Saudi Arabia has recently approved the Commercial new Franchise Law 122/1441 (the New Franchise Law) which went into force on April 22, 2020. Priorly, franchises in the KSA used to be subject to the requirements of the Saudi Commercial Agencies Regulations. The New Franchise Law was enacted in order to align the Saudi franchise protection laws with international best practices. Ultimately, it would encourage more commercial franchising activities and put the Saudi economy on top among other countries.
Perhaps the most important aspect of the New Franchise Law is that it applies to all franchises, even to those entered into before its enactment. There is thus a need for franchisors to review their existing franchise agreements to ensure that the same are at par with the present requirements of franchise laws and regulations. If in doubt, it is highly recommended to consult a franchise lawyer especially in matters of assignment, renewal and termination. A handful of law firms such as Mohammed Almuzayen Law Firm specialize in the franchise business. A franchise solicitor’s advice regarding the franchise law basics would go a long way in preserving your business and avoiding costly litigation.
So how does one go about buying a franchise under the New Franchise Law and regulations? It bears emphasizing that certain requirements must be met for the enforceability of franchise agreements in Saudi Arabia. Firstly, experience is a must. The business to be franchised must have been operated in accordance with the Franchise Operations System for at least one (1) year and by at least two (2) persons (which may include the Franchisor or any of its related entities, or in two (2) separate units. Similarly, the franchisees are not allowed to offer sub-franchises unless it or the sub-franchisee has had at least 1 (year) of experience in the Kingdom.
Secondly, the law requires full disclosure. Franchisors must provide the franchisees with a Franchise Disclosure Document (FDD) at least 14 days before the execution of the contract or receiving the consideration for the franchise. This document contains vital information to make sure that franchisees are appraised of their rights and duties prior to entering the franchise agreement. Other responsibilities attached to a franchise agreement include:
Responsibilities of the Franchisee in Franchise law :
- Give franchisor access to data and its business facilities.
- Seek the franchisor’s approval before any change to the goods or services or the business strategy is implemented.
- Advertise and execute marketing activities.
Responsibilities of the Franchisor in Franchise law :
- Inhibit itself from creating another commercial entity that is engaged in an activity similar to that of the franchise in the geographical area specified in the franchise agreement.
- Provide the franchisee with standards and instructions that the franchisee must adhere to while conducting of the franchise business.
- Provide manuals, training, expertise, and related goods and services
Nevertheless, all franchise agreements must be in writing and in Arabic. After all, there is a need for it to be registered with the proper government authority. In fact, quite a number of mandatory stipulations are prescribed by the Franchise Law. In this regard, franchisors would certainly benefit from the legal services of a franchise lawyer especially in making sure that the contract is beneficial and compliant with the law and regulations. Franchisees are likewise advised to retain the services of a franchise solicitor to gain some leverage against the franchisors since the latter generally draft the franchise contracts.
In cases of breach, the laws and regulations has put in place penalties and procedure on how to make one’s case. A franchisee is entitled to compensation in cases of non-renewal without lawful cause, failure to disclose and failure to register, among others. In case of invalid termination, the franchisee may also be entitled to re-purchase. On the other hand, a franchisor is entitled to compensation should the breach in termination be committed by the franchisee.
A claim for compensation must be brought within three years from the date of termination in cases of invalid termination. In other cases, the prescription period is three years from the occurrence of violation or one year from the time of discovery, whichever comes first. Arbitration, mediation, and conciliation are highly encouraged. The Franchise Center has been established by the Royal Decree, under which the Franchise Law was enacted, pursuant to this goal.