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    The Saudi Franchise Law

    With the continuation of the pace of structural reforms targeted by the Kingdom, which seeks to enact legislation and laws that help in the distribution of revenue sources and the advancement of the Saudi economy, a Royal Decree No. 22 dated of 09/02/1441 AH was issued and published in Um al-Qura newspaper, issue No. 4802 dated 02/26/1441 AH, as the law consists of 27 articles divided into 11 chapters, knowing that the law will be implemented, God willing, after one hundred and eighty days from the date of its publication in The official newspaper, as this will be on Tuesday 28/08/1441 AH corresponding to 04/21/2020 AD.

    The Franchise or commercial franchise gives an opportunity for entrepreneurs to start doing business professionally, and expand rapidly based on the reputation and experience of merchants who have been doing business for a long time.

    The concept of “Franchise” appeared commercially after the War of Independence in the United States of America in 1871, especially in the marketing of sewing machines, where manufacturers and distributors of these machines found it difficult to distribute said machines, due to the expansion of the American market and the lack of means of communication, and so the sewing machine producers invented this concept in order to hire people and give them a license to manufacture, maintain and sell machines under the same brand. The International Franchise Association now puts more than 75 different categories in its classifications in order to classify businesses that can often be franchised.

    In the United Arab Emirates, there is no such law or legislation for franchising. Their reliance is on federal laws related to trademarks, commercial agencies and intellectual property. Arbitration is the peremptory means in settling disputes related to franchise. There are two types of agreements within the Emirates related to commercial franchise, the registered and the unregistered. The registration is done through the Ministry of Economy, such as the registration of trademarks as well. The dispute shall be brought when it arises within the UAE courts in accordance with the provisions of Federal Law No. 13 of 1981 AD, as amended, related to commercial agencies, and the Chamber of Abu Dhabi encourages this approach in line with the state’s strategy and the Chamber’s vision through the Entrepreneur Development Department by providing consultancy, administrative studies, services for businessmen, linking to global franchise networks, and developing relations with external parties related to franchise activities in support and development of brand activities.

    As for the Saudi commercial franchise, it is in line with international franchise laws, taking into account intellectual property rights. The Law also specified the obligations of both the franchisor and the franchisee. The Law defines the franchisor as: (a person of a natural or legal capacity who grants the concession under the concession agreement, and this includes the main franchisor in relation to his relationship with the sub-franchisor) and the franchisee: (a person of a natural or legal capacity who is granted the franchise under the franchise agreement and includes the sub-franchisee in relation to its relationship with the main franchisor).

    In a simplified way, the law has listed some obligations on the franchisor, including, but not limited to, training the franchisor’s employees, providing technical, marketing and other expertise required by the nature of the concession granted, as well as what is stated in Article 8 of the law.

    The law also obligated the franchisor, for example, to provide the franchisor with data related to the franchise business, which would enable him to develop the franchise business model, including the financial and accounting data related to those business, and to enable him to inspect the facilities used in carrying out the franchise business, provided that this did not result in the disruption of the business of the franchisor privilege and damage it.

    It is noted that the concession law has taken into account major principles in the science of concession in the event that there is no provision for them in the main concession contract. It also left the option for the parties to the relationship to agree among themselves to violate some of these rules, provided that the agreement is in writing.

    The law was distinguished by the establishment of a committee specialized in commercial regulations consisting of three members appointed by a ministerial decision to look into violations of the provisions of the law without prejudice to the relevant regulations. This committee is located in the General Authority for Small and Medium Enterprises, which has set the necessary conditions for practicing mediation and conciliation in commercial concessions, educating practitioners of commercial franchise laws with relevant laws, regulations, and decisions, and working to settle disputes that arise between franchisees and grantors by friendly means in coordination with other specialized centers, according to the decree. Royal No. m/22, dated 09/02/1441 AH, bearing in mind that those against whom a decision was issued by that committee may file a grievance against it before the Board of Grievances. This will undoubtedly facilitate and organize the work of the franchise business. The law allowed for the settlement of disputes arising from concession agreements to be agreed upon by applying the law by alternative means such as arbitration, mediation and conciliation. Claims for compensation as a result of the franchisor’s termination of the concession agreement are not heard after the expiration of three years from the date of termination of the concession agreement. The law also indicated another time limitation that claims for compensation as a result of the concessionaire or the concessionaire’s breach of his obligations stipulated in the law or in the concession agreement shall not be heard after the lapse of one year from the date on which the non-violating party became aware of the breach or after the lapse of three years from the date of the breach, whichever is earlier.

    For all of the above, our firm has a long experience in drafting and concluding commercial concession contracts, and if there are any inquiries, we will be happy to answer them.

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