A Commercial Franchise Law (the “Franchise Law”) became effective in Saudi Arabia on 22 April 2020 (“Effective Date”). The Franchise Law is supplemented by implementing regulations which became effective on 12 May 2020 (“Implementing Regulations”). Previously, there was no special purpose franchise law in Saudi Arabia. Instead, franchise arrangements in Saudi Arabia were deemed to be governed by other applicable laws, primarily the Commercial Agencies Law pursuant to a resolution issued by the Minister of Commerce.
II. Key Take Away
Prior to the introduction of the Franchise Law, parties to a franchise arrangement in the Kingdom were relatively free to contract at their discretion, so long as the franchise agreement did not conflict with applicable Saudi Arabian laws and regulations. The new Franchise Law, which now governs franchise arrangements in Saudi Arabia (subject to certain, limited exceptions), sets out specific obligations and requirements that apply to franchisors and franchisees and regulates other aspects of franchise arrangements.
A. What is covered
The Royal Decree that enacted the Franchise Law states that certain provisions of the Franchise Law do not apply to franchise agreements already in place in Saudi Arabia before the Effective Date (“Pre-Existing Franchise Agreements”). These provisions are:
1. the requirement that the franchisor have prior experience in relation to the franchised works (Article 5 of the Franchise Law);
2. registration and disclosure requirements (Articles 6 and 7 of the Franchise Law);
3. franchisor and franchisee obligations (Articles 8 and 9 of the Franchise Law);
4. contents of the franchise agreement (Article 11 of the Franchise Law);
5. franchisee’s right to terminate the franchise agreement for the franchisor’s failure to register the franchise agreement or to make the necessary disclosures (Article 17 of the Franchise Law); and
6. the right of the franchisee to claim indemnities from the franchisor, without terminating the franchise agreement, for the franchisor’s failure to make the required registrations and/or declarations (Article 19 of the Franchise Law).
The above provisions may, however, apply to Pre-Existing Franchise Agreements that are amended after the Effective Date, depending on the content of such amendments.
For all franchise arrangements entered into after the Effective Date, the franchise agreements and disclosure documents related to such franchise arrangements – all of which must be in Arabic – must be registered with the Ministry of Commerce (the “Ministry”).
B. Franchise Agreement
The Franchise Law and its Implementing Regulations provide certain essential components that must be included in any franchise agreement that is to be performed in Saudi Arabia. Although the contracting parties may opt-out of some of these components, they must nonetheless be included in the franchise agreement. For example, the contracting parties may opt-out of the training of franchisee’s personnel component of a franchise agreement by stating in the franchise agreement that the franchisor will not be providing training to the franchisee’s personnel.
C. Disclosure Document
The disclosure document must be provided to the franchisee at least fourteen (14) days prior to executing the franchise agreement. The contents of the disclosure document are listed in detail in the Implementing Regulations. We list below some of the key requirements of the disclosure document:
1. information about the franchisor (including information relating to the franchisor’s trade name, address, date and place of incorporation, and owner of the franchise), and information about the products or services of the franchisor that will be used by the franchisee for the purpose of the franchise agreement;
2. details of the franchisor’s experience in the preceding five (5) years;
3. a list of the franchisor’s board members and senior executives;
4. whether the franchisor has been through any bankruptcy proceedings in the past ten (10) years, and whether the franchisor has gone through any corporate or debt restructuring as part of any bankruptcy proceedings;
5. total anticipated costs to be borne by the franchisee to commence the franchised works, including costs of leases and improvements to leased properties, construction works, designs and decor, equipment, insurance and capital requirements;
6. exclusivity (or non-exclusivity) and territory of the franchised works;
7. details of current franchisees, whether inside or outside of Saudi Arabia; and
8. the franchisor’s financial position for the previous year, and the franchisor’s audited financial statements for the preceding two (2) financial years.
D. Registration Requirements
Article 3 of the Implementing Regulations states that the franchisor must register the franchise agreement and disclosure document with the appropriate administration at the Ministry within 90 days from the date of execution of the franchise agreement. Registration of Pre-Existing Franchise Agreements is not required under the Franchise Law. It is not clear, however, whether Pre-Existing Franchise Agreements will need to be registered and made compliant with the Franchise Law if they are renewed after the Effective Date. This may depend on how such renewal is implemented.
E. Term and Renewal of Franchise Agreement
The Franchise Law states that one of the main components required to be in a franchise agreement is the term of the franchise. Article 15 of the Franchise Law states that, unless the franchise agreement provides otherwise, a franchise agreement may be renewed pursuant to a notice of renewal sent by the franchisee to the franchisor at least one hundred and eighty (180) days prior to the expiration of the term of the franchise agreement.
Upon the franchisee serving such renewal notice, the franchise agreement would renew for a similar term and under similar conditions, except in the event of any of the following:
1. the franchisor and franchisee agree to new terms for the franchise;
2. the occurrence of any “cause” for termination;
3. the franchisee’s failure to pay the consideration stated in the franchise agreement;
4. the assignment of the franchise agreement by the franchisee to a third party approved by the franchisor;
5. the franchisor’s unwillingness to perform the franchised works or to grant such franchises in Saudi Arabia; or
6. the franchisee not entering into the renewal or extension agreement for the franchise pursuant to the reasonable requirements of the franchisor within a period of at least sixty (60) days prior to the expiration of the term of the franchise agreement.
F. Key Rights and Obligations of the Franchisor
The Franchise Law sets out the main obligations of the franchisor in a franchise agreement. While many of the obligations may be opted-out of by the contracting parties, others are mandatory.
For example, the Franchise Law does not permit the franchisor unilaterally to terminate the franchise agreement before the end of its term without “cause” and lists causes under Article 18 of the Franchise Law. Article 18, however, also affords the franchisor the right to add more “causes” for termination in addition to those stated in the Franchise Law. Thus, in any adjudication of a termination of a franchise arrangement under the Franchise Law, the court or arbitral tribunal should recognize causes for termination agreed by the parties in addition to those expressly set out in the Franchise Law. If the franchise agreement is terminated for such “cause” as listed in the Franchise Law or as agreed by the parties, then the franchisor should have the unilateral right to terminate the franchise agreement under the Franchise Law.
Another mandatory clause applicable to the franchisor is that if a franchisor terminates the franchise agreement without “cause” or if the franchisor simply refuses to renew the franchise agreement for reasons other than (i) the franchisee’s failure to pay the consideration stated in the franchise agreement, (ii) the assignment of the franchise agreement by the franchisee to a third party approved by the franchisor, or (iii) the franchisor’s unwillingness to perform the franchised works or to grant such franchises in Saudi Arabia, then the franchisor is obligated to repurchase from the franchisee the assets used for the franchised works that were sold by the franchisor. Such repurchase must occur within sixty (60) days after such termination or non-renewal, and at the same price at which such assets were purchased by the franchisee, less depreciation.
G. Key Rights and Obligations of the Franchisee
Similar to those applicable to the franchisor, the Franchise Law also sets out certain rights and obligations of the franchisee. While it is possible for some of these obligations to be opted-out of, many of these are mandatory and cannot be waived (even if opted-out of in writing).
For example, if the franchisor is found to be in material violation of its registration and disclosure requirements under the Franchise Law, then the franchisee shall have the right to either (i) terminate the franchise agreement without indemnifying the franchisor for such termination (Article 17 of the Franchise Law), or (ii) assert a claim for any damages incurred by the franchisor as a result of such violation, but without terminating the franchise agreement (Article 19 Franchise Law). We emphasize, however, that Articles 17 and 19 of the Franchise Law, among others, are not applicable to Pre-Existing Franchise Agreements.
H. Dispute Resolution
There are no requirements under the Franchise Law that disputes arising out of a franchise agreement be resolved before Saudi Arabian courts. In this regard, the Franchise Law allows franchisors and franchisees the freedom to choose their form and venue for dispute resolution, which may include litigation or arbitration inside or outside the Kingdom.
The Franchise Law and its Implementing Regulations are new. Therefore, franchisors and franchisees alike should consult with experienced counsel in Saudi Arabia before entering into franchise arrangements in Saudi Arabia, or amending any existing franchise relationships, to become familiar with the mandatory provisions of the Franchise Law and its Implementing Regulations (including those with opt-out options).
Law Office of Mohanned bin Saud Al-Rasheed
In association with Baker Botts L.L.P.
*This Client Alert is not intended, and should not be relied upon, as legal advice.
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