out specific obligations regarding the information that must be included in the disclosure document where the franchisor is a master franchisee (or a multi-unit franchisee), in which case the following information about the master franchisor must be included: its trade name, its address and contact details, and its relationship with the master franchisee. A statement must also be provided regarding the franchised business it has carried on during the last five years.
In addition, certain information must be stated regarding the agreement concluded between the franchisor and the master franchisee:
1- A statement of the geographic scope of the agreement and the rights and obligations of each party, and the right to grant a sub-franchise.
2- The expiry date of the agreement, with clarification as to whether it is renewable or not.
3- Cases of termination of the agreement.
4- The extent to which the prospective agreement to be concluded would be affected in the event of termination of the master franchise agreement. (8)
Sources:
(1) The Executive Summary of the Updated Investment Law for 1446H corresponding to 2024G, published on the official website of the Saudi Ministry of Investment.
(2) Paragraph Five of Article One of the Franchise Law issued by Royal Decree No. M/22 dated 9/2/1441H.
(3) Article (11) of the Franchise Law.
(4) Article (6) of the Franchise Law.
(5) Paragraph Twelve of Article One of the Franchise Law.
(6) Article (8) of the Franchise Law.
(7) Article (9) of the Franchise Law.
(8) Article (5) of the Annex (Disclosure Document Requirements) to the Implementing Regulation of the Franchise Law issued by Minister of Commerce Decision No. (00591) dated 18/9/1441H.
