The publication of the Saudi Franchise Law was widely expected and the need for a clear framework to structure franchise arrangements long overdue. The new law will be a significant game changer for investors and entrepreneurs doing business in Saudi Arabia. It is expected to generate new commercial opportunities, provide legal protection and alignment to international best practice. An integral part of Vision 2030, the new franchise law forms one of the key steps to building an investment-friendly legislative environment and regulatory system.
The Franchise Law1 was published in the KSA official gazette on Friday the 25th of October 2019, and will come into force 180 days following the date of publication, accompanied by its respective implementing regulations. Historically, arrangements between franchisor and franchisee fell under the principal and agent relationship, governed by the Saudi Commercial Agencies Law2.
"The Franchise Law has included reference to a declaration certificate that entails rights and obligations of the contracting parties agreed prior to the conclusion of the franchise agreement"
The Franchise Law aims to enable international companies to access local markets as well as to develop a regulatory framework for the relationship between the franchisor and the franchisee. It also helps the franchise parties make the right investment decisions that contribute to raising the quality of goods and services offered in the Kingdom of Saudi Arabia (KSA).
In principle, the Franchise Law applies when the franchisor grants the franchisee the right to do business on behalf of the franchisor. The provisions of the Franchise Law apply to any Franchise Agreement implemented in the KSA.
The Franchise Law refers to the conditions required for qualifying as a franchisee, where these conditions set out a remarkable leap to ensure quality and experience of a franchisee.
Requirements for Franchisee & Franchisor
A brief overview of each of the franchisee and franchisor's duties are as follows:
The Franchise Law articles referred to several requirements that need to be embedded in a franchise agreement such as defining the franchise works, their description, method of amendment, any fee to be paid to the franchisee and the rights and obligations of each party.
In terms of procedures, the Franchise Law has included reference to a declaration certificate that entails rights and obligations of the contracting parties agreed prior to the conclusion of the franchise agreement. The subject law also requires the franchise agreement to be in Arabic.
Termination & compensation
The legislator introduced termination scenarios such as: (i) if the franchisee failed to meet its obligations and has not cured that breach within 14 days from the day of being notified of such breach; (ii) franchisee entering into liquidation proceedings, and (iii) any other condition included in the franchise agreement.
In terms of compensations, the franchisee may request compensation if it was harmed due to the franchisor's inadequate termination. It also included a time-bar to hear the franchisee's claims before the competent court, where a claim/case will not be heard 3 years after the termination of the franchise agreement. Additionally, the court will not hear any the claims for compensation as a result of the franchisor or franchisee breaching its obligations during a year after being aware such breach, or 3 years after the occurrence of the violation.
Violating provisions of the Franchise Law shall result in a fine not exceeding SAR 500,000 imposed by a committee formed by a ministerial resolution. The latter's decisions are appealable.