Franchising in Saudi Arabia: top tips for navigating the Kingdom's regulatory framework

Franchising Update

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The Kingdom of Saudi Arabia (KSA) continues to present attractive propositions for international franchisors seeking to expand their business operations. Navigating the KSA's complex regulatory framework however is not without its challenges. Understanding these challenges and the framework as it currently applies to franchise agreements in the KSA is vital for those either considering entering into the KSA for the first time, or those seeking to review their current business operations.

In this article, we provide a high level overview of the legal framework that applies to franchise agreements in the KSA. We also outline six top tips for franchisors considering franchise opportunities in the KSA to help you to avoid the common pitfalls and provide you with the best platform for success.

The KSA's legal framework defined

Generally speaking, the legal framework in the KSA is based on Shari'a (or Islamic) principles, which is the primary (but uncodified) source of law. In addition, the law in the KSA also consists of legislation passed by Government.

Whilst there is no specific "franchise law" as such currently in force in the KSA, we are aware that the Ministry of Commerce & Investment (MOCI) released a draft Franchise Law for public consultation in January 2017. In line with the KSA's Vision 2030 strategy, the broad aims of that draft Franchise Law include the encouragement of franchise activities and foreign investment in the KSA by the enactment of a specific legal framework that regulates the franchisor / franchisee relationship and enshrines the basic rights of the parties. The deadline for those interested in providing feedback on the Franchise Law closed on 25 January 2017, and we will provide a further update on this once there is an announcement from MOCI.

For the moment, as has been the case since 1992, franchise agreements are still subject to the requirements set out in the Commercial Agencies Laws and Regulations (CAL) (which was initially enacted in 1962, but has been subject to subsequent amendments).

Under this law, there are a number of features which are important for franchisors to be aware of. These include:

  • Similar to agency/distribution agreements, franchise agreements are required to be registered by the franchisee with MOCI and must meet the requirements of the law. This requires the completion of a bespoke application form by the franchisee which is to be submitted to MOCI, with relevant supporting documents.
  • The provision of a model franchise contract by MOCI which can be used by the contracting parties. This is an optional contract that contains additional protections for the local franchisee. The parties however may choose to use their own form of contract, provided that this is compliant with local law.
  • A franchisee may be appointed on an exclusive or non-exclusive basis. Importantly, there is nothing currently in the CAL which guide's the franchisor's choice in this regard, with the franchisor free to make this selection based on its own preference and discussions with the franchisee.
  • A requirement under the CAL for the agreement to contain certain specific terms (for example, the capacity and nationality of the parties, the subject matter and territory, and duration and method of renewal and termination), and the parties may include such additional terms which are not in contradiction with the laws in force in the KSA.
  • The CAL imposes certain spare parts and maintenance obligations, for the duration of the agreement and one year following the date of its termination or the date of appointing a new franchisee, whichever is earlier.

Top six tips for franchisors

  1. Undertake sufficient "due diligence" of the franchisee at an early stage. It is important to be comfortable that the franchisee is able to deliver on its commitments and will enhance the brand in the agreed territory.
  2. "Localise" the provisions of your franchise agreements to ensure they are, as far as possible, compliant with and enforceable under local law. All too often we see franchise agreements signed on terms which may not be enforceable under KSA law.
  3. Consider including additional franchisor "protections" in your franchise agreement (for example, in relation to termination of the agreement).
  4. Ensure that your key trademarks are protected in the KSA. Unregistered rights afford very limited protection for franchisors.
  5. Be wary that when terminating a franchise agreement, additional considerations will usually apply. This includes the application of Shari'a principles and the need to deregister the agreement with MOCI (ideally, with the franchisee's full cooperation).
  6. Keep a look out for any updates from MOCI on the draft Franchise Law, which could significantly impact on the applicable legal framework and the franchisor / franchisee relationship. We will provide a further update on this once there is an announcement from MOCI.