LexisNexis

Saudi Arabia - franchise update, May 2021

Wednesday 2 June 2021

Melissa Murray

Bird & Bird, Dubai

melissa.murray@twobirds.com

Eddie Chiu

Bird & Bird, Dubai

eddie.chiu@twobirds.com

Mayowa Olusola

Bird & Bird, Dubai

mayowa.olusola@twobirds.com

Background

Franchising in Saudi Arabia is subject to the Franchise Law (The Saudi Arabia Cabinet Decision No 122/1441) and its accompanying Implementing Regulations (Saudi Arabia Ministerial Decision No 591/1441). These prescribe the required content for the franchise disclosure document and establish other implementing rules and procedures.

The Franchise Law is the first specific law governing franchising in Saudi Arabia. Historically, the Commercial Agencies Law and its Regulations (which govern the principal-agent relationship) applies to franchisor-franchisee relationships.

Before a franchisor can grant a franchise in Saudi Arabia, the franchise model must have been operating in at least two separate outlets for at least a year.

Pre-sale disclosure

The franchisor is required to provide a prospective franchisee with a disclosure document at least 14 days before either signing the franchise agreement or the payment of any fee. The franchisor must provide a disclosure document containing the content prescribed in the Implementing Regulations and annexing a copy of the franchise agreement.

The disclosure document must be current and correct. In the event of any material change after the disclosure document has been issued but prior to signing of the franchise agreement, the franchisor needs to provide a revised disclosure document or a separate document outlining the material changes.

Registration

Both the franchise agreement and the disclosure document must be translated into Arabic and registered with the relevant government ministry. Registration must come into effect within 90 days of the date of signing the franchise agreement. The registration will remain valid for the duration of the agreement, however a further registration is required if the franchise agreement is amended by changing any of its parties or its term.

Parties’ obligations

The Franchise Law also sets out various obligations on the franchisor and the franchisee, some of which the parties may agree to otherwise in writing. Many of these obligations apply retrospectively to franchise agreements entered into prior to the Franchise Law coming into effect. For example, although there is no prescribed format or template for a franchise agreement, Article 11 of the Franchise Law states that a franchise agreement shall include, among other things, a description of the franchised business; the geographical scope or territory of operation; the parties’ obligations concerning training of the franchisee’s personnel; specification as to the franchisee’s right to sub-franchise; and provisions relating to change in ownership. Article 10 of the Franchise Law also codifies the Shariah law obligation for parties to deal with each other in good faith.

Transfers and renewals

If the franchise agreement does not establish a procedure for assignments or renewals, the Franchise Law establishes default rules which apply retrospectively. For assignments, Article 13 of the Franchise Law bans a franchisor from withholding its consent to a requested assignment of the franchise agreement, unless: the prospective franchisee does not meet the franchisor’s qualifications for suitability and capability; the assigning franchisee has failed to pay monies due; or for any other reason set out in the Implementing Regulations (such as an unremedied breach by the assigning franchisee of its core obligations, or if the prospective franchisee lacks the necessary licences or approvals to conduct). The franchisor must also respond in writing to a franchisee’s written request to assign, otherwise the franchisor is deemed to have accepted the franchisee’s request.

Under the Franchise Law, franchisors are required to renew the franchise for a similar period and under similar conditions if the franchisee gives adequate written notice. A franchisor may only refuse to renew under the law only if there is ‘legitimate cause’ to terminate the franchise agreement, the franchisee fails to pay monies due or comply with the franchise agreement, the franchise agreement is being assigned on expiration, the franchisor plans to leave the market, or the franchisee does not sign the renewal agreement at least 60 days before expiration.

Termination

Article 18 of the Franchise Law requires ‘legitimate cause’ to terminate a franchise agreement before expiry. Although ‘legitimate cause’ is not defined, the Franchise Law provides examples of circumstances constituting legitimate cause, including voluntary abandonment, intellectual property infringement, or an unremedied breach of the franchise agreement. There is also a ‘catch-all’ provision which allows the franchisor to terminate for any other case stated as a legitimate cause in the Franchise Agreement. The franchisor may also terminate the franchise agreement if the franchisee commences any liquidation procedures, dies, or has a health issue which impedes the operation of the business. These restrictions apply retrospectively.

Termination and compensation

A franchisee may give notice to terminate the franchise agreement early if the franchisor has substantially breached its disclosure or registration obligations. This right is subject to a limitation period in which the franchisee must exercise their right to termination. Alternatively, the franchisee may seek damages it has incurred and elect to have the franchise agreement remain.

Separately, if: (1) the franchisee requests termination because the franchisor has not complied with the disclosure or registration requirements; (2) the franchisor has terminated the franchise agreement without ‘legitimate cause’; or (3) the franchisor refuses to renew the franchise agreement for any reason other than one the ‘permitted reasons’, the franchisee may require the franchisor to repurchase the physical assets used exclusively in the business and (except for the franchisor’s refusal to renew), compensate the franchisee for any losses incurred in setting up, acquiring, or operating the franchised business.

Following the end of the franchise relationship, the franchisor is required to apply for the cancellation of the registration and must notify the Saudi Authority for Intellectual Property that the franchisee’s licence to use the franchisor’s trademarks has ended.

Conclusion

Given the new requirements in Saudi Arabia under the Franchise Law, many franchise deals are now taking much longer than before, as franchisees in the region are grappling with the new requirements. As the documentation for registration under the law must be legalised and notarised, there are also delays by relevant government authorities in the franchisor’s home countries in finalising such authentication processes, meaning that some of the timeframes discussed above are being missed. These items, together with the Arabic language requirements for the documentation make it important to seek experienced legal counsel when undertaking a franchise deal in Saudi Arabia.