Comprehensive information about franchise agreements in Saudi Arabia

A franchise agreement in Saudi Arabia is an agreement between a franchisor and a franchisee, granting the franchise. The Franchise Law and its implementing regulations specify certain conditions that must be met in the agreement. This article will provide comprehensive legal information about franchise agreements for all franchisees and franchisors in Saudi Arabia.

Conditions for the validity of a franchise agreement

Article 11 of the system stipulates that the franchise agreement must be written in Arabic and signed by both parties, and if it is written in a language other than Arabic, it must be translated into Arabic by a certified translator.

If this condition is not met, the franchise agreement is considered absolutely null and void, meaning that the agreement is null and void by itself, because it is one of the conditions that relate to violating public order in Saudi Arabia and the rules for regulating the official language in transactions.

Key clauses in a franchise agreement

Article 11/2 of the regulations stipulates that the franchise agreement must include – in addition to what is agreed upon between its parties – the following:

The franchise activities and their description, the duration of the franchise agreement, how it can be amended, and its geographical scope.
Any consideration that the franchisee must pay to the franchisor, including the financial consideration for the franchise, the financial consideration for training the franchisee’s employees (if any), technical support, and the mechanism for calculating any amount paid as consideration for goods or services provided to the franchisee by the franchisor or any person within its group.
The obligations of both parties regarding the franchisor’s training of the franchisee’s employees.
The franchisor’s commitment to provide technical, marketing and other expertise required by the nature of the franchise granted.
The franchisee is obligated to comply with the instructions, marketing and presentation methods, and to maintain the franchise’s identity.
Any obligation on the part of the franchisor to supply any good or service to the franchisee, and the obligation of the franchisee to obtain that good or service from the franchisor directly or through another party based on the instructions of the franchisor.
The franchisee’s rights to use any trademark and any other intellectual property rights relating to the franchise business, and the obligations of both parties in the event of breach of intellectual property rights and the resulting compensation.
A mechanism for settling any dispute relating to the franchise agreement.
The extent to which the franchisee is entitled to grant a sub-franchise to a third party, and the provisions governing this.
The implications of any change in ownership of the franchisee, the franchisor, or the person controlling either of them.
Any other item specified by the regulations.

As for the other items stipulated in Article 8 of the regulations, they are as follows:

Any restrictions imposed on the franchisee regarding the transfer of any of his rights under the franchise agreement to a third party.
Identifying the owner of the trademark, trade name, or other intellectual property rights used in the franchise business, and the franchisee’s relationship to the owner if the franchisee is not the owner.
The rights and obligations of both the franchisor and the franchisee regarding the termination of the franchise agreement.
The franchisee has the right to renew or not renew the franchise agreement or extend it, if any.
The rights and obligations of both the franchisor and the franchisee upon termination or expiry of the franchise agreement.
Any restrictions imposed on both the franchisor and the franchisee regarding the practice of any business that competes with the franchise business during the term of the agreement or after its termination or expiry, without prejudice to the provisions of the Competition Law.
The franchisee’s obligation not to harm the reputation of the franchisor and the franchisee’s business.
The franchisee’s obligations relating to the location or premises of the franchise business, if any, and his right to change that location or premises, if any.
Obligations of both the franchisor and the franchisee relating to confidentiality and data protection.

Third: Renewal or extension of the franchise agreement

Unless the franchise agreement stipulates otherwise, if the franchisee wishes to renew or extend the franchise agreement, they must give written notice to the franchisor at least (one hundred and eighty) days before its expiry date. The agreement shall be renewed or extended for a period equal to its agreed term and under similar conditions, except in the following cases:

Franchisee and franchisee agree on new terms.
One of the cases stipulated in Article 18 of the system is confirmed.
Failure of the franchisee to pay the consideration due under the franchise agreement.
The franchisor’s consent for the franchisee to assign the franchise agreement and franchise business before the end of the franchise agreement to a person who meets the approved criteria for granting a franchise.
If the franchisor no longer wishes to conduct franchise business or to grant franchises in the Kingdom.
The franchisee’s failure to enter into a renewal or extension agreement in accordance with the franchisor’s reasonable requirements at least (60) days before the expiry of the franchise agreement.

Fourth: Assignment of the franchise agreement

Unless the franchise agreement provides otherwise, before changing the person who controls the franchisee or assigning the franchise agreement and business to a third party,

Exceptions

If it is unlikely that the assignee will have sufficient financial resources to enable him to fulfill the obligations incumbent upon the franchisee under the franchise agreement.
If the assignee is unable to meet the franchisor’s reasonable requirements regarding the assignment of the franchise agreement and business.
If the franchisee does not meet the criteria approved by the franchisor for selecting franchisees.
If the assignee does not agree – in writing – to assume the franchisee’s obligations under the franchise agreement from the date of assignment.
If the franchisee does not pay any amount due to the franchisee.
Any other case as specified by the regulations.

Subject to the provisions of Article 13 of the Regulations, the franchisor shall be deemed to have agreed by default to the assignment by the franchisee of the franchise agreement and franchise business to a third party or to a change in the person in control, if he does not respond – in writing – to the written request submitted to him in this regard by the franchisee, in accordance with what is specified in the Regulations.

Article 10 of the regulations stipulates that, subject to the provisions of Article 13 of the system, the franchisor may not object to a change in the person who controls the franchisee, or object to the franchisee assigning the franchise agreement and franchise business to a third party, or withdraw his consent after granting it, except in the following cases:

If it opens the door for the person potentially controlling the franchisee to any bankruptcy proceedings.
If the assignee does not have the necessary licenses or approvals to conduct franchise business, or is prohibited from doing so by virtue of a court ruling or regulatory provision.
إذا كان صاحب الامتياز مخلاً بأي من التزاماته الجوهرية المقررة بموجب اتفاقية الامتياز، ولم يعالج الإخلال خلال (14) يوماً من تاريخ تسلمه إخطاراً مكتوباً بذلك من مانح الامتياز.

How can Shihab Al Saleh Law Firm and Legal Consulting help you?

If you are interested in starting your own business and aspire to achieve rewarding financial returns with minimal risk and costs, then franchising offers you many advantages and opportunities, including financial, operational, and administrative benefits.

Drafting the franchise agreement and disclosure forms with complete legal accuracy.
Helping you to draft the binding Operations Manual.
Regulating the contractual relationship between you as a franchisee or franchisee and the other party.
Clarifying the rights and obligations of both parties in a way that protects your interests and ensures compliance with the system.
Representation in negotiations, dispute resolution, or amendments to existing agreements.

Feel free to contact us.

For more official details:
Franchise System – Systems Portal
Franchise Services – Ministry of Commerce
Company Formation and Commercial Contracts Services – Shihab Al Saleh Office

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