The new Saudi Arabian Franchise Law ("FL") came into effect on 22 April 2020, it should be noted that the Implementing Regulations ("FLIR") relating to the FL are still pending. The IFLR will provide guidance on the implementation of the FL. The franchise business operators in the Kingdom of Saudi Arabia need to consider aligning their existing arrangements with the FL. A number of provisions of FL have retrospective effects and will influence the agreements entered into prior to the effective date. This article focuses on the provisions that will affect franchise arrangements entered into prior to the effective date. For the avoidance of doubt, these provisions are also applicable to the franchise arrangements entered into after the enactment of the FL.
Therefore, any franchise agreements that were drafted or are in place under the ambit of Commercial Agency Law must be reviewed and amended accordingly.
The articles of the FL that will apply retrospectively to franchise agreements entered into prior to 22 April 2020 relate to the registration of the franchise agreement, disclosure requirements relating to the franchise business itself, certain obligations imposed on the franchisor [1] , the main contents of the franchise agreement and the possible termination by the franchisee and claim for compensation by the franchisee in the event of a breach by the franchisor of the registration and disclosure requirements.
However, in our opinion, it remains to be seen how the Ministry of Commerce ("MoC") or indeed the FLIR will interpret the term "pre-existing" agreements. It may very well be that should the Franchisor and the Franchisee agree to any amendments or new conditions to a pre-existing agreement, the amended franchise agreement might be deemed as a new agreement which would subject the parties to FL in its entirety.
We would recommend that all existing franchise agreements are reviewed particularly with respect to the following areas since these matters apply to all franchise arrangements in Saudi Arabia irrespective of their date of execution:
- Fulfilling obligations in good faith – the FL states that both the franchisor and the franchisee are supposed to fulfil their obligations (as stated in the franchise agreement) in good faith but there is no definition in the FL of good faith Absent clear guidance (which may or may not be found in the FLIR), it may be assumed that general principles of Shari'ah will be used to interpret whether parties have acted in good faith or not.
- Change in Control of Franchisee or Transfer/Novation – Before a franchisee can undergo a change of control or novate/transfer the franchise business or agreement to a third party, it needs to obtain the franchisor's written approval [2]. The franchisor is not allowed to withhold its approval unreasonably and the FL provides examples of instances where a franchisor can withhold its approval (such as the proposed transferee not having the financial resources necessary to implement the obligations of the franchisee under the franchise agreement or if the proposed transferee does not meet the reasonable requirements of the franchisor with respect to the transfer of the franchise agreement or the franchise business). The FLIR may provide further guidance on the time frame within which the franchisor has to respond to any approval request made by the franchisee.
- Renewal/Extension of Franchise Agreement – Unless otherwise stated in the franchise agreement [3], a franchisee can request the renewal/extension of the franchise agreement by submitting a written request to the franchisor at least 180 days before the expiry of the franchise agreement. Again similar to the transfer and change of control, there are certain circumstances under which a renewal or extension will not take place such as the parties agreeing to new terms and conditions (thereby agreeing to a new agreement) or if there is a legitimate cause to terminate the agreement, such as the failure by the franchisee to pay the fees due under the franchise agreement or if the franchisor terminates the franchise agreement for legitimate cause (please see the termination provisions below).
- Termination – Other than termination of a franchise agreement occurring due to the death of a franchisee (if a natural person) or bankruptcy of a franchisee [4], a franchisor can only terminate a franchise agreement for legitimate cause before its expiry (unless the franchisee provides its written consent). Legitimate cause has been defined (amongst others):
- where the franchisee breaches any material obligation under the franchise agreement, and such breach remains un-remedied for 14 days from the day the franchisor notifies the franchisee in writing of such breach;
- if the franchisee loses any license required for conducting its franchise business;
- if the franchisee infringes the intellectual property of the Franchisor during the term of the franchise agreement.
Although the FL allows the franchise agreement to list any other matter that may be deemed a legitimate cause for termination, it remains to be seen whether the FLIR will elaborate on any other instances constituting legitimate cause.
- Compensation – the FL gives the franchisee the right to claim compensation from a franchisor in the event the franchisor terminates the franchise agreement without legitimate cause. Such compensation involves reimbursing the franchisee for any losses suffered in relation to setting up, acquiring or operating the franchise business in Saudi Arabia and any other damages suffered by the franchisee (this does not apply if the franchisor refuses to renew or extend the Franchise Agreement for reasons stipulated in the FL). The franchisor is also obligated to repurchase any physical assets bought by the franchisee within 60 days of the franchisee requesting the franchisor to do so. However, the remedies available under the FL are time-barred.
A franchisor can claim compensation from a franchisee for any losses suffered by the former resulting from the termination of the franchise agreement by the franchisee in violation of the FL [5].
- Penalties – any violations of the FL will result in fines not exceeding SAR500,000. A committee of three members will be set up by the MoC who will be responsible for handling cases of violations and imposing penalties on any offenders.
- Governing Law/Jurisdiction – The FL allows parties to settle any disputes relating to the franchise agreement through alternative dispute resolution. Interestingly, the FL does not specify any particular governing law leaving the possibility for the parties to agree to foreign law subject to the mandatory provisions of the FL. It remains to be seen whether the FLIR will shed further light on governing law.
In conclusion, although the FL provides a better framework for franchise arrangements, franchisors and franchisees have the option to navigate away from some of the requirements as long as both parties agree to the same clearly in the franchise agreement. However, given that the FLIR has still not been issued, there are several areas within the FL that require clarity especially with respect to registration and disclosure requirements that will impact all new franchise arrangements from April 2020. As an immediate step, parties with existing arrangements should undertake a careful review of their agreements to align them with the mandatory provisions of the FL.
Footnotes:
[1] The FL grants the franchisor the option to not follow all the obligations under Article 8 as long as the franchisee agrees in writing.
[2] However, the FL also permits the parties to agree to otherwise as long as this is stated in the Franchise Agreement.
[3] The FL grants the franchisor the option to opt out of the requirements of Article 15 as long as there are alternatives mentioned in the franchise agreement which the franchisee has agreed to.
[4] The FL grants the franchisor the option to opt out of the requirements of Article 16 if that the franchise agreement provides so.
[5] The FL grants the franchisee the option to opt out of the requirements of Article 20 (2) if that the franchise agreement provides so.
