All questions

Franchise law

i Legislation

Saudi Arabia does not currently have a law that specifically governs franchising, but the MOCI has issued Commercial Agency Regulations that govern the principal agent relationship between a franchisor and a franchisee. The Commercial Agency Regulations also set out the procedure for registering a franchise in Saudi Arabia, as well as the rights and obligations of all involved parties.

ii Pre-contractual disclosure

Under shariah law, parties must deal in good faith and fully disclose all material facts to each other. Parties may seek judicial remedies if a party is alleged to have failed to disclose or fraudulently disclosed any pertinent facts and the other party sustained damage from the disclosure or non-disclosure.

iii Registration

Within six months of effecting a franchise agreement, the franchisee must register the agreement with the MOCI. Non-Saudi nationals, including GCC nationals may not register franchises or agencies – only Saudi national legal persons are permitted to do so.

The MOCI requires the following documents to register a franchise agreement:

  1. a standard application;
  2. a certified Arabic translation of the agreement, as well as all other foreign-language documentation;
  3. a copy of the franchisee's commercial registration and chamber of commerce certificate; and
  4. a declaration, in writing, that the franchisee's capital is Saudi-owned and its authorised representative is a Saudi national.

Franchise agreements must be registered with the MOCI to be recognised and enforceable under the Saudi agency law and therefore consideration should be given as to whether this is in the interests of the various parties. There is an element of local protectionism in this registration requirement. Registration of an exclusive agreement offers greater protection to franchisees, as it prevents the franchisor from appointing another franchisee upon termination of the franchise agreement. Franchisor and franchisee must resolve all their pending issues, such as mutually acceptable remuneration, before the franchisor is allowed to appoint legally another franchisee.

iv Mandatory clauses

While a franchise agreement does not have to follow a specific template, it must include the following elements for the agreement to be enforceable under Saudi law:

  1. the agreement must be executed directly with the franchisor in the franchise's country of origin;
  2. each party's rights and obligations must be explicitly set out;
  3. each party's obligations to the consumer must be stated;
  4. each party's capacity and nationality must be stated;
  5. the subject of the franchise must be stated;
  6. the services, works and goods covered by the franchise must be stated;
  7. the territory must be specified;
  8. the duration of the agreement and the terms of renewal must be stated;
  9. the termination procedure must be stated; and
  10. the agreement must establish that any dispute will be settled according to Saudi arbitration law.
v Guarantees and protection

Franchise agreements generally include guarantees. Guarantees are enforceable depending on their level of conformity with the elements of shariah law. Guarantees may be enforceable against entities, and personal guarantees may be enforceable against individuals.