Franchising in the Kingdom of Saudi Arabia

The Kingdom of Saudi Arabia (KSA) is situated in western Asia in the Arabian Peninsula. In October 2018, the Saudi Economy was the largest in the Middle East and the 18th largest in the world. Saudi Arabia has taken several measures to develop a stimulating business environment and encourage entrepreneurs to invest in this Country, for example, across the franchises. In Saudi Arabia, franchising began in 1970. It succeeded significantly in the early 1990s with different types of international companies’ franchises in areas such as hotels or restaurants. Before, the franchise was regulated by Royal Decree Number m/11 dated 1382H(1969G) about the Saudi Commercial Agencies Regulations, but it was not appropriate for franchises.

In 2017, The Ministry of Commerce of Saudi Arabia made a draft about the Franchise Law. The Law was promulgated by Royal Decree Number M/22 dated 9/2/1441 (the Franchise Law) and came into effect in 2019. The Franchise law defined a franchise as the rights approved by the franchisor to the franchisee to do the franchise business under the franchisee’s account. It is a type of license got by a party to permit them to access a business’s processes, trademarks, and proprietary knowledge to offer a service or trade a product under the party’s name (franchisor). This Law is made up of 11 articles divided into 27 sections. The franchising system is a win-win relationship: the franchisor could expand their KSA businesses. The franchisee could develop and own investment and obtain support from the franchisor. For both, the risk is low; for example, the franchisee benefits from the franchisor’s administrative experience, who can guide in aspects such as finance, accounting, and legal matters. Another advantage is the facility of obtaining loans in the banks for the company’s history. Additionally, a franchisor has many years of experience and brand identity, facilitating franchisees to establish themselves and exist in the marketplace. On the other hand, if the franchisee presents marketing, financial or logistic difficulties, the franchisor could support him and help the franchisee do well; their relationship is mutual. For this support, the franchisor must have a unified training and control program that permits it to monitor the franchisee’s work carefully and make sure all requirements and circumstances of the franchise have been fulfilled and understood clearly. This includes providing the franchisee with operational manuals for the site, cleaning, and the final design.

One more Law that is very important in the KSA franchisee topic is the Gulf Cooperation Council (GCC) Trademark Law, which was approved by Royal Decree Number 51 on May 25th. This Law applies to the protection, registration, and licensing of trademarks that may be offered as part of franchises’ offers and sales. Before the franchisor’s registration, he/she must register or apply to register any trademark used for introducing the business model in Saudi Arabia. According to Article 3 of the Franchise law in KSA, it is mandatory to register the franchisor with the franchise agreement and the trademark, and any licensed intellectual property. Additionally, the franchisor must submit a disclosure document to the Ministry of Commerce (MOC) before the implementation of the franchise agreement he/she must attach documents such as a statement of disclosure, a copy of the draft franchise contract, and a copy of the certification for registration of the trademark; the documents shall be translated in Arabic by a certified translator and shall be attested by the KSA embassy/consulate in the jurisdiction of the franchisor. The franchise disclosure document (FDD) should be handed over to potential franchisees more than fourteen (14) days before signing the franchise contract or paying any franchise fee to the franchisor. Article 3, section 5 of the Franchise Law lays down that the franchisor should practice the business for one (1) year alternatively and have more than one unit. If not complying with the pre-sale disclosure obligations, the penalty will be a maximum of SAR 500.000 (Article 24 of the Franchise Law).

The most habitual form of business entity in KSA is a Limited Liability Company (LLC). Most local Saudi franchisors are recognized as LLCs. Furthermore, the Saudi franchise law does not mention anything about the existing franchise agreements signed before April 20th,2020. Legal experts expect that Courts would handle these situations case by case and find a suitable way to resolve disputes between franchisors and franchisees. On the other hand, trademarks are protected by the GCC Trademark Law, which was approved by Royal Decree Number 51 dated 25/05/2014G. A trademark registration frequently lasts for ten (10) years. It can be changed by submitting a renewal request and filling the restitution requirements; failure to protect a mark in Saudi Arabia will refuse the holder of the mark any rights under the valid regulations. Furthermore, know-how and trade secrets are protected from being unlawfully used by third parties with the Protection of Confidential Trade Secrets Regulations delivered by the Ministry of Commerce in Resolution Number 50 dated 25/02/1426h(05/04/2005G).

According to the Franchise Law in KSA, the franchisee can demand damages from the franchisor if a franchisor fails to fulfill mandatory disclosure obligations. One of the essential elements in a franchise disclosure document is the litigation clause. In case of a violation, fraud, or any legal reason, this clause will give the details about how to deal with these situations. Also, the franchisor could impose such restrictions as to sell, transfer, assign or dispose of the franchise in the franchise agreement. However, according to Royal Decree Number m/18 date 08/03/1428H(26/03/2007G) or the Electronic Transaction Law, electronic signatures are acceptable in Saudi Arabia. Article 14(3) lays down the requirements for the e-signature, such as the e-signature must be the signature of the person identified in the pertinent digital certificate, and it has not been changed since the electronic signature was affixed thereto. Finally, with COVID 19, the KSA has been commercially and economically affected, and there is a lot of business that has been closed. Furthermore, during the curfew and lockdown, the government authorities and agencies are handling all the procedures online, and slowly many companies such as the franchising market are returning. This reappearance invites encouragement to many businesses to increase in the Saudi Market.