After many years of drafting, discussions, negotiations and revisions, the Saudi Franchise Regulations (the "Regulations") have finally been approved by the Council of Ministers in its meeting on 8 October 2019; the Law was published in the official gazette (Um Al-Qura) as Royal Decree M/22 of 9/2/1441H. on 25 October 2019.
1. The Regulations comprise of 11 chapters and 27 Articles; the main and most interesting provisions are the following:
- a “franchise” is defined as the grant of a right to exercise certain activities in connection with a trademark or trade name, including the provision of technical expertise and know-how, and the determination of the way how to exercise the activities, against remuneration;
- the Regulations apply to all franchises performed in Saudi Arabia;
- a franchise must not be granted unless it has been operated on the basis of the same franchise operation manual by at least two entities and for at least one year; if the franchise has been granted from abroad, the franchisee must not grant sub-franchises unless the franchise has been operated in Saudi Arabia for at least one year;
- franchise agreements must be registered;
- the franchisor must provide the franchisee with a comprehensive disclosure document, which must be in Arabic, or be translated into Arabic; the franchisor may be liable for damages resulting from a breach of that obligation;
- subject to the provisions of the franchise agreement, the franchisor is under extensive obligations towards the franchisee, including the obligation to train, transfer know-how, provide a franchise operation manual and not to compete with the franchisee in the same geographical area;
- the franchise agreement must be in Arabic, or be translated into Arabic, and have a certain minimum content (including a term);
- the franchisor must accept a change of control over the franchisee or assignment of the franchise agreement unless in specific circumstances;
- unless the agreement provides otherwise, the franchisee can, depending on certain conditions, request renewal of the franchise agreement;
- the franchisor must not terminate an agreement before the expiry of ist term unless for specific reasons, such as material breach by the franchisee - the parties may agree such reasons in the agreement;
- in case of termination or non-renewal of the franchise agreement, the franchisee may request re-purchase of equipment and, in certain circumstances, compensation of damages resulting from the establishment, acquisition or operation of the franchise;
- a waiver by the franchisee of any rights under the Regulations is not enforceable unless in the context of a final settlement;
- the parties may agree on alternative dispute resolution mechanisms, including arbitration;
- further details will be specified in executive regulations, in which context model franchise agreements and model disclosure documents may be issued;
- the Regulations will be applicable after 180 days following publication in the official gazette.
2. According to the introductory provisions contained in the decree of Council of Ministers, a large number of the above provisions will not apply to franchises existing at the time of the Regulations, in particular the obligations concerning prior experience with the franchise operation manual, registration, disclosure, termination by franchisee and indemnity for termination by franchisor.
In addition, the Ministry of Commerce and Investment (MOCI) may declare that certain requirements of the Regulations should not apply to certain types of franchises.
Finally, a Commercial Franchise Center will be established within the SME Department of the MOCI.
3. The Regulations contain, to a certain extent, customary provisions; on the other hand, there are a number of peculiarities, and it will need to be seen how the Regulations will actually be applied in practice. At this stage, and from a mere review of the text of the Regulations, the following issues occur:
- Although there is no specific provision to this effect, it is quite obvious that the provisions of the Regulations should be considered to be mandatory; as a result, and in view of the (lack of) Saudi conflict of law rules, a choice of foreign law in a franchise agreement will almost certainly not help in avoiding the provisions of the Regulations.
- However, the Regulations expressly provide that disputes may be resolved by way of arbitration and, in this context, the question will be as to whether an arbitration clause, together with a choice of foreign law, will be enforceable.
- The Regulations do not seem to consider franchise agreements for an unlimited term; all relevant provisions, e.g. those concerning the content of a franchise agreement, or those on termination and indemnity, exclusively refer to agreements with a limited term, and it is unclear whether unlimited-term are even permissible.
- If unlimited-term franchise agreements are permissible – which, in our opinion, should be the case – termination will probably be subject to the provisions of the agreement, and indemnity will not be payable to the terminated franchisee if the termination is in line with those provisions (and unless the agreement expressly foresees an indemnity).
- To date, franchise agreements have been subject to the Commercial Agencies Regulations and their registration requirements; although there is no express provision to this effect, it is almost certainly to be understood that franchise agreements will, following the effective date of the Franchise Regulations, not be subject to the Commercial Agencies Regulations any more.
For more information on legislation in Saudi Arabia, visit https://www.idiproject.com/documents/legislation?nation=617.
Stephan Jäger, IDI Country Expert for agency & distribution in Saudi Arabia