The long-awaited Saudi Franchise Law will take effect on 22 April 2020 and will apply to all franchises operating wholly or partly within the Kingdom, including franchise agreements entered into before the effective date of the Law (with certain provisions not applying to pre-existing agreements) and including those between foreign franchisors and local franchisees.

Introduction

The long anticipated new Saudi Franchise Law (the Law), M/22 of 1441H (2019) was approved by the Council of Ministers on 09/02/1441H (corresponding to 8 October 2019) and will come into effect on 22 April 2020.

With the introduction of the Law, we assume that the Decision of the Minister of Commerce Number 1012 of 17/09/1412H (corresponding to 22 March 1992) which determined that franchising would be considered a form of “commercial agency” governed by the Commercial Agencies Law (CAL), has been repealed. This view is supported by Article 27 of the Law which provides that “any provisions conflicting with the Law shall be repealed”. Furthermore, Article 4(2) of the Law provides that agreements or contracts subject to the Kingdom’s Commercial Agency Law are not considered as franchise agreements.

Application to Existing Franchise Agreement

The Royal Decree provides that Articles 5 (franchisor experience required), 6 and 7 (registration and disclosure), 8(2)* and 9(2) (franchisor obligations), 11 (franchise agreement contents) and 17 and 19 (termination and compensation for franchisor breach of its disclosure and registration obligations) do not apply to franchise agreements entered into prior to the Law taking effect (Pre-existing Agreements). As a result, franchisors which actually enter into franchise agreements prior to the effective date of the Law would not, for example, be subject to the default non-competition provision in Article 8 as one of those Articles that the Law provides does not apply to Pre-existing agreements. On the other hand, the renewal provisions contained in Article 15 will apply to Pre-existing Agreements and hence some franchisors will presumably wish to consider including in their agreements to be entered before 22 April 2020 adequate opt-out language as invited by the opening phrase of Article 15.

It is also worth noting that the Royal Decree pursuant to which the Law was issued provides that the Council of Ministers may exempt certain categories of franchisors and franchisees from some of the requirements under the Law based on criteria to be proposed by the Minister of Commerce and Investment (the Ministry). Such criteria should take into account the status of the relevant sector, type of activity and the size of market players.

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To speak to us in relation to any franchising issues in Saudi Arabia, please feel free to contact one of the lawyers below.

Author

George Sayen is the Head of the Corporate practice in the Gulf and the Co-Managing Partner of the associated offices in Riyadh and Jeddah. He has been residing in Riyadh and handling Saudi legal matters since 1987, actively advising Saudi Arabian and foreign clients on full range of corporate and commercial law matters including corporate/commercial transactions, major projects, M&A, employment, joint ventures, government contracting and competition law.

Author

Mohammad Al Rasheed is a partner in our UAE/Saudi Arabian Corporate & Securities practice, specialising in mergers and acquisitions, initial public offerings and private placements. Mohammad has worked on transactions in the Kingdom of Saudi Arabia for more than 10 years, and has developed an in-depth knowledge of the Saudi Arabian market. Although based in the UAE, his practice is split between the Kingdom of Saudi Arabia and the UAE.

Author

Christiana O'Connell-Schizas is an associate of Legal Advisors Abdulaziz Alajlan & Partners in association with Baker & McKenzie Limited. She joined the firm at the beginning of 2014 and is actively involved in advising both Saudi Arabian and foreign clients on a wide range of corporate, commercial and employment matters and M&A transactions.

Author

Robert (Bob) Cartwright is an Of Counsel at Legal Advisors Abdulaziz Alajlan & Partners in association with Baker & McKenzie Limited. He joined the firm in 2011 and is based in Riyadh.

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