Translation of the attached article:
Saudi Arabia pays great attention to franchising due to its social and economic effects, which help small investors find investment opportunities and generate profits that contribute to strengthening the national economy.
This is especially because franchise projects are among the most successful and effective ways to generate profits with lower risk rates compared to other projects. In this article, we will explain the meaning of the Franchise Law and its conditions.
What Is the Franchise Law in Saudi Arabia?
A franchise means that a person called the franchisor grants another person called the franchisee the right to conduct business for their own account in connection with the trade name or trademark owned by the franchisor or licensed to them for use.
This includes the technical know-how and operational expertise provided to the franchisee, as well as defining the mechanism for operating the franchise business. This is done in return for a financial or non-financial consideration, excluding amounts paid by the franchisee to the franchisor in exchange for services or goods.
The Franchise Law: Why Was It Issued and What Are Its Objectives?
The Franchise Law was issued for several objectives, the most important of which include:
Providing an Opportunity for Entrepreneurs:
Franchising gives small and medium-sized business owners the opportunity to enter the market under a previously known trademark, which reduces the risks associated with starting a business in the traditional way.
Brand Expansion:
Franchisors can expand the scope of their brands across Saudi Arabia or globally without needing to make a large investment in establishing new branches. Franchising also helps increase customer loyalty and build the brand’s reputation.
Transfer of Expertise and Knowledge:
The franchisee receives training and support from the franchisor, which ensures high performance standards and unified operational quality. This support includes marketing strategies, training plans, and operations management.
Strengthening the Saudi Economy:
It supports Saudi Vision 2030 by encouraging investment in small and medium-sized projects, helping create new job opportunities in the Saudi market and enhancing economic diversification.
Definition of Franchise and the Parties to the Relationship
A franchise agreement is a document that regulates the contractual relationship between the franchisee and the franchisor. The agreement regulates the duties and rights of both parties and ensures that the conditions related to franchising in the Kingdom are fulfilled.
Under the agreement, the franchisor is obligated to allow the other party to use its trademark, and is also obligated to provide the necessary technical and operational training.
The franchisee is also obligated to comply with the brand’s operating model, pay the agreed fees, and maintain the confidentiality of information related to the trademark.
Agreements Excluded from the Franchise Law
There are certain excluded agreements specified by the Saudi regulator when issuing the Franchise Law, including:
- Concessions issued or granted under royal decrees.
- Contracts or agreements subject to the Commercial Agencies Law in the Kingdom.
- Contracts or agreements limited to the sale and purchase of goods, the provision of services bearing a trademark, or the use of a trademark or any other intellectual property rights in relation to any service or goods.
- Arrangements under which the franchisee is wholly owned, directly or indirectly, by the franchisor.
- Any other arrangements or agreements specified by the regulations.
Conditions for Granting a Franchise Under the Saudi Law
There are several conditions that must be met to grant a franchise under the Saudi law. These conditions are as follows:
- The franchise business must be practiced according to the franchise business model for a period of no less than one year by two persons or at least through two different points of sale, and one of these persons must be the franchisor or any person within its group.
- If the franchisor does not practice the franchise business itself in the Kingdom, the franchisee may not grant the franchise or offer the franchise opportunity until after practicing the franchise business for a period of no less than one year. The Minister of Commerce and Investment may amend this period.
- The franchise agreement and disclosure document must be registered with the Ministry of Commerce and Investment.
- The franchisor must provide the franchisee with a copy of the disclosure document at least 14 days before the date of signing the franchise agreement or the date on which the franchisee pays any consideration related to the franchise, whichever occurs first.
The Franchise Law and the Difference Between It and Commercial Agency
A franchise is a contract between two parties under which the franchisee is granted the right to use the trademark, operating systems, business model, and marketing plans for a specific period and within a specific geographical area.
A commercial agency, on the other hand, refers to a contractual relationship between the agent and the principal. In this case, the agent obtains the right to distribute or sell the parent company’s products within a specific scope, but is not bound by a specific operating model and does not have the right to represent or manage the trademark in the same way.
Franchise Agreement: Clauses That Must Not Be Missing
A franchise agreement should include several important clauses, the most important of which are:
- The franchise business and its description, the duration of the franchise agreement, its geographical scope, and the method of amending it.
- Any consideration payable by the franchisee to the franchisor, including fees for training the franchisee’s employees, franchise fees, technical support, and the method of calculating any amount payable in exchange for services or goods provided to the franchisee by the franchisor or by any person within its group.
- The obligations of both parties regarding the franchisor’s training of the franchisee’s employees.
- The franchisor’s obligation to provide the marketing, technical, and other expertise required by the nature of the granted franchise.
- The franchisee’s compliance with the instructions, presentation and marketing methods, and preservation of the franchise identity.
- Any obligation on the franchisor regarding the supply of any service or goods to the franchisee, and the franchisee’s obligation to obtain such service or goods from the franchisor directly or through another party based on the franchisor’s instructions.
- The franchisee’s rights to use any trademark and any other intellectual property rights related to the franchise business, and the obligations of both parties in case of infringement of intellectual property rights and the resulting compensation.
- The method for settling any dispute related to the franchise agreement.
- The effects resulting from any change in the ownership of the franchisor, the franchisee, or the person controlling either of them.
- The extent to which the franchisee is entitled to grant a sub-franchise to others.
- Any other clauses specified by the regulations.
Obligations of the Franchisor and the Franchisee
Obligations of the Franchisor
There are several obligations of the franchisor in Saudi Arabia, including the following:
- Defining the rights granted to the franchisee in relation to the franchise.
- Defining the franchise business model in detail, including setting standards and issuing instructions that the franchisee must comply with when practicing the franchise business in a way that enables them to operate the business, as well as providing operating manuals.
- Providing the marketing, technical, and other expertise required by the nature of the granted franchise.
- Training the franchisee’s employees.
- Providing the franchisee directly or through another party with the services or goods related to the franchise throughout the term of the franchise agreement, except for services and goods that the franchisee is allowed to purchase from third parties.
- Maintaining the confidentiality of financial and accounting data and information related to the franchisee’s business.
- Responding to the franchisee’s request to provide details of the financial consideration due from or paid by them regarding the practice of the franchise business.
- Not establishing any entity that practices an activity similar to the franchisee’s activity in the geographical area specified in the franchise agreement, or granting others the right to do so during the term of the agreement.
- Fulfilling the obligations stated in the franchise agreement in good faith.
- Providing franchisees with a report explaining how contributed amounts were spent, if the franchisor creates a bank account to finance marketing and advertising activities and franchisees practicing franchise business in the Kingdom contribute to it, provided that the report is submitted within four months from the end of its fiscal year.
Obligations of the Franchisee
The franchisee is obligated to:
- Obtain the franchisor’s approval for any change in the services, goods, or method of practicing the franchise business.
- Provide the franchisor with data related to the franchise business that enables the franchisor to develop the franchise business model, including accounting and financial data related to such business.
- Allow the franchisor or its representatives to inspect the facilities used in practicing the franchise business, provided that this does not harm the franchisee or disrupt its business.
- Obtain the franchisor’s approval when changing the place designated for practicing the franchise business.
- Fulfill the obligations stated in the franchise agreement in good faith.
Why Is Nawaf bin Awad Al-Harbi Law Firm the Most Suitable Choice in Franchise Cases?
Franchising requires a precise understanding of the laws and legal obligations that govern the relationship between the franchisor and the franchisee. Any mistake in understanding the obligations and rights or in drafting the agreement may lead to disputes between the parties.
Therefore, Nawaf bin Awad Al-Harbi Law Firm provides specialized legal services in the field of franchising, including reviewing and drafting franchise agreements, providing legal consultations to investors and entrepreneurs, and analyzing the legal risks associated with commercial agreements.
The firm also helps clients understand and comply with the requirements of the Franchise Law, and represents them in disputes related to franchise agreements when needed, ensuring the protection of rights and achieving the best legal and commercial outcomes.
Contact now with the best companies and establishments lawyer to establish a franchise in Saudi Arabia, draft franchise agreements, ensure both parties comply with legal conditions, and protect your legal rights while practicing franchise business under the approved regulations.
Conclusion
The Franchise Law is one of the important laws that helps regulate the relationship between the franchisor and the franchisee and protect the mutual rights and obligations of both parties. This enhances transparency between the parties and reduces potential disputes between them.
If the franchise is based on a trademark that will be sold or assigned, you may need to understand trademark ownership transfer before completing any procedure.
Frequently Asked Questions
What Is a Franchise Agreement?
It is a document that regulates the contractual relationship between the franchisee and the franchisor. It regulates the duties and rights of both parties and ensures that the conditions related to franchising in the Kingdom are fulfilled. Under this agreement, the franchisor is obligated to allow the other party to use its trademark, and is also obligated to provide the necessary technical and operational training.
Does the Franchisee Have the Right to Transfer the Franchise to Another Person?
This depends on the terms of the franchise agreement concluded between the parties, as many agreements include controls or prior approvals before assigning or transferring the franchise to another party.
When Is It Recommended to Seek the Assistance of a Lawyer Before Signing a Franchise Agreement?
It is recommended to seek the assistance of a lawyer before signing any franchise agreement in order to review the contractual clauses and understand the rights, obligations, and potential risks.
