Franchise Contract in Saudi Arabia

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In Saudi Arabia, franchise started small in the late seventies and early eighties; as it was in the form of import from outside the Kingdom, and then this phase has expanded until the number of international companies operating in the franchise field has exceeded 250 companies in the Saudi market.

In the early nineties, however, several Saudi companies started franchising outside the Kingdom; as they have 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 of the world, including Sweden, and Northern Europe.

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 franchiseeís 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 franchise network

How to Formulate 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 within the unnamed contracts; i.e. the contracts that are not regulated by the civil laws, where the contract parties can formulate its content freely; however, the absence of laws does not mean full freedom in the formulation of its provisions.

Under the principle of freedom of contract applicable in the commercial systems, the two parties can contract among themselves at their own discretion; provided that there is no conflict between the contractís 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 contractís content is built.

The Most Common Form Is:

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, in order to achieve better organization and understanding of the contractís content, there should be a definition 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 contractís conclusion.
Provisions that define the partiesí rights and obligations during the contractís term.
Provisions that govern the reasons and methods for the contractís termination.
Franchiseeís work area.
Trademarks protection.
Protection of the companyís secrets.
Competitive activities.
Franchise fees and marketing fees.
Promotion and advertising.
Regulatory powers of the franchisor.

The final rulings that mostly concern 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 franchisorís entitlements, or the determination of the partiesí obligations after the completion of the cooperation.

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 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 Franchisorís Trademark on the Shops or Restaurants Billboards

Adding in the franchiseeís commercial register that 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, which is the franchisor, to register another franchisee or distributor in the same spatial scale of the franchise contract.

(Prevention) the inability of the franchisor to register another franchisee or distributor in the same spatial scale of the registered franchise contract; if there is a dispute or a lawsuit filed concerning the franchise contract until a final ruling is issued.

Franchise Contract Registration Conditions 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 franchisorís country.

It must be endorsed 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 its 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 contractís 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 contractís signing date.

Note that the registration fee is 500 riyals equivalent to 134 US dollars.

ABOUT THE AUTHOR: Abdel Halim Ammar
Abdel Halim Ammar is a Legal Advisor.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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