Definition of Franchise According to Saudi Law
According to the Saudi Franchis Law, a franchise is defined as a situation in which the franchisor grants the right to the franchisee to carry out specified business activities under the franchisor’s trademark or trade name, while providing them with the necessary technical expertise, operational knowledge, and procedural methods, in exchange for a financial or non-financial consideration (excluding payments for goods or services).
In other words, it is a contract that involves the transfer of a business model and comprehensive supervision from the franchisor to the franchisee.
Enabling the latter to operate independently using the franchisor’s experience and techniques. This definition is explicitly stated in Article 1 of the Saudi Franchise Law.
Regulatory Laws and Provisions Governing Franchise in Saudi Arabia
Franchise in the Kingdom is governed by the Saudi Franchise Law issued by Royal Decree No. (M/22), dated 9/2/1441 AH (8/10/2019 AD), which came into effect in Ramadan 1441 AH (April 2020).
The law is complemented by Executive Regulations issued by the Ministry of Commerce, which outline detailed provisions for registration procedures, disclosure requirements, contractual frameworks, and certain exceptions.
The law aims to promote franchising activities in Saudi Arabia by regulating the relationship between the franchisor and the franchisee based on transparency and freedom of contract.
It also safeguards the rights of both parties, especially upon contract termination, and mandates full disclosure of rights, obligations, and risks prior to contracting.
Legal and Commercial Advantages of Franchising in Saudi Arabia
From a legal standpoint, the Saudi Franchise Law provides a clear legal framework that enhances confidence between franchisor and franchisee, and protects the weaker party (usually the franchisee) through binding and transparent rules.
Such as requiring the franchisor to provide a disclosure document well before signing the contract. It ensures freedom of contract while maintaining transparency and offers mechanisms for dispute resolution.
From a commercial perspective, franchising allows entrepreneurs and investors to enter into established, successful ventures using tried-and-tested business models and recognized brands, thereby minimizing risks associated with new businesses.
It also contributes to improving the quality of goods and services in the Saudi market.
Also creates new job opportunities, and supports economic diversification.
Additionally, it facilitates expansion for both local and international brands within a favorable legal environment.
Franchise Registration Procedures in Saudi Arabia
The law requires that franchise agreements and disclosure documents be registered with the Ministry of Commerce
(via the Franchise Center in Monsha’at) to be legally effective.
The main steps typically include:
- Preparation of the Disclosure Document: The franchisor prepares a comprehensive disclosure document outlining the rights and obligations of both parties and any significant risks. It must be provided to the franchisee at least 14 days prior to signing the agreement.
- Drafting the Franchise Agreement: Both parties draft the contract in accordance with legal and regulatory requirements (e.g., it must be in Arabic, signed, and notarized) and include essential contract information.
- Submission to the Ministry: The parties submit the contract and disclosure document to the Ministry via the electronic registration platform. Official approval must be granted for the registration to be valid.
- Trademark Registration: It is preferable that the trademark used is already registered (or in the process of being registered) in Saudi Arabia with the Saudi Authority for Intellectual Property (SAIP) to protect rights prior to franchise activation.
Following these procedures is essential to ensure the legality of contractual relations.
And to benefit from legal protections provided under Saudi law.
Key Contractual Terms and Provisions
The law stipulates that the franchise agreement must be in Arabic, signed by both parties (with an accredited translation if in another language),
and must include the following essential terms:
- Description of Business Activities: Clearly define the scope of the franchise, duration, renewal terms, and geographical coverage.
- Financial Commitments: Specify the financial consideration payable by the franchisee to the franchisor (e.g., franchise fee, training and technical support fees, cost of goods/services).
- Franchisor’s Obligations: Including providing technical, training, and marketing support, as well as operational manuals and implementation guidance.
- Franchisee’s Obligations: Such as adhering to the franchisor’s standards for marketing and presentation, maintaining brand identity, and ensuring quality in line with the operating model.
- Intellectual Property Rights: Define the franchisee’s rights to use the franchisor’s trademarks and intellectual property, and consequences of infringement.
- Dispute Resolution Mechanism: Provide a framework for resolving disputes between the parties.
- Sub-Franchising and Assignment: Outline conditions under which the franchisee may sub-franchise or assign the agreement, subject to the franchisor’s approval.
- Other General Clauses: Including ownership changes, transfer of rights, and any additional terms as required by regulation.
Precise drafting of these terms is crucial to ensure clarity of rights and obligations and avoid future ambiguity.
Practical Applications of Franchising
Franchising is widely used across various economic sectors in Saudi Arabia, including:
- Food and Beverage: Local and international restaurant and coffee shop chains.
- Retail Sector: Clothing, footwear, home goods, and electronics stores.
- Health and Beauty: Beauty salons, private clinics, and fitness centers.
- Education and Training: Language and education centers, private schools, and kindergartens.
- Public Services: Maintenance, cleaning, IT services, car rentals, and logistics companies.
These examples illustrate how entrepreneurs or investors can engage in successful business models through franchise rights
instead of building a new brand from scratch.
Importance of Legal Review Before Signing
Before entering any franchise agreement, thorough legal review and negotiation of each clause is vital to safeguard rights.
Both the franchisor and franchisee must examine legal obligations, financial terms, restrictions, termination, and renewal conditions.
And all submitted documentation (disclosure and financial statements, if any).
Some risks only become apparent upon legal scrutiny, such as hidden liabilities or conditional penalties. Ensuring the franchisee’s financial and technical capacity to meet the franchisor’s standards is essential.
Engaging specialized legal counsel ensures proper interpretation of contract terms and the implementation of necessary amendments.
Thereby avoiding future disputes and protecting the investment.
Legal Support from Al-Mashora Law Firm
If you are an entrepreneur or investor about to enter into a franchise in Saudi Arabia agreement, it is wise to consult experienced legal experts.
Al-Mashora Law Firm provides specialized services in franchise and agency agreements, offering clear and precise contracts to protect both parties’ rights. Our legal team reviews all relevant documents (including operational manuals) to ensure compliance with Saudi laws and regulations. We offer comprehensive legal consultation regarding registration, licensing, and contractual obligations.
Our lawyers review drafts, disclosures, intellectual property issues, and more.
And can represent you in negotiations to ensure that your franchise agreement is concluded with full confidence and legal assurance.