Splitting away from agencies: The New Saudi Franchising Law 

The Saudi Franchising Law has been approved by the Saudi Council of Ministers on 08 October 2019 (the Franchising Law) and will come into effect on 8 April 2020. The Franchising Law is administered by the Ministry of Commerce and Investment (MOCI), which will be issuing the Implementing Regulations for the Franchising Law. The Implementing Regulations will further elaborate the provision of the Franchising Law providing regulation at a granular level. As per the Franchising Law, the MOCI is also authorised to issue template franchising agreements.

The Franchising Law applies to all franchising arrangements that are to be implemented in the Kingdom of Saudi Arabia (KSA). Franchising arrangements in the KSA used to be treated as a commercial agency, and therefore have been governed by the Commercial Agencies Law (until the Franchising Law comes into effect).

In our preliminary review of the Franchising Law, we note that it predominantly sets default provisions to govern a franchising relationship thereby defining the mandatory structure of a franchising agreement, and at the same time enables parties to deviate from certain provisions, thus promoting freedom of contract. Franchisees, however, may not relinquish certain rights that the law grants them, unless the same is part of a final settlement.

Summary of certain provisions

Scope

The Franchising Law excludes certain arrangements from the ambit of the law, such as agreements and arrangements that fall under the Commercial Agencies Law, agreements for the sale and purchase of goods and service bearing a specific trademark, agreements for the use of trademarks or any other intellectual property rights in relation to goods and services, and inter-group arrangements where the franchisor is directly or indirectly owned by the franchisor.

Defining franchising

Franchising has been defined as “the granting by a person referred to as the franchisor to another referred to as the franchisee of the right to carry out the activities - subject of the franchising - for its own account under the trademark or the trade name owned by the franchisor or licensed to it, providing technical expertise and know-how to the franchisee and determining the manner of operating the franchised business, against monetary or non-monetary consideration, which consideration shall not include the amounts paid by the franchisee to the franchisor for goods and services supplied.”

Mandatory disclosure

Disclosure of certain information by the franchisor has become a statutory requirement. The franchisor is required to register the franchising opportunity with MOCI in a ‘disclosure document’ containing the main rights and obligations and material risks associated with the franchising. This ‘disclosure document’ precedes the franchising agreement and is to be provided to prospective franchisees prior to entry into the franchising agreement. Further, failure to adhere to the disclosure obligations entitles the franchisee to claim damages for any loss or harm resulting from the failure, and to terminate the franchising agreement without having to make any payment on account of such early termination.

Qualifying for franchising

For a business to qualify for franchising, the same should be carried out in accordance with its franchising manuals for a period of 1 year in 2 locations at least.

Elements of a franchising agreement

The Franchising Law requires certain clauses to be included in the franchising agreement, namely, description of the franchised business, term of the franchise, the manner of its amendment, geographical territory, consideration, employees’ training obligations, franchisor’s obligations of transfer of know-how, franchisee’s obligations in respect of the franchisor’s brand, obligations of supply and purchase of goods or services from a specific source, dispute resolution mechanism, rights of granting sub-franchises and the terms thereof, and effects of change in control of either party.

Change of control and assignment

On the change of control of the franchisee and the assignment of the franchising agreement by the franchisee, prior approval of the franchisor is stated to be required, unless agreed otherwise. The Franchising Law however provides that this approval may not be withheld or withdrawn, except in certain circumstances stipulated in the relevant clause of the Franchising Law. Where the franchisor fails to respond to a request for approval of change of control or assignment of the franchising agreement, approval shall be deemed to be given.

Termination

An entire chapter of the Franchising Law deals with termination and expiry of franchising agreements. Under the said chapter, a limited number of circumstances are stated in which the franchisor may terminate the franchising agreement. These include franchisee’s breach of contractual obligations, winding up or insolvency of the franchisee, suspension by the franchisee of the franchised business for more than 90 consecutive days, if a risk is posed to public health or safety, material violations of KSA laws by the franchisee, infringement of the franchisor’s intellectual property rights, and any other ground stipulated in the franchising agreement.

Indemnifying the franchisee

Where the franchising agreement is unlawfully terminated by the franchisor, the franchisor is required within 60 days of the franchisee’s demand to re-purchase any asset bought by the franchisee for the franchised business on the basis of instructions from the franchisor, whether such assets were bought from the franchisor or from any third party. This aforesaid provision will also apply where the franchisor does not extend or renew the term of the franchising agreement as per the relevant provisions of the Franchising Law. In addition to the foregoing, the franchisor will be required to compensate the franchisee for any losses incurred in certain circumstances.

The Tribunal

A tribunal within the MOCI shall be formed with jurisdiction over matters involving violations of the Franchising Law. The limitation period for the franchisee to claim damages or compensation on account of unlawful termination of the franchising agreement by the franchisor is 3 years from the date of termination. In all other cases of claims for damages or compensation, the limitation period is 1 year from the date of knowledge of a party of a breach by the other party or 3 years from the date of such breach, whichever is earlier.

Our view

The Franchising Law reflects a contemporary approach to franchising arrangements in the KSA and in our view it encourages more franchising deals whether from outside the Kingdom or within the KSA.

MOCI generally issues implementing regulations for public consultation prior to their effective date. Our team is already getting busy advising clients on getting ready to be compliant with the Franchising Law, pending the issuance of the Implementing Regulations as this exercise will allow us and parties in franchise arrangements to have practical comments ready to be shared with the MOCI, which has been promoting collaboration with the market.

Article co-authored by Bilal AlSamarrai.