Saudi Arabia: Cabinet Issues New Law on Commercial Franchise

(Mar. 5, 2020) In October 2019, the Saudi Cabinet approved the Commercial Franchise Law of 24/2/1441 (Hijri, corresponding to October 23, 2019). The new Law is the first in the kingdom to govern the relationship between a franchisee and a franchisor in a comprehensive manner in accordance with international best practices. The Law regulates (1) franchise agreements, (2) the conducting of a franchise business, and (3) the ongoing and contractual business relationship between the franchisor and franchisee. (Art. 1.)

Purpose of the Law

The new Law aims to encourage commercial franchise activities in the kingdom by establishing a regulatory framework whereby all contractual obligations by parties to a franchise agreement will be honored unless they violate public policy or Islamic law. It also promotes the principle of transparency in a franchise transaction in order to provide the necessary protection to the franchisee and the franchise grantor. This Law also encompasses the disclosure of rights, duties, and risks related to franchising opportunities. (Art. 2.)

Conditions for Granting a Franchise

The Law prohibits franchisors from offering or granting franchise opportunities unless the franchisors have successfully operated their franchise business for at least one year. Moreover, it prohibits the franchisee from appointing another entity to be a sub-franchisee or offer the franchise business to another entity or person for at least one year. (Art. 5.)

Responsibilities of the Franchisor

Under the new Law, the franchisor is required to provide the franchisee with a copy of the disclosure documents at least 14 days before the signing of the franchise agreement or 14 days from the date the franchisee makes any payment concerning the franchise. (Art. 7.)

The Law prohibits the franchisor 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. It also requires each franchisor to specify in detail the rights that are granted to the franchisee under the franchise business model. The franchisor must supply the franchisee with standards and instructions that the franchisee must adhere to while conducting of the franchise business. Likewise, the franchisor must provide the franchisee with operating manuals, training of its employees, and technical and marketing expertise. Finally, the franchisor must provide the franchisee with adequate goods and services related to the nature of the franchise. (Art. 8.)

Responsibilities of the Franchisee

The Law obligates the franchisee to obtain the consent of the franchisor for any change in the goods, services, or manner of conducting the franchise business. Additionally, it mandates that the franchisee provide the franchisor with data pertaining to the franchise business that enables the franchisor to develop the franchise business. (Art. 9.)

The Law requires that the franchise agreement be in writing and signed by both parties. The agreement must include its duration, geographical scope, and a description of the franchise. (Art. 11.)

The Law determines the responsibilities of the franchisee with regard to advertising and marketing activities. It also sets forth circumstances under which the franchisee may terminate the franchise agreement, the penalties for breach of the agreement, and the compensation that must be paid by parties that breach their obligations. (Arts. 13 to 20.)

Finally the Law stipulates that disputes arising from the franchise agreement can be resolved through arbitration, mediation, and conciliation. (Art. 25.)

Statement of the Ministry of Trade and Investment

The Saudi minister of trade and investment, Dr. Majid Al-Qasabi, has stated that the approval on the Commercial Franchise Law opens a new horizon for entrepreneurs and provides legal protection for them by establishing the principle of pacta sunt servanda in accordance with international best practices. He also noted that the new legislation is among a number initiatives to build a legislative system that conforms to the Vision 2030 of Saudi Arabia plan, whose main goal is to enhance and diversify the capabilities of the Saudi economy to make the Saudi Public Investment Fund the world’s largest sovereign wealth fund.

The director of the general authority for small and medium enterprises, Engineer Saleh Al-Rasheed, shares the same view. Al-Rasheed has declared that the new franchise Law encourages commercial franchising activities in the Kingdom of Saudi Arabia by setting a transparent regulatory framework for the relationship between the franchisor and franchisee.

Prepared by Zahrah Majeed, Law Library intern, under the supervision of George Sadek, Foreign Law Specialist.