To date, there have been no specific legal provisions concerning the contractual relationship between the franchisor and the franchisee in Saudi Arabia; the Saudi Ministry of Commerce and Investment issued a model franchise agreement, the use of which, however, has not been mandatory.
From a regulatory perspective, franchises have been subject to the requirements of the Saudi Commercial Agencies Regulations (promulgated by Royal Decree M/11 of 1382H. [1969G.], as amended), in particular the registration requirement.
After many years of discussion, the Saudi Ministry of Commerce and Investment (MCI) recently published draft Franchise Regulations in January 2017 and requested all persons interested and the public to review the draft Franchise Regulations and to provide their comments and suggestions by the end of January 2017; apparently, the MCI is still evaluating the feedback it received and considering the details of the Draft Franchise Regulations.
The Draft Franchise Regulations comprise 34 Articles in 10 Chapters; the Chapters deal with general provisions, the law’s scope of application, obligations of the franchisor, conditions for the grant of the franchise, the franchise agreement, the franchise relationship, disclosure of information, compensation and termination, concluding provisions, and the law’s entry into force.
The following observations concerning the content of the Draft Regulations seem to be worth mentioning:
The definition of the term “franchise” is quite unusual and not really clear:
In Article 1 (Definitions), there is no specific definition of the term “franchise”; a “franchise” is defined as a “commercial franchise that is subject to the provisions of these Regulations”, and a “franchise agreement” is defined as a an “agreement between the franchisor and the franchisee under which the franchise is granted”.
In Article 3 (Scope of Application), the term “franchise agreement” is provided to include any arrangement under which the franchisor grants to the franchisee the right to carry out the activities that are subject to the franchise, for its own account, against monetary or non-monetary consideration, including the provision of technical expertise, training of the franchisee, and the determination of the method of operating it in connection with the trademark owned or licensed by the franchisor.
Article 4 contains an extensive list of agreements that should not be governed by the Regulations, including agency and distribution agreements, sale, purchase, service and license agreements, employment agreements.
The provisions of the Regulations should apply to all franchise agreements that “apply”, entirely or partly, in Saudi Arabia; the meaning of this provision is not really clear.
The franchisor must not grant the franchise unless (1) the “franchise operation program” has been applied for at least one year by at least two companies, and (2) the franchisor has applied the “franchise operation program” in two different locations for at least one year; violations may be subject to fines.
The franchisor must register the trademark that relates to the franchise; violations are subject to fines.
The franchisor must register its model franchise agreement and its disclosure document with the MCI before entering into the franchise agreement; documents in foreign languages must be translated into Arabic; violations are subject to fines.
Franchise agreements must be in Arabic, or be translated into Arabic; the content of the franchise agreement is specified in detail.
The franchisee cannot waive any right provided by the Regulations unless in the context of a final settlement.
All disputes under a franchise agreement are subject to the jurisdiction of Saudi courts, but the parties may agree on alternative dispute resolution methods, such as arbitration or mediation; it is not clear whether arbitration outside Saudi Arabia, under rules other than the Saudi Arbitration Regulations, will be permissible.
The franchisee may terminate the franchise within seven days of the date of execution without any compensation.
The franchisor must not object to a change of control of the licensee, nor object to the assignment of the franchise to a third party licensee, unless in specific circumstances.
The franchisee can request renewal or extension of the term of the franchise on its expiry, and the franchisor must not object to the renewal or extension unless for specific reasons; if the franchisor refuses to the renewal or extension, the franchisee has the right to request repayment of the amounts paid to the franchisor for the acquisition of assets. It is not clear whether franchise agreements for an unlimited should be permissible.
The franchisor must deposit the promotion and marketing contributions paid by all franchisees in Saudi Arabia in a separate bank account, and provide the franchisees who paid such contributions with a statement of the account on a regular basis; violations may be subject to fines.
The franchisor must provide the franchisee, at least 14 days before the signature of the franchise agreement or the first payment by the licensee, whichever comes earlier, with a disclosure document and a draft of the franchise agreement. The disclosure document must be in Arabic, unless the franchisee expressly agrees to a different language. The disclosure document must be updated in case of material changes. The disclosure document must also contain information on the financial performance of the franchise as operated by the franchisor, its affiliates, or third party franchisees. Violations may be subject to fines; the franchisor must pay compensation for damages if franchisee is not provided with information on material changes and a complete disclosure document.
The franchisee may terminate the franchise agreement, and the franchisor is not entitled to compensation for such termination if (1) the franchisor has provided information on material changes or the disclosure document too late, or if (2) the franchisor has not registered the franchise with the MCI. It is entirely unclear whether and on what conditions the franchisor will otherwise be entitled to damages. In these two cases, franchisor must (1) repay all amounts paid by the franchisee, and repurchase all materials bought by the franchisee, (2) compensate the franchisee for all damages resulting from the establishment and operation of the franchise.
Executive regulations will be issued to regulate the details, including (1) the minimum content of franchise agreements, (2) the requirements for the disclosure document.
Stephan Jäger, IDI agency and distribution country expert for Saudi Arabia