Franchise Contract

Written by Abdel Halim Ammar

Introduction

• In Saudi Arabia, the franchise started small in the late seventies and early eighties; as it was in the form of import from outside the Kingdom, this phase later expanded until the number of international companies operating in the franchise field exceeded 250 companies in the Saudi market; however, in the early nineties several Saudi companies started franchising outside the Kingdom; and they reached twenty-two companies today, one of which is called (Corn in a Cup), where the number of its franchises has reached 700 franchisees in many countries around the world, including Sweden, and Northern Europe.

The franchise is considered an opportunity to start a private commercial project under the trademark that had previously achieved successful experiences and used by many businessmen all over the world as the franchise gives freedom in managing the private work, but this freedom must be coupled with the responsibility for the decisions that are taken, especially since the franchise contracts rely on the franchisee’s responsibility in complying with the principles of the franchise contract, which also means the need to comply with the customer service procedures followed in the franchise network, the purchase of goods from the franchisor only, and the participation in all the promotional campaigns organized by the franchise network.

• Forming a Franchise Contract

The franchise contract is the foundation upon which the relationship between the franchisor and the franchisee is built, and it is classified among the unnamed contracts; i.e. the contracts that are not regulated by the civil laws, where the contract’s parties can form its content freely; however, the absence of laws does not constitute full freedom in the formulation of its provisions.

Under the principle of freedom of contract applicable in the commercial laws, the two parties may contract among themselves at their own discretion; provided that there is no conflict between the contract’s content or objective and the characteristics of the relationship or the law, and is not in violation of the public order. That way, the mentioned principle of freedom of contract defines the limits for formulating the content of the franchise contract.

Given the diversity of the investment areas and activities in the franchise, it is difficult to form a unified form for the franchise contract that can be applied to all the agreements that bear the franchise character. However, the conditions that must be included in each contract of this type can be defined; as they form the main axis, upon which the contract’s content is built.

The Most Common Form of the Franchise Contract:

• To start the franchise contract with a preamble, which determines the actual status, and the parties’ intentions, ideas and values, which will be the basis for the cooperation between them.
• Afterwards, and in order to achieve better organization and understanding of the contract’s content, there should be definitions included for the basic terms used therein.
• Subsequent conditions are then placed for cooperation based on the contract, which do not go beyond the following in any franchise contract:
• Provisions concerning the contract’s conclusion.
• Provisions that define the parties’ rights and obligations during the contract’s term.
• Provisions that govern the reasons and methods for the contract’s termination.
• Franchisee’s work area.
• Trademarks protection.
• Protection of the company’s secrets.
• Competitive activities.
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• Franchise fees and marketing fees.
• Promotion and advertising.
• Regulatory powers of the franchisor.
• The final rulings that are mostly concerning the legislations applicable to the matters not regulated by the contract and the methods for conducting amendments thereon.

In addition to the above, it is possible for the franchise contracts to contain additional conditions; concerning, for example, the penal conditions, the protection of the franchisor’s entitlements, or the determination of the parties’ obligations after the completion of the cooperation.

• The importance of registering the Franchise Contract at the Ministry of Commerce and Industry

The investors and businessmen, who wish to work in the franchise must be careful when choosing the company granting the franchise’s right; as they must choose a company that has a famous reputation and trademark with a high level of efficiency in its administrative and operational system, and they must resort to specialized consulting firms when negotiating and formulating the franchise contract; therefore, the importance of registering the franchise contract at the Ministry of Commerce and Industry lies in the following:

• Using the franchisor’s trademark on the billboards of shops or restaurants.
• Adding in the franchisee’s commercial register confirming he is the franchisee for the granting company.
• Giving the Saudi company the marketing strength and the business confidence in the dealing, for being the franchisee for a company with a global reputation and even before banks in case of borrowing.
• (Prevention) the inability of the foreign company (the franchisor) to register another franchisee or distributor in the same territorial locations of the franchise contract.
• (Prevention) the inability of the franchisor to register another franchisee or distributor in the same territorial locations of the registered franchise contract; if there is a dispute or a lawsuit filed concerning the franchise contract until a final ruling is issued.
• Conditions of the Franchise Contract Registration at the Ministry of Commerce and Industry in Saudi Arabia

The substantive and formal conditions required for registering the commercial agency contract in the franchise contract must be made available in order to register it at the Ministry of Commerce and Industry, as follows:

• Contract: The contract must contain the official name of the foreign company in Arabic and English languages in its literal form and not its definition, without any abbreviations or symbols; provided that its original form is endorsed by the Ministry of Foreign Affairs, the Chamber of Commerce, and the Saudi Embassy in the franchisor’s country.
• It must be certified by the Saudi Ministry of Foreign Affairs and the Saudi Chamber of Commerce.
• The contracting should be carried out with the manufacturer or franchisor directly, without the presence of any intermediary outside of their country.
• The types and names of the goods and services under the franchise contract must be clarified in detail, while enclosing any appendices or catalogues showing the products; provided that the contract’s term and the methods for its termination and renewal are identified.
• It must be submitted to the Ministry during the first three months from the contract’s signing date.
• Note that the registration fee is 500 riyals equivalent to 134 US dollars.