Answer ... Franchising is regulated in Saudi Arabia under the Franchise Law (Cabinet Decision 122/1441) and its accompanying Implementing Regulations (Ministerial Decision 591/1441).

The Franchise Law and the Implementing Regulations replace the commercial agency law with respect to the franchisor-franchisee relationship. Specifically, an agreement that is subject to the commercial agency law in Saudi Arabia is expressly not considered a franchise agreement for the purposes of the Franchise Law.

Answer ... The Franchise Law is applicable to both domestic and foreign franchisors.

Answer ... No; however, there is an exemption for franchises granted or issued under a royal decree, which are not considered ‘franchise agreements’ for the purposes of the Franchise Law.

Answer ... Under the Franchise Law, it is envisioned that a commercial franchise centre, established at the General Authority for Small and Medium Enterprises (Monshaat), under agreement with the Ministry of Commerce and Industry, will have the power to enforce certain aspects of the Franchise Law. Its powers will include the following:

• to set the necessary conditions to conduct brokerage and conciliation activities in commercial franchising;
• to prepare programmes and arrange events to raise awareness of commercial franchise activities, relations and opportunities;
• to prepare bulletins and awareness-raising and cultural documents related to commercial franchising;
• to prepare studies and research and gather information and statistics related to commercial franchising;
• to raise awareness among commercial franchising players on the rules, regulations and decisions related to their practice;
• to identify obstacles faced by commercial franchising players, discuss them with the competent government authorities and find appropriate solutions thereto;
• to settle disputes between franchisors and franchisees through amicable means in coordination with the other specialised centres; and
• to handle any other task assigned to it by the board of directors of Monshaat.

Answer ... Both the franchise agreement and the franchise disclosure document must be registered with Monshaat.

Furthermore, if there is any breach of the Franchise Law or the Implementing Regulations, the minister of commerce and investment can establish a committee to examinate the violation. The committee may impose any applicable penalty (such violations may be punished by a fine not exceeding SAR 500,000).

Answer ... There are no trade associations for the franchise sector in Saudi Arabia.

Answer ... Franchising is common in Saudi Arabia and many well-known international brands have already established a presence within the jurisdiction.

Answer ... Franchising is common across multiple consumer sectors, including food and beverage, retail, beauty, education, healthcare and hospitality.

Answer ... Franchising is a large and growing sector in Saudi Arabia. Typically, most franchisors will have a separate ‘international franchisor’ entity, which is separate from the franchisor’s other IP entity, operating entity or domestic franchise entity. The purpose of the international franchisor entity is to enter into franchise agreements and to grant franchising rights to local Saudi-based franchisees.

Answer ... Both models are common in Saudi Arabia. However, the development area model is more prevalent for larger and well-known international brands looking to enter the jurisdiction.

Where a master franchisee is granted development rights and grants sub-franchises to third parties to operate within Saudi Arabia, the master franchisee will also be obliged to comply with the Franchise Law and the Implementing Regulations, including (among other things):

• issuing disclosure documents to prospective sub-franchisees; and
• registering the sub-franchise agreements and disclosure documents.

Answer ... Single unit franchise models are less common, but can be useful where the franchisor is looking to develop a concept or brand new to the Middle East region, or wants to ‘test out’ a new franchisee or a location before committing to a significant number of outlets.

Answer ... There are some disadvantages to the master franchising model where sub-franchise rights are granted. Given that there is no legal relationship between the franchisor and the sub-franchisee, it can be difficult to enforce obligations, particularly those concerning brand protection and IP infringements. As discussed in question 3.2, a single unit franchise model allows the franchisor to assess whether the prospective franchise business will be successful and whether the franchisee is capable of taking on more responsibility.

Answer ... Certain cultural and religious sensitivities should be considered when franchising in Saudi Arabia. For example, operating hours and opening obligations can be impacted during the holy month of Ramadan, on Fridays or otherwise during prayer times.

For food and beverage brands, there are restrictions on serving pork products and alcohol. Where this is an integral part of the franchise business, these restrictions should be provided for in the franchise agreement, as the franchisee may need to make adjustments to the menu.

Also, it is common for the franchisee to lease the premises from which it will conduct the franchised business. This is different from other countries where it is customary for the franchisor to hold the lease and then sub-let to the franchisee. Commercial leases in Saudi Arabia are usually for three to five years and tenants are expected to pay at least one entire year’s rent upfront.

Answer ... Under Article 1 of the Franchise Law, the unofficial English translation of the definition of a ‘franchise’ is as follows:

Answer ... Pre-contractual disclosures are required under the Franchise Law, which must be provided to the prospective franchisee at least 14 days prior to execution of the franchise agreement or payment of any moneys by the prospective franchisee. The matters that must be included in the disclosure document are prescribed under the Implementing Regulations (see question 6).

Article 11 of the Franchise Law and Article 8 of the Implementing Regulations set out some of the mandatory terms to be included in the franchise agreement (see question 7).

Under the Franchise Law, both the franchise agreement and the disclosure document must be written in Arabic. If either document is written in another language, it must be translated by a certified translator.

It is mandatory for both the franchise agreement and the disclosure document to be registered with the Ministry of Commerce and Industry. The franchisor is responsible for registration and must register the documentation within 90 days of execution of the agreement.

Answer ... No answer submitted for this question.

Answer ... No answer submitted for this question.

Answer ... There are no prohibited activities.

Answer ... It is possible for a foreign franchisor to enter the Saudi Arabia market by appointing a local entity as its franchisee. Before a foreign franchisor can offer franchises in Saudi Arabia, Article 5 of the Franchise Law requires that the franchise business model have been operating for a period not less than one year by two persons or in at least two different outlets.

Answer ... Foreign franchisors are not required to have a presence in Saudi Arabia or to incorporate a legal entity in order to establish a franchise relationship. However, it is recommended that a foreign franchisor incorporate a separate legal entity in its country of incorporation – for example, from which it grants and manages the franchise rights.

Answer ... There are no requirements or restrictions when selecting or recruiting a franchisee in Saudi Arabia.

Answer ... Franchisees must have the appropriate business/trade licence to conduct business in Saudi.

Answer ... All franchisors are subject to pre-contractual disclosure obligations. As noted in question 4.2, the Implementing Regulations set out the mandatory items that must be disclosed to a prospective franchisee. The Franchise Law requires that the disclosure document be written in Arabic and be clear and accurate. The disclosure document must be accompanied by a form of the franchise agreement.

If there is any material change in the disclosure document after the franchisor has provided it to the prospective franchisee, but before the franchise agreement is signed, the franchisor must submit a new disclosure document or a separate document. Article 6 of the Implementing Regulations states that: “any change in facts or circumstances that has a material impact on the value of the franchise business or the franchisee’s decision to conclude the franchise agreement shall be deemed a fundamental change.”

Article 7 of the Implementing Regulations imposes additional obligations on the franchisor in the event that information provided in the disclosure document relates to previous or expected financial performance.

Answer ... See question 6.1.

Answer ... See question 6.1.

Answer ... In the event of any breach by franchisor of its pre-contractual disclosure requirements or the registration requirements, the franchisee has the right, within one year of learning of the breach or within three years of the date of the breach (whichever is earlier), to terminate the franchise agreement without compensating the franchisor.

If the franchisee terminates the franchise agreement on this basis, then under Article 20 of the Franchise Law, the franchisor will be required to:

• repurchase material assets used exclusively in the franchise business that the franchisee purchased from it or from others based on its directions; and
• compensate the franchisee for any loss incurred in the establishment, acquisition or operation of the franchise business, and for any other damage incurred by it.

As mentioned in question 1.5, the committee may also investigate any violations of the Franchise Law.

Answer ... From the franchisor’s perspective, it can be difficult to obtain extensive information on a prospective franchisee in Saudi Arabia, as this information is not publicly available. This can make it difficult to conduct effective independent due diligence on a prospective franchisee. A lot of reliance is placed on the cooperation of the franchisee to provide corporate documents and respond to questions on the company (eg, the franchisee should be asked to provide its commercial registration certificate and articles of association).

Answer ... There are no restrictions imposed on franchise brokers in Saudi Arabia.

Answer ... No answer submitted for this question.

Answer ... Under the Franchise Law, the franchise agreement must be in writing, in Arabic and signed by both parties. If it is written in any other language, it must be translated into Arabic through a certified translation.

Article 11 of the Franchise Law provides that a franchise agreement must include the following:

• the franchise business and a description thereof, the duration of the franchise agreement, the method for amending the agreement and the geographical scope of the agreement;
• any consideration that the franchisee must pay to the franchisor;
• the obligations of both parties concerning the training of the franchisee’s employees by the franchisor;
• the obligation of the franchisor to provide technical, marketing and other types of experience required by the nature of the granted franchise;
• the obligation of the franchisee to adhere to the instructions, marketing methods, display and maintenance of the franchise identity;
• any obligations on the franchisor related to the supply of any goods or services to the franchisee, and the obligations of the franchisee concerning obtaining such goods or services directly from the franchisor or through another party pursuant to the instructions of the franchisor;
• the rights of the franchisee to use any trademarks or other IP rights related to the franchise business, and the obligations of both parties in case of violation of the IP rights and the compensation resulting from the same;
• the mechanism for resolving any dispute related to the franchise agreement;
• the extent to which the franchisee is entitled to grant unit franchise to others and the provisions thereof; and
• the effects of any change in ownership of the franchisee, the franchisor or a person controlling either one of them.

Furthermore, Article 8 of the Implementing Regulations requires a franchise agreement to include the following:

• any restrictions imposed on the franchisee as regards the transfer of any of its rights under the franchise agreement to third parties;
• the trademark owner, the trade name and other IP rights used in the franchise business, and the franchisor’s relationship with the trademark owner if it is not the owner;
• the rights and obligations of both the franchisor and the franchisee to terminate the franchise agreement;
• the franchisee’s right to renew, not renew or extend the franchise agreement, if any;
• the rights and obligations of both the franchisor and the franchisee arising from the termination or expiry of the franchise agreement;
• any restrictions imposed on either the franchisor or the franchisee regarding the exercise of any competing business during the period of validity of the franchising agreement or after its termination or expiry (without prejudice to the Competition Law);
• the franchisee’s commitment not to harm the reputation of the franchisor and the franchise business;
• the obligations of the franchisee related to the franchise business site or headquarters, if any, and its right to change the same, if any; and
• the obligations of the franchisor and the franchisee related to the confidentiality of information and data protection.

Answer ... It is possible for the contracting parties to choose a foreign law to govern the franchise agreement.

However, if a dispute is brought before a local court, the court may not uphold a foreign choice of law clause if the dispute concerns public policy or morality matters.

Answer ... Many of the provisions of the Franchise Law and the Implementing Regulations are subject to any agreement between the parties, as stipulated in the franchise agreement. However, under Article 8 of the Franchise Law, the franchisor must (unless agreed otherwise with the franchisee in writing):

• determine the rights granted to the franchisee concerning the franchise;
• determine the franchise business model in detail, including the statement of standards and the issuance of instructions that the franchisee must observe upon exercising the franchise business, enabling it to operate such works, and provide it with operating manuals;
• train the franchisee’s employees;
• provide technical, marketing and other types of experience required by the nature of the granted franchise;
• provide the franchisee, whether directly or through another party, with the goods or services related to the franchise throughout the term of the franchise agreement (except those goods and services that the franchisee must purchase from others);
• maintain the confidentiality of information, accounting and financial statements related to the franchisee’s works;
• respond to the franchisee’s request to provide details of the financial consideration due or paid by the franchisee concerning the exercise of the franchise business; and
• not create any establishment that undertakes activities similar to those of the franchisee in the geographical area specified in the franchise agreement, or grant the right therein throughout the term of the franchise agreement.

Answer ... Many of the provisions of the Franchise Law and the Implementing Regulations are subject to any agreement by the parties, as stipulated in the franchise agreement. However, under Article 9 of the Franchise Law, the franchisee must (unless agreed otherwise with the franchisor in writing):

• obtain the franchisor’s consent to any change in the goods, services or method of exercise of the franchise business;
• submit to the franchisor all data related to the franchise business in order to enable it to develop its franchise business model (including the financial and accounting statements related to such business);
• enable the franchisor or its representatives to inspect the franchisee’s facilities, provided that this does not entail disruption or damage to the franchisee’s business; and
• obtain the franchisor’s consent to any change in the location of the franchise business.

Answer ... See question 7.1. It is up to the parties to agree in the franchise agreement what restrictions (if any) are to be imposed on the parties regarding the exercise of any competing business for the franchise business during the period of validity of the agreement or after its termination or expiry (without prejudice to the Competition Law).

Further, unless the parties agree otherwise, Article 8 of the Franchise Law provides that the franchisor must not create any establishment that undertakes activities similar to those of the franchisee in the geographical area specified in the franchise agreement, or grant the right therein throughout the term of the franchise agreement (see question 7.3).

Answer ... Yes, Article 10 of the Franchise Law provides that the franchisor and franchisee must act in good faith when meeting their obligations set forth in the franchise agreement.

Answer ... It is important for the franchisor to set out all rights and obligations regarding renewal rights within the franchise agreement.

Unless the parties agree otherwise in writing under the franchise agreement, the Franchise Law provides that if the franchisee wishes to renew the franchise agreement, it should provide written notice to the franchisor at least 180 days before the date of expiry. The franchise agreement must be renewed for a similar period and under similar conditions, except in specific circumstances set out in the Franchise Law, such as the franchisee’s failure to pay consideration due under the franchise agreement.

If the franchise agreement is amended by changing any of the parties (in the case of an assignment or resale) or its term (in the case of a renewal), the franchisor must register the franchise amendment agreement with the Ministry of Commerce and Investment within 90 days of the date of its occurrence.

Answer ... The franchisor cannot terminate the franchise agreement before the expiry of the franchise term without the written consent of the franchisee, unless the termination has a legitimate cause. Article 18 of the Franchise Law sets out the circumstances in which the cause of termination will be legitimate as follows:

• The franchisee violates its substantial obligations under the franchise agreement and the violation is not rectified within a period not exceeding 14 days from the date on which the franchisor sends a written notice;
• The franchisee:
• • is liquidated or dissolved;
  • assigns the franchise business or the benefit thereof to its creditors; or
  • disposes of the assets related to the franchise business to others;
• The franchisee voluntarily leaves or suspends the exercise of the franchise business for a period exceeding 90 consecutive days;
• The franchisee fails again to comply with the provisions of the franchise agreement (or another agreement concluded with the franchisor or its affiliate concerning the franchise), despite the franchisor notifying it in writing of the non-performance of its obligations;
• The franchisee’s exercise of the franchise business poses a risk to public health and safety;
• The franchisee loses any of the licences needed to undertake its activities;
• The franchisee commits substantial violations of any provisions of applicable Saudi law that would negatively affect the reputation of the franchise business;
• The franchisee commits an act of commercial fraud in undertaking its activities;
• The franchisee infringes the franchisor’s IP rights during the franchise agreement term; or
• Another legitimate cause for termination as specified in the franchise agreement exists.

Answer ... There are no foreign exchange controls or restrictions on the remittance of funds in Saudi Arabia.

Answer ... Withholding taxes apply to franchising in Saudi Arabia.

Answer ... The operations manual is not considered a legally binding contract in the jurisdiction.

Answer ... Compliance with the franchisor’s operational standards should be specified as one of the franchisee’s obligations under the franchise agreement, with clear consequences of any related breaches. From a practical perspective, the franchisor should consider conducting regular site visits, audits and training to ensure that the franchisee is compliant.

Answer ... It is up to the parties to negotiate into the franchise agreement terms on the method for amending the franchise agreement (such terms may include the franchisor’s right to make unilateral changes to its operational standards during the term of the franchise agreement). This is subject to the parties’ obligations to act in good faith, as explained in question 7.6.

Answer ... Most companies will register their trademarks with the Saudi Authority of Intellectual Property prior to entering the market. Furthermore, there is an obligation under the Implementing Regulations to include in the disclosure document all trademark data used to distinguish the franchise business model. Trademark registration in Saudi Arabia provides first-to-file priority.

Answer ... It is common for the franchisor to protect its intellectual assets contractually, in order to prevent the recipient from using or disclosing the trade secret information (eg, a non-disclosure agreement). To further enhance the protection of its intellectual assets, the franchisor should ensure that any disclosure is done in the strictest of confidence.

One way to achieve this is for the franchisor to require the franchisee’s owners, key personnel and/or senior managers to sign a non-disclosure agreement directly with the franchisor. The franchise agreement should be specific about what the franchisor’s trade secrets are and include adequate protection provisions and enforcement rights.

The parties should ensure that acknowledgement of copyright ownership is specified in the franchise agreement. Such material is often translated into Arabic or, in the case of marketing material, tailored for use to suit market conditions. It is important that the franchise agreement is clear as to which party owns the copyright in the translation or modifications to the franchisor’s copyrighted materials.

Answer ... The franchisee will be required to comply with local Saudi labour laws and obtain the necessary permits and visas for its employees. There are rules in the jurisdiction requiring ‘Saudization’ – a process whereby Saudi companies are required to maintain a certain number of Saudi nationals within their workforce for certain roles.

Answer ... It is unlikely that franchisees will be considered employees of the franchisor, particularly where the franchisor is not registered in Saudi Arabia. The entity that sponsors an employee’s visa will be recognised as the employer.

Answer ... Cabinet Decision 372/1440 on the approval on the Competition Law focuses on encouraging fair competition and combating and preventing monopolistic practices that may affect lawful competition or the interests of consumers.

Provisions commonly seen in a standard franchise agreement – such as price controls and the mandatory purchase of products from authorised suppliers – are unlikely to require the approval of the Competition Regulation Committee.

Answer ... Cabinet Decision 628/1440 on the Approval of the E-Commerce Law regulates e-commerce in Saudi Arabia. It applies where an e-commerce service provider is selling to consumers located in Saudi Arabia.

There are no specific prohibitions under the law on franchisees using e-commerce in their businesses operations.

Answer ... There are no specific consumer protection laws in Saudi Arabia. Although some consumer protection provisions are included in the E-commerce Law, as well as in the banking and finance sectors, they are not specifically relevant to franchising.

Answer ... Not applicable, particularly as the most common method of franchising in Saudi Arabia is for foreign franchisors to grant development rights to a large franchisee entity. Franchisees are not mentioned specifically under the Consumer Protection Law.

Answer ... There is currently no federal data protection law in Saudi Arabia.

Answer ... Breaches of the provisions of Cabinet Decision 79/1428 on the Approval of the Anti-Cyber Crime Law – such as unlawful access to computers, websites or banking and credit data – may be punished by imprisonment or a fine. This may be relevant in the franchising context, given that the franchisor will often have its own intranet, e-commerce platforms or social media accounts.

Answer ... A commercial franchise centre will be established at the General Authority for Small and Medium-Sized Enterprises that, under agreement with the Ministry of Commerce and Investment, will settle disputes between franchisors and franchisees through amicable means.

Furthermore, Article 25 of the Franchise Law allows the parties to agree to settle disputes arising from the franchise agreement or the application of the Franchise Law by alternative means, such as arbitration, mediation or conciliation.

Answer ... Both mediation and arbitration are commonly used to resolve franchising disputes in Saudi Arabia.

Answer ... No answer submitted for this question.

Answer ... A class action regime was introduced in Saudi Arabia in 2017; however, it is relevant only for claims by shareholders of listed companies in Saudi Arabia (and is thus not relevant in the franchising context).

Answer ... Not applicable.

Answer ... The Franchise Law and its Implementing Regulations introduced additional disclosure obligations which have improved transparency and made it easier for local prospective franchisees to conduct their own due diligence to assess the suitability of franchise opportunities.

Answer ...

• Ensure that thorough due diligence is conducted on the prospective franchisee.
• Ensure that the disclosure and registration requirements are complied with, as failure to comply may result in significant consequences, such as the right to early termination by the franchisee and/or payment of compensation.
• Take steps to protect intellectual property by registering it with the Saudi Authority of Intellectual Property.