the status of franchising laws in the arab region

The Status of Franchising Laws in the Arab Region: Traditional Rules and New Legislative Enactments

Mohammed Y. Mattar Clinical Professor of Law, Chair of the Legal Skills Department, Qatar University College of Law, Doha, [email protected]

Abstract

There has been a vast and rapid growth in the franchising business in the countries of the Middle East. The purpose of this article is to examine the status of franchising laws in the Arab World with particular focus on the commercial relationship between a franchisor and a franchisee. Most Arab countries rely on the traditional commercial agency laws to regulate the franchising business. These are designed to protect the interest of the national franchisee. Saudi Arabia is the first Arab country to adopt a comprehensive and independent law in the Arab region, while other countries rely on a code of conduct, an application of the distribution trade law or the implementation of the general rule of commercial agency. Saudi Arabia provides a detailed account of the franchising business, its establishment and its operation in an attempt to balance the interest of both, the franchisor and the franchisee.

Keywords

Franchising in the Arab region – commercial agency – Islamic law – Arab law – comparative law

1 Introduction1

In Yusuf Ahmed AlGhanim & Sons V. Toys R Us, Inc, a case decided by the Second Circuit of the United States Court of Appeals, in 1997, Toys “R” Us, Inc entered

1 This research is conducted within the framework of a research project funded by the Qatar National Research Fund (qnrf) – National Priorities Research Program (nprp)

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into a “License and Technical Assistance Agreement” and “Supply Agreement” with Alghanim, a privately owned Kuwaiti business. The agreement authorized Alghanim to open Toys “R” Us in Kuwait and 13 other countries in the Middle East. The agreement was signed in November of 1982. The first store opened in 1983. Three more stores opened in 1985 and 1988. The stores lost a sum of 86.65 million over the 11-year period from 1983 to 1993. Following the Gulf war, the two parties met to renegotiate the terms of the Franchising Agreement. The nego-tiations failed and Toys “R” Us sent Alghanim a notice of non-renewal, termi-nating the agreement, which was allegedly four days late in providing the six month notice required under the agreement, thus automatically extending the agreement for two more years. Toys “R” Us gave another notice of non-renewal. Alghanim offered to release Toys “R” Us from the franchising if they pay $2 mil-lion for losses that Alghanim had incurred in developing the Franchising busi-ness. They declined, and started negotiating with another business, invoking arbitration as the dispute resolution mechanism in the agreement. On July 11, 1996 the arbitrator awarded Alghanim $46.44 million plus interest for lost profits. The court of Appeal confirmed the arbitral award concluding that “The fact that Alghanim lost 86.65 million over ten years does not make the arbitrator’s award of future lost profits of $46 million “completely irrational”. The Court continued “Past losses do not necessarily negate any expectations of future profits.”2

Today, there has been a vast and rapid growth in the franchising business in the countries of the Middle East, especially the Gulf States; Saudi Arabia, Kuwait, United Arab Emirates, Oman, Bahrain and Qatar. This is especially seen in the international food and beverage sectors in franchising outlets such as, Five Guys, McDonalds, Burger King, Hardees, Wendy’s and Pizza Hut,3 in a market value of over 30 billion dollars4 and an annual growth of 27 per cent,5

– Cycle 11S – Qatar Foundation. The three-year research project (2019–2022) is entitled “Toward Reforming the Economic Legislative Mechanisms for Achieving Legal Security in light of the National Policies of the State of Qatar” – nprp11S-0101-180160.

2 Yusuf Ahmed Alghanim & Sons v. Toys ‘R’ Us, Inc., 126 F.3d 15, 23 (2d Cir. 1997). The Court concluded by saying that “Toys “R” Us merely takes issue with the arbitrator’s well-reasoned interpretations of those provisions, and simply offers its own contrary interpretations. Toys “R” Us does not advance a convincing argument that the arbitrator manifestly disregarded the agreement. We will not overturn the arbitrator’s award merely because we do not concur with the arbitrator’s reading of the agreement… We find the arbitrator’s interpretation of the contractual provisions supportable.”

3 http://francorpkuwait.com/growth-of-the-franchise-industry-in-the-middle-eastern-region/.

4 https://www.ameinfo.com/industry/finance/franchise-economy-international-franchise-exhibition-2019.

5 https://www.arabnews.com/node/1518186/saudi-arabia.

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http://francorpkuwait.com/growth-of-the-franchise-industry-in-the-middle-eastern-region/

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with more than 50 per cent from these international brands,6 thus contribut-ing to diverse business opportunities in the Arab region.7 Franchising is flour-ishing in the region, as a model of conducting business that may avoid risks associated with other types of investment.8

The purpose of this article is to inquire into the status of Franchising legis-lation in the Arab World. The question addressed is whether there is a specific franchising legislation or is franchising subject to the general civil and com-mercial laws. With few exceptions, franchising is regulated in accordance with the commercial agency laws. These laws will be examined. More recently Saudi Arabia passed a specific franchising law that will be discussed. The question becomes to what extent does the new law adopt the rules embodied in the commercial agency law which was designed to protect the agent, especially in the event of termination or non-renewal of the agreement. The focus of the article is on the commercial relationship between a franchisor and a fran-chisee rather than the transfer of technology or the rules governing intellectual property rights that may apply to the franchising agreement.

2 The Franchising Laws as Part of the Civil or Commercial Codes or as Independent Regulations

In some countries, franchising is covered as part of the civil code9 under different labels such as, complex entrepreneurial license10 or commercial concessions.11 In other countries, it is regulated under different commercial

6 https://m.gulf-times.com/story/654172/QIB-sponsors-Qatar-s-1st-Franchise-Conference-Expo-2020.

7 https://saudigazette.com.sa/article/543070/?utm_redirect=301.8 In the field of financing infrastructure projects, there have been a number of laws that

adopt the public-private model. See e.g., Law No. (12) Of 2020 of Qatar Organizing the Partnership between Public and Private Sector. See also, Law No. (1) of 2019 of Qatar Regulating the Investment of non-Qatari Capital in Economic Activity.

9 Such as, Belarus. (The civil code of 1998 was amended in 2004 and contained a chapter on complex entrepreneurial license for franchising), Azerbaijan. (The Civil Code of 1999 (articles 723- 731)), Albania. (Chapter xx- franchising (articles 1056- 1064)), Russia. (Chapter 54 of the Civil Code of 1996 in part 2 (articles 1027–1040) on commercial concessions or franchising), Lithuania. (The Civil Code of 2000 (articles 6–766 and 6–779) are devoted to franchising.)

10 Belarus. The civil code of 1998 was amended in 2004 and contained a chapter on complex entrepreneurial license for franchising.

11 Ukraine. (In 2004, a new civil code was adopted. Chapter 76 (Articles 1115–1129) contains provisions on commercial concession or franchising.) Moldova, (The 2003 civil code in chapter 11 contains 8 articles (1171–1178) on franchising.)

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laws, concerning development of commercial and artisanal enterprises12 or medium and small retail business13 or commercial partnership agreements14 or retail distribution of trade15 or the law of commercial affiliation16 or as part of other related laws such as competition law17 or consumer protection act18 or intellectual and industrial property laws.19 In some countries, franchising is covered by an independent, comprehensive and specific act20 or mainly as a disclosure law21 or merely within a code of conduct22

3 Application of the General Rules of Private Transactions to Franchising Agreements

It is well established that the general rules embodied in laws governing pri-vate transactions, whether the civil law or the commercial law, shall apply to a franchising agreement. For instance, a franchisor must deal with the franchise in good faith in accordance with the principle of good faith and fair dealings

12 France was the first country to develop a legislation relating to franchising in 1989. The law no. 89–1008 Concerning the Development of Commercial and Artisanal Enterprises and the improvement of their economic, legal and social environment. While the law was not franchise specific, article 1 thereof covered franchising. Then, the law was inserted into the commercial code, as article L330-3.

13 Japan. The law no 101 of 1973 Regarding Medium-Small Retail Business Promotion Act.14 Belgium. The 2005 law Regarding Pre-contractual Information in the Framework of

Commercial Partnership Agreements may be applied to franchising and other agreements of commercial partnerships.

15 Tunisia. (Chapter 5 of the Law No 2009–69 of 2009 Relating to the Distribution Trade), Spain. (The Law No. 7 of 1996 Relating to Retail Trade.)

16 Italy. (The Law No. 129 of 2004 on Provisions for the Discipline of Commercial Affiliation or Franchising.), Kazakhstan. (The Law No. 330 on Franchising.), Indonesia.(Regulation no. 16 of 1997 Concerning the Provisions and the Procedures for the Implementation of Franchised Business Registration), China: (The 2004 Specific Measures for the Regulation of Commercial Franchises).

17 South Korea. Fair Transactions in Franchise Business Act No. 6704, May 13, 2002 as amended by Act No. 7109, Jan. 20, 2004.

18 South Africa. The Consumer Protection Act No. 68 of 2008 contains provisions on franchising.

19 Mexico. The Law of 1991 on Industrial Property (article 142 (2)) and The Law of 2006 on Intellectual Property (articles 142 bis – article 143 bis 3).

20 Malaysia. (Franchise Act No. 590 of 1998). Brazil. (Law No. 13.966 of 2019 Franchising Law)21 USA. (The 1979 Federal Trade Commission (ftc) Rule on Disclosure Requirements

and Prohibitions Concerning Franchising and Business Opportunity Ventures (16 C.F.R section 436), Sweden. (The Law No. 484 of 2006 on the Duty of a Franchisor to Provide Information).

22 Australia. Franchise Code of Conduct of 1998 as amended in 2014.

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stipulated in the Civil Code.23 This would require the franchisor to disclose information relevant to the franchising to the franchisee prior to entering into the franchising agreement.24 In this context, the law of Qatar provides that “A Contract shall be performed in accordance with its provisions and in such manner consistent with the requirement of good faith.”25

4 A Code of Ethics for Franchising

In Lebanon, the Lebanese Franchise Association26 adopted a Code of ethics for franchising27 “In order to allow prospective individual franchisees to enter into a binding document with full knowledge, they shall be given a copy of the pres-ent Code of Ethics as well as full and accurate written disclosure of all infor-mation material to the franchisee relationship, within a reasonable time prior to the execution of these binding documents”.28 The Code of Ethics stipulates

23 See, Mohamed Y. Mattar, ‘Integrating the Unidroit Principles of International Commercial Contracts as a source of Contract Law in Arab Civil Code’, Uniform Law Review 22 (2017) 168 arguing that Arab Civil Codes limit the concept of good faith to the phrase of the performance of the contract.

24 See generally, The Unidroit Model Franchise Disclosure Law of 2002. For a discussion on the impact of model law on Arab Law, see, Mohamed Y. Mattar, Harmonization of National Legislation Through Model Laws: From the United Nations Commission on International Trade Law to the League of Arab States and the Gulf Cooperation Council, uncitral Publications (July, 2017).

25 Article 172 of the law of Qatar No. 22 of 2004 regarding promulgating the Civil Code.26 The Lebanese Franchise Association was established in 2006 “in response to the needs of

a fast growing franchise industry, with the mission to develop franchising in Lebanon, and to promote Lebanese franchises worldwide.” http://redirect.State.Sbu/?url=http://www.Ifalebanon.com.

27 The Code of Conduct applies to the relationship between the Franchisor and the individual franchisees. It also applies to the relationship between the Master franchisee and individual franchisee. It does not apply to the relationship between the Franchisor and the Master Franchisees. The Attestation of these parties to the Code of Ethics needs as follow “We, the undersigned, Having fully read the Code of Ethics above, agree to the terms laid down in it, and do hereby commit ourselves to abide by it as an integral part of our membership in the Lebanese Franchise Association in witness whereof we have initialed each page of the above Code of Ethics and affixed our signature on this last page of it.”

28 The Code of Ethics for franchising – Lebanon. The Code explicitly provides that the “Franchisee should be given written information on the purpose of any consideration he may be required to pay the Franchisor to cover the latter actual expenses, incurred during and with respect to the pre-contract phase.” The Code further provides that “if the franchise agreement is executed, the said consideration should be reimbursed by the franchisor or set off against possible entry fee to be paid by the individual Franchisee.” Id, Recruitment, Advertising and Disclosure, Para 04.



http://redirect.State.Sbu/?url=http://www.Ifalebanon.com

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that the franchising agreement should “reflect the interest of the members of the franchised network in protecting the Franchisor’s industrial and intellec-tual rights and in maintaining the common identity and reputation of the fran-chised network”.29

The Code of Ethics requires writing for the formation of the franchising agreement30 and sets forth the essential terms that must be embodied in a franchising agreement,31 including the rights and obligations of the franchisor and the franchisee, the goods and/or services to be provided under the agree-ment, its duration and termination, and the provisions relevant to the use of the intellectual property rights.32 The Code of Ethics also provides that the duration of the franchising agreement “should be long enough to allow indi-vidual Franchisees to amortize their initial and subsequent investments spe-cific to the franchise”.33 In the meantime, the Code of Ethics states that “the Franchisor can impose non-competition and/or secrecy clause to protect its know-how and identity.”34

5 Franchising Regulated by a Distribution Trade Law

Franchising in Tunisia is subject to the specific law No 2009–69 of 2009 relat-ing to the distribution trade.35 The distribution Trade Law devotes chapter 5 to “franchise contracts” and Article 14 of the law defines the franchise contract as “a contract through which the trademark owner grants the right of its use to a natural person or to a legal entity called franchisee, in order to distribute the products or provide services with fees.” The right of the franchisee includes

29 Id. The Franchise Agreement, para 02.30 Id, para 02.31 Id, para 04.32 Id, para 04.33 Id.34 Id, Recruitment Advertising and Disclosure, para 04.35 The Law passed on August 12,2009 and it contains nine chapters that cover general

provisions, practicing the activity of distribution trade, shopping centers, business relations, franchise contracts, purchasing groups, the national council of trade, infringements and sanctions, and miscellaneous provisions. Article (1) of the law explains its objectives. The Article states that “The Law herein according to which freedom is the principle and the authorization is the exception. It aims at modernizing and developing the commercial sector and guaranteeing the equilibrium between the different sector investments.” According to the law, “any activity practiced as professional related to products purchasing in order to be resold wholesale or on retail is deemed distribution trade.” Article (2).

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“the transfer of the acquired knowledge, the expertise and use of the intellec-tual property rights.”36

The law requires that the franchise contract be in writing.37 The contract must include the rights and obligations of the franchisor and the franchisee.38 To protect free competition, any condition that dictates the price to be changed by the franchisee for the goods or services offered, or fixes a minimum turn-over to be realized by the franchisee is prohibited39 The law also requires the franchisor to disclose certain information to the franchisee at least 20 days prior to signing the franchise contract.40 The franchise disclosure document must provide basic information about the franchise.41 The franchise contract must be registered within 60 days of its execution.42

36 Article 14. The Article further provides that “All the independent trades under the same trademark and according to the standard trade methods as the premises adjustment, the management methods, the display, the marketing and the sources of supply are deemed franchise system.”

37 The Decree No. 2010-1501 of 2010 specifies the following contractual clauses; services provided by the franchisor to the franchisee, especially the transfer of know-how, technical expertise, and the use of intellectual property rights, the financial consideration to be paid by the franchisee, the duration of the franchise contract and the conditions of its renewal, conditions of the use of the trademark or the corporate name, conditions of termination of the franchise contract, conditions of the exclusivity of supply, non-competition clauses, any exclusive rights to use the franchisor’s trademark or corporate name within a certain geographic location, the franchisee’s obligation to keep confidential information disclosed by the franchisor, the investment plan to be realized by the franchisee, the basis upon which advertising expenses are shared, the means of communicating the information regarding the franchisee’s sales and financial status to the franchisor; conditions under which the franchisor or its representatives have access to the franchisee’s premises, and any sub franchise right granted to the franchisee.

38 Id.39 Chapter 4 of the Decree No. 2010-1501 of 2010.40 Article 15.41 The Decree No 1501 of 2010 covers in article 3 the following information; the legal

form of the franchisor’s enterprise and the nature of its activity; the identity of the franchisor’s legal representative; the address of the franchisor’s head office, the list of the franchisor’s managers, the amount of the franchisor’s capital; a summary of the history of the franchisor, information related to the franchisor’s registration number in the trade register, proof of ownership of the trademark or the trade name, information relating to the registration of the trademark with the register of trademark, information about the franchise system, the list of franchisees in Tunisia, their addresses, dates on which they joined the system and former franchisees, information about the franchisor’s industry and the opportunities for the development of the industry in areas where the trademark is represented and in Tunisia, the nature and amount of expenses and investment specific to the trademark or trade name, and the franchisor’s financial statements.

42 Registration takes place at the Tunisian tax authorities. The franchisee should record its right to use the trademark granted by the franchisor with the National Register of Marks.



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6 The application of the Commercial Agency Laws to Franchising Agreements

In the absence of a specific Franchising Law, Franchising agreements are regu-lated under the Commercial Agency Laws in different Arab countries. Whether the contract is to be considered as a commercial agency that is subject to the law applicable to commercial agencies is a subject to the determination of the court.43

Traditional commercial agency rules are based on several premises that are designed to protect the agent, or the franchisee.44 One of these rules is no ter-mination without compensation. In order words, unless the principal can jus-tify the decision to refuse to renew the Commercial agency contract, he must

43 In the case No 13/2009 – 21 (23) that was decided by the Court of Cassation in Qatar, the Court in determining the characterization of a contract of distribution, and whether it was an agency contract, applied two conditions; first the contract must stipulate an exclusion clause “whereby the producer or wholesale merchant gives a local distributor the exclusive right to sell its products alone in a certain territory”; and second the distributor must “carry out specific services within the scope of the agency contract on behalf of kthe principle in consideration of a profit or commission” as stated in Article 4 of the Law of 1986 on the regulation of commercial agencies, which corresponds with Article 2 of the Law No 8 of 2002. The distribution contract in the case stated otherwise, providing that “the distributor may not describe itself with the clause “sales agent” or any other clause that signifies the agency relation. In addition, it is not authorized to contract on behalf of the appellant or under its name, or create obligations thereon.” Accordingly the Court of Cassation concluded that “the contract shall not be considered, in this way, as a commercial agency contract, and shall be subject to Commercial Agents Law…”.

44 But see Samir M. Hamza and Howard L. Stovall, Commercial Agency and Distributorship: Egyptian Law and Practice, https://www.stovall-law.com/files/2019-07-25_12_59_13_egypt_commercial_agency.pdf concluding that “Neither the Commercial Agencies Law, nor (Law No 120 of 1982) or any other special legislation in Egypt limits a foreign company its right to terminate or not renew a commercial agency, or obligates the foreign company to provide a statutory minimum notice of termination or non-renewal, or to pay termination or non-renewal compensation to its commercial agent. Thus absence of “protective” legislation is significant: many other Middle Eastern countries have specific laws or administrative practices that provide substantial rights to commercial agents in the event of their termination or non-renewal.” The author noted, however, that an Egyptian court may grant a commercial agent damages on basis of the doctrine of abuse of rights”, if the principal, inappropriately or unjustifiably abused his right to terminate or not to renew the agency agreement. In franchising in Egypt see generally, Ezzat Molouk Kenawy, ‘The Economic Importance of Franchise Industry in Egypt’, European Journal of Academic Essays 1(9) (2015) 23 arguing that “As there is no specific legislative organizing the franchise system there should be a clear contract agreement which includes all agreed upon points” Id at 25: The author also recommends “Establishing a franchise studying program in the facilities of Commerce, Economics and Management, Law at the Egyptian Universities to deepen the franchise concept” Id at 32.

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pay the agent a compensation for termination or non-renewal.45 The question becomes what constitutes “just cause” and what amounts to “fundamental breach” or a material breach.46

For instance, In Palestine,47 Franchising agreements are subject to the Commercial Agents Law No (2) of 2000. The Palestinian Law provides that “If the principal has terminated the agency agreement or not renewed it for no serious reason, he is obligated to compensate the agent fairly, taking into account the damages that the agent suffers due to the termination of the agree-ment or non-renewal, and what the principal has benefited from the agent’s activity in promoting his products or services.”48 Similarly, in the United Arab Emirates, commercial agents are regulated by Federal Law No. 18 of 1981, as amended in 1988, 2006 and 2010. The Law explicitly provides for the right of an agent/Franchisee to compensation upon termination or non-renewal, unless the principal/franchisor terminates the agreement or refuses to renew it for “just cause”.49 In Kuwait, franchising agreements are subject to the commercial

45 See generally, Frederick W. Taylor and Howard O. Weissman, ‘Middle East Agency Law Survey: Legal Requirements for Commercial Agency Arrangements in the Middle East’, The International Lawyer 14 (1980) 331. The Article covers the laws of Algeria, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Saudi Arabia, Syria and the United Arab Emirates.

46 The Commercial Agency laws do not define a just or lawful cause. The first of these laws was the law of Lebanon No 34 of 1967 as amended in 1975. Article 4(2) thereof states that “A commercial representation contract shall be deemed to be made for the mutual benefit of the contracting parties. Therefore, in the event of its termination by the principal without any fault on the part of the agent or without any other lawful cause, the agent shall notwithstanding any agreement to the contrary, be entitled to claim compensation equivalent to any damage he may have sustained or to any profits he may have lost.”

47 See Amin Khalil, ‘The Need for Legal Framework to Regulate Franchising in Palestine’, Global Journal of Comparative Law 6 (2017) 206, stating that “reviewing the legal environment of franchising work in Palestine under the current Palestinian relevant laws that regulate commercial activity has shown that the franchise environment has shortcomings that effects the development of the franchise work in the Palestinian market” Id at 225.

48 Article 15 of The Commercial Agents Law No (2) of 2000 of Palestine.49 Article 8 provides that “The Principal shall not be entitled to terminate the agency contract,

unless there is a valid reason for termination, regardless that the period of agency contract is fixed.” Article 9 provides that “if the agency is withdrawn in a non-convenient time, or due to a reason beyond the control of the agent, the principal may be claimed to pay compensation against the injuries sustained by the agent.” Article 9 also provides that “Cases of misuse of right which necessitate payment of suitable compensation, include non-acceptance by the principal to renew the agency contract after lapse of its original period, if the agent proves that his activity has led to apparent success in distribution of the principal’s products on publicity thereof, and that non-renewal of contract causes injuries to the agent or denies him the profit expected due to his activities, unless the principal proves that the agent has committed a mistake which justifies non-renewal of the contract.” The amendment to the Commercial Agency Law in 2010 did not change the rules.



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agency law No 36 of 1964. The law was replaced by the Commercial Agency law No 13 of 2016. In 2017, a ministerial regulation No 565 was issued.50 In Qatar, Commercial agencies are regulated by the 2016 Law which replaced the old 2002 Law. The Law No (8) of the year 2002 on organization of Business of Commercial Agents explicitly provided that an agent, in a fixed term agency agreement51 or an open-ended agency agreement52 has “the right to claim compensation from the principal if on behalf of the agent, his activities have brought substantial success in the promotion of the principal’s products, and his refusal to renew agency has deprived the agent from gaining the remuneration arising from that success”53 Similarly, in Oman, a franchising agreement is considered as a form of commercial agency and as such is subject to the Commercial agency law No 26 of 1977 as amended.54 The Law requires registration of the agency contracts. This franchising agreement must be registered in the Register of Commercial Agencies at the Ministry of Commerce and Industry.

Another protective rule is the exclusionary rule or the nationality require-ment. Only a national may be permitted to carry out agency activities. For instance Article 23 of the Kuwaiti Commercial Code provides that non-na-tionals may not engage in commercial activities except through a local partner whose equity holding is at least 51%.55

50 The Kuwaiti Law, like other laws in the Gulf Region, requires registration of the commercial agency with the Commercial Agencies Registry of the Ministry of Commerce and Industry. An unregistered commercial agency shall not be valid and a claim may not be filed regarding an unregistered commercial agency.

51 Article 8.52 Article 9.53 Article 8 (c) & 9 (c). In applying the rule under the old commercial agency law No 4 of 1986,

the Qatar Court of Cassation in the case no 51/2006 (73), of 2006 held that failure of the Judgment under appeal in applying this rule amounted to a violation of the law and an ease in its application. The Court of Appeal stated that “whereas the Judgment under appeal applied Article 6 of the Law No. 4 of the year 1986… and considered that the right of the agent to receive the compensation does not arise except in case the unlimited contract that is terminated by the agent in an appropriate time and without an acceptable reason, while the second paragraph of the same law mentioned above entitles the commercial agency, upon the termination of the commercial agency by the expiry of its term, to claim for a compensation to be assessed by the court even if there is an agreement to the contrary, if its activities have led to an apparent success in promoting the products of the principal or increasing the number of its clients and the rejection of the principal to renew the contract of agency without a strong reason prevents it from the projects “it violated the law…”.

54 The Royal Decree 26/1977, was amended in 2014 with Royal Decree 34/2014.55 Similarly, Article 24 of the Kuwaiti Commercial Code provides that a foreign company

may not establish a launch in Kuwait or engage in business activities except through a Kuwaiti agent.

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These protective rules were subject to limited change recently. For instance, in Oman, the Royal Decree No 34 of 2014 abolished mandatory compensation that was required under the Law No 26 of 1977, stating that the courts “may decide on appropriate compensation depending on commercial and local practices.” While the mandatory compensation is still the rule in other Gulf countries such as Qatar.

7 The New Saudi Arabian Law on Franchising

The Saudi Arabian Commercial Agency Regulation of 198056 does not con-tain an explicit provision allowing for compensation upon termination or non-renewal.57 Nonetheless, the Model Contract which is adopted by the Ministry of Commerce states that “The Commercial agent or distributor may claim reasonable compensation for his efforts which actually led to the apparent success in the agency or distribution work, promotion thereof, dis-covering and developing customers, in case the principal refuses to renew or continue the contract and as a consequence the new agent or distributor has obtained benefit from the previous activity.”

On October 8, 2019. Saudi Arabia passed a specific franchising law.58 The new franchising law replaces the Commercial Agency Law.59 The Law contains 27 Articles in 11 chapters covering general provisions, scope of application, conditions for granting a franchise, registration and disclosure, obligations of the franchisee and the franchisor, the franchising agreement, assignment of

56 Royal Decree 14/32 of 10/8/1/1400H. See, Paul Homsy, ‘Agency Law in the Arabian Peninsula and North Africa’, Northwestern Journal of International Law & Business 5 (1983–1984) 296, concluding that “A successful relationship between the foreign principal and his local agent in the Arab world must be based not only on familiarity with the laws of the particular country, but also on a knowledge of the business customs of that region. The principal must continuously cultivate good personal relations with his local agent” Id at 325.

57 Article 15 of the Ministry of Commerce Model Contract on Commercial agency. See generally, Robert B. Cartwright, ‘The New Saudi Commercial Agencies Regulation’, The International Lawyer 16 (1982) 443.

58 According to Article 27 of the Law, it enters into force 180 days after its publication in the official Gazette. So the Law became effective on April 8, 2020. The Minister of Commerce and Investment will be issuing Implementing Regulations that will include issuance of model of franchising agreement, the disclosure documents, procedures and requirements of applications to be submitted to the Ministry and the financial fees that must be delivered in consideration for the registration of the franchising agreement [Article 26].

59 The Commercial Agency Law of Saudi Arabia was enacted by the Royal Decree No. M/11/1382, dated 20/02/1382 H., corresponding to 22/7/1962 G.



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the franchising agreement, renewal of the franchising agreement, termination or expiration of the franchising agreement, damages and final provisions.

7.1 Definition of a FranchiseThe Franchising Law defines Franchising as “granting by a person referred to as the franchisor to another referred to as the franchisee the right to carry out the activities – subject of the franchising for its own account under the trade-mark or the trade name owned by the franchisor or licensed to it, providing technical expertise and know-how to the franchisee and determining the man-ner of operating the franchised business, against monetary or non-monetary consideration, which consideration shall not include the amounts paid by the franchisee to the franchisor for goods and services supplied”.60 This definition is in line with the international definition of a franchise. For instance, accord-ing to the European Code of Ethics for Franchising “Franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its individual Franchisees, whereby the Franchisor grants its individual Franchisee the right, and imposes the obligation, to conduct a business in accordance with the Franchisor’s concept.”61 Similarly, according to the undiroit Franchise Disclosure Law “franchise means the rights granted by a party (the franchisor) authorising and requiring another party (the franchisee), in exchange for direct or indi-rect financial compensation, to engage in the business of selling goods or ser-vices on its own behalf under a system designated by the franchisor which includes know-how and assistance, prescribes in substantial part the manner in which the franchised business is to be operated, includes significant and

60 Article (1). The Law defines the franchisor as a natural or legal person who grants the franchising in accordance with the franchising agreement. The franchisee is defined under the law as the natural or legal person who receives the franchising through the franchising agreement. The Law, however, does not consider the following agreements or agreements as franchising, those that fall within the scope of application of the Commercial Agencies Law, or the agreements or contracts that are limited to purchase or sale of goods or offering services bearing a specific trademark of for the use of trademarks or any other intellectual property rights in relation to goods and services, or the franchising that is granted or issued by royal decrees [Article 4].

61 The Code further provides that “The right entitles and compels the individual Franchisee, in exchange for a direct or indirect financial consideration, to use the Franchisor’s trade name, and/or trade mark and /or service mark, know-how, business and technical methods, procedural system, and other industrial and /or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between parties for this purpose.”

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continuing operational control by the franchisor, and is substantially associ-ated with a trademark, service mark, trade name or logotype designated by the franchisor.”62

It is to be noted that the law excludes from its definitions the agreements or the contracts that are subject to the commercial agency law.63

7.2 Objectives and Governing PrinciplesThe Saudi Franchising Law is designed to encourage franchising activities in the Kingdom by balancing the relationship between the franchisor and the franchisee, protecting both especially during the pre-contractual phase of their agreement and its termination, assisting the franchisee in making a sound investment decision, and providing for the principles of transparency and free-dom of contract.64 Under the law of Saudi Arabia, which follows the Hanbali doctrine, freedom of contract is subject to only two prohibitions; interest or its equivalence in riba, and uncertainty or gharar.65

7.3 Conditions for Granting a FranchiseThe franchising Law of Saudi Arabia requires for granting a franchise practic-ing the acts of franchising for a period not less than one year.66 Other fran-chising laws also require some expertise on the part of the franchisor before granting the franchise. For instance, according to the law of china, the fran-chisor must own at least two directly operated outlets and must also have been in operation for more than one year.67 Similarly, the Law of Romania requires the franchisor to have business experience. The franchisor must hold and oper-ate the commercial activity for a certain period of time prior to the execution of the franchising agreement.68

62 The definition further provides that this includes “(A) the rights granted by a franchisor to a sub-franchisor under a master franchise agreement; (B) the rights granted by a sub-franchisor to a sub-franchisee under a sub-franchise agreement; (C) the rights granted by a franchisor to a party under a development agreement.”

63 Article (4).64 Article (2).65 See generally, Noor Mohammed, ‘Principles of Islamic Contract Law’, Journal of Law and

Religion 6(1) (1988) 115. See also, Hussein Hassan, ‘Contracts in Islamic Law: The Principles of Commutative Justice and Liberality’, Journal of Islamic Studies 13 (2002) 257.

66 Article (5).67 Article (7-2) of the Law of China 2004 on Specific Measures for the Regulation of

Commercial Franchises.68 Article (4) (2) (9) of 1997 Ordinance No. 52 on the Legal Regime Applicable to Franchising.



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7.4 A Disclosure DocumentFourteen days prior to executing the franchising agreement, the franchisor must submit to the franchisee a copy of the disclosure document, which must be drafted in the Arabic language or translated into the Arabic language. Such document must include the financial status of the franchisor.69 The unidroit Model Franchise Disclosure Law70 of 2002 provides for a list of information that should be disclosed in the document, including the franchisor’s principle place of business, the trademark and the trade name under which the fran-chisor carries its own business, a description of the franchise, the franchisor’s business experience, the franchisor’s intellectual property to be licensed to the franchisee, the categories of goods and services that the franchisee is required to purchase or lease, financial statements of the franchisor and a description of the state of the general market of the products or services that are subject of the franchising agreement.71

7.5 Obligations of the FranchisorThe franchising law provides for the obligations of the franchisor. These include specifying the rights granted to the franchisee,72 the standards and instruc-tions that the franchisor must follow in the franchising business,73 training the employees of the franchisee,74 providing technical and marketing expertise and other expertise that are depending upon the nature of the franchising, supplying the franchisee with the related products and services throughout the duration of the franchise unless the franchisee shall buy them from a third party, preserving the confidentiality of the information and accounting data related to the franchising, providing the details of the financial consideration that the franchisee must pay, and not establishing any establishment that is practicing a similar activity in the geographic zone specified in the franchising agreement, or granting a third party such a right during the period of the fran-chising agreement.

69 Article (7).70 The unidroit Model Law covers only pre-contractual disclosure in two articles, dealing

with the scope of application (Article 1), definitions (Article 2), the delivery of the disclosure document (Article 3), the format of the disclosure document (Article 4), exceptions from the obligation to disclose (Article 5), what information has to be disclosed (Article 6), acknowledgment of receipt of the disclosure document (Article 7), remedies (Article 8), the temporal scope of application of the law (Article 9) and waivers (Article 10).

71 Article (6).72 Article (8).73 Article (8).74 Article (8).

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7.6 Who is the Employer of the Franchisee’s Employees?As stated above, the franchisor is under an obligation to train the employees of the franchisee. However, the franchisor is not the employer of such employ-ees. Although some argue that the franchisor maybe be jointly liable for the franchisee’s employees actions “only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge and relevant day-to-day aspects of the work place behavior of the franchisee’s employees”.75 Consequently, the franchisee’s employees are sub-ject to the Kafala or Sponsorship Rule.76

7.7 Obligations of the FranchiseeThe franchisee is under a duty to obtain approval of the franchisor in the event of making any change to the products or services or the means of practicing the franchising.77 A franchisee must also provide the franchisor with the date regarding the franchise business to enable him to improve the franchise.78 He must also enable the franchisor to have access to the premises upon which the franchising is exercised without causing any delay or damage.79 The Franchisee must also obtain the approval of the franchisor if he wants to change the place of the franchising.80

7.8 Good Faith in Performance of the Franchising AgreementBoth parties to the Franchising agreement must perform their obligations in good faith.81 The franchising law applies the principle of good faith in various articles that prohibit unreasonable or arbitrary behavior.82 The franchising law

75 Patterson vs. Domino’s Pizza llc, 333 P.3d723, 739-440 (cal.2014). See generally, David J. Kaufmann, Felicia N. Soler, Breton H. Permesly and Dale A. Cohen, ‘A Franchisor is Not the Employer of Its Franchisees or Their Employees’, Franchise Law Journal 34 (2015) 439.

76 Kafala or the Sponsorship Rule is a system that determines the relationship between an employer and an employee including the right of an employee to change employment or travel. As such, it imposes restrictions on freedom of contract, since the employee may not exercise any of these rights except after obtaining the approval of the employer. See generally, Joshua Nelson, ‘The Ethical Implications of the Kafala System’, Pitt Political Review 11 (2017) 41. See also, Majed Alzahrani, ‘The System of Kafala and the Rights of Migrant Workers in gcc Countries – With Specific Reference to Saudi Arabia’, European Journal of Law Reform 2 (2014).

77 Article (9) (1).78 Article (9) (2).79 Article (9) (3).80 Article (9) (4).81 Article (10).82 See for instance, Article (9) (1), Article (13), Article (15), Article (18) and Article (22).



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however, does not define good faith. Other laws inquire into “whether the party acted honestly and not arbitrarily and whether the party operated to achieve the purposes of the (franchising) agreement”.83 Other laws also ask the ques-tion whether the party to the agreement acted in accordance with reasonable commercial standards.84The principle of good faith is embodied in the Qur’anic verses that emphasize honesty and sincerity.85 One may argue that several doc-trines may be utilized to determine good faith in a franchising agreement,86 such as, the Islamic doctrine of no injury and no inflicting of injury and injury shall be removed,87 or the unidroit principles of Inconsistent Behavior88 or co-operation between the parties89 or the Restatement of Contract catalogue of types of bad faith90 or the civil law theory of abuse of rights.91

83 Section 6(3) of the Australian Franchising Code of Conduct. See generally, Andrew Terry and Cary Di Lernia, ‘Franchising and the Quest for the Holy Grail: Good Faith or Good Intentions?’, Melbourne University Law Review 33 (2009) 542.

84 Section 3 of the Canadian Franchise Act of 1992.85 Sourat Al Ma’eda, versus 1. See generally, Yusuf Abubakar, Ahamad Ogunbado and

Mpawenimana Saidi, ‘Doctrine of good faith in contracts: A comparison between conventional and islamic laws’, Indian Journal of Public Health Research & Development 9 (2018) 1534.

86 See generally, Benjamin Djung, ‘The Statutory Role of Good Faith in Franchising’, Canberra Law Review 15(1) (2017).

87 See Articles (19) (20) (27) (28) (30) of The Ottoman Code of Law (Medjelle).88 Article 1.8 titled “Inconsistent Behavior” which states that “A party cannot act inconsistently

with an understanding it has caused the other party to have and upon which that other party reasonably has acted in reliance to its detriment.” or what is known as promissory estoppel. See generally, Mohamed Y. Mattar, ‘Promissory Estoppel: Common Law Wine in Civil Law Bottles’, Tulane European and Civil Law Forum 4 (1988) 71.

89 Article 5.1.3 titled “Co-operation between the parties” which states that “Each party shall co-operate with the other party when such co-operation may reasonably be expected for the performance of that party’s obligations.” For a discussion of utilizing the principles of the unidroit in Arab civil codes, see Mohamed Y. Mattar, ‘Integrating the unidroit Principles of International Commercial Contracts as a source of contract law in Arab Civil Codes’, Uniform Law Review 22(1) (2017) 168.

90 Section 205, Restatement Second of Contracts, which provides that “A complete catalogue of types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain, lack of diligence and slacking of, willful rendering of imperfect performance, abuse of a power to specify terms and interference with, or failure to co-operate in the other party’s performance.”

91 The theory of abuse of rights has been adopted by Arab civil codes. See e.g., Law no (22) of 2004 Regarding Promulgating the Civil Code which states that “Any person who lawfully exercises his rights shall not be liable for any harm arising therefrom.” (Article 62) “The exercise of a right shall be unlawful in any of the following circumstances: If the desired interest by such use is unlawful; If such use is intended solely to cause damage to others; If the interests desired are disproportionate to the harm that will be suffered by others; or If such use may cause unusually gross damage to third parties.” (Article 63).

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7.9 The Terms of the Franchising AgreementThe Franchising Law determines the terms of the franchising agreement which must include the nature of the franchising, the duration of the agree-ment, means of amending it, the financial consideration that the franchisee must pay the franchisor including the financial consideration for training the employees of the franchisee, the technical support, the products and services supplied by the franchisor, the obligations of both parties regarding training of the franchisee’s employees, the obligation of the franchiser in providing tech-nical and marketing expertise and other expertise depending upon the nature of the franchising, the obligation of the franchisee in following the instructions and means of marketing and preserving the essence of the franchising, any obligations of the franchisor regarding supply of any products or services to the franchisee and the obligation of the franchisee in receiving such products or services, the rights of the franchisee in using any trademark or other intel-lectual property rights related to the franchising and their infringement or the damages caused by such infringement means of setting any dispute related to the franchising agreement,92 right of the franchisee in sub franchising, and the effects of a change in the property of the franchisor or the franchisee.

7.10 Assignment of the Franchising BusinessThe law allows change of the franchisee provided that the franchisee obtains the consent of the franchisor who may not refuse a transfer of the franchising except in the following cases: if the assignee does not have the capacity to meet the reasonable requirements of the franchisor regarding the transfer of the franchising, if the assignee does not have the standards set by the franchisor in choosing a franchise, if the assignee does not consent, in writing, to the obliga-tion imposed on the franchisee in accordance with the franchising agreement, if the assignee does not make the payments due to the franchisor, or in any other cases determined by the executive regulation that will be issued pursu-ant to this law.93 Nonetheless, the law presumes that the franchisor accepts the transfer of the franchising to a third party, if he did not respond, in writing to an assignment request submitted by the franchisee.94

7.11 Renewal of the Franchising AgreementThe Franchising agreement may be renewed, unless agreed to the contrary, upon a written notice to the franchisor during a period no less than 180 days

92 Article (11).93 Article (13).94 Article (14).



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from the date of the termination of the franchising agreement which shall be extended for a similar period of time unless the parties to the agreement have agreed to new terms, or if one or more of the cases mentioned in arti-cle 18 exists, or if the franchise fails to make the payments stipulated in the franchising agreement, or if the franchisor agrees to the transfer of the fran-chising agreement before the termination of the agreement, or if the fran-chisor does not wish to continue the franchising in the Kingdom, or if the franchisee does not execute the renewed agreement in accordance with the reasonable requirements of the franchisor, 60 days prior to the termination of the franchising agreement.95

7.12 Termination of the Franchising AgreementThe Franchisor has no right to terminate the franchising agreement, prior to its date of termination, without a written consent of the franchisee, except for a just cause.96 In the event of a substantial breach of the obligations of the franchisor regarding disclosure or registration, the franchisee has the right to terminate the franchising agreement one year before the date of knowledge of the breach or three years from the date of the occurrence of the breach.97 A franchising agreement may be terminated if the franchisee, a natural per-son, became subject to bankruptcy regulations, or in the event of his death, or loss of capacity or a health condition that binders his capacity to perform the franchising.98 If the franchisee is a legal person, the franchising agreement is terminated upon issuance of a decision of bankruptcy.99 In some franchising laws, the term of a franchise agreement is not less than three years, subject to renewal upon negotiation.100 Other franchising laws provide for a term that is not less than five years,101 while other franchise laws provide that the term of the agreement should be sufficiently long for the franchisee to benefit from his investment, but in all cases does not be shorter than three years.102 Obviously, the Saudi Law departs from the long standing hanbali principle that an agency

95 Article (15).96 Article (18).97 Article (17).98 Article (16).99 Article (16)(2).100 Article (15) of The 2004 Specific Measures for the Regulation of Commercial Franchises of

China.101 Article (28 -1) of Malaysia Franchise Act No. 590 of 1998.102 Article (3-3) The Law No. 129 of 2004 on Provisions for the Discipline of Commercial

Affiliation or Franchising of Italy.

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contract is terminable at will at any time.103 “Under Islamic law, agency is con-sidered a permissible (jaaiz) but a non-binding (ghair-laazim) contract. As such, the contract can be terminated at any time by either party.”104

7.13 What Constitutes “ Just Cause “?The law defines a “just cause” to include the following cases; if the franchisee commits a substantial breach of his obligations and fails to remedy the breach no later than 14 days from the date he received a written notice from the fran-chisor to do so, if the franchisee became subject to the bankruptcy regulations, or he waived his rights to the franchising to his creditors, or transferred the assets of the franchising to a third party, if the franchisee relinquished the fran-chising or voluntarily ceased its operation for a consecutive period of 90 days, if the franchisee, repeatedly fails to perform his obligations under the franchis-ing agreement, if the operation of the franchising by the franchisee causes a risk to the public health and safety, if the franchisee loses any of the licenses required for the operation of the franchising, if the franchisee commits a sub-stantial breach of any of the regulations applicable in the Kingdom that may harm the reputation of the franchising operations, if the franchisee commits an act that constitutes commercial fraud in the operation of the franchising, if the franchisee infringes upon the intellectual property rights of the franchisor. The Law adds “any other circumstances that the franchising agreement consid-ers as a just cause for its termination.”

7.14 DamagesThe Law covers damages in great detail. It provides that the franchisee has the right to claim damages for any harm caused due to failure of the franchisor to fulfill his disclosure or registration obligations.105 The Franchisee may request the franchisor, upon termination of the franchising agreement in accordance with article 17 of the law, or article 18, or if the franchisee does not extend the franchising agreement,106 repurchasing the material assets that is used in the

103 In Saudi Arabia, a judge decides civil cases with reference to two treaties of the Hanbali doctrine; Sharh Muntaha Ali-Iradat [explanation of the act of the will] and Aliqna [Explanation of the Means of Persuasion] in accordance with a 1928 decree.

104 Muhammad Masum Billah, ‘Agency Contract under Conventional Law and Islamic Law as Manifested in the Civil Code of Oman: A Comparative Analysis’, Electronic Journal of Islamic and Middle Eastern Law 4 (2016) 109–126.

105 Article (19).106 In accordance with the reasons stipulated in Article 15 except paragraphs 2, 3, 4 & 5.



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operation of the franchising.107 The franchisee may also request compensation for any loss that he suffers in the establishment or operation of the franchis-ing.108 In the meantime, if the franchisee terminates the franchising agree-ment in violation of the franchising law, the franchisor has the right to ask for compensation for any loss that he suffered due to this violation.109 A claim for damages must be filed 3 years from the date of the termination of the franchis-ing agreement in accordance with Article 18 of the law, or one year from the date of knowledge of the occurrence of the loss.110

It must be noted however that damages are limited under the law of Saudi Arabia. In the case of National Group for Communication and Computers, Ltd. v. Lucent Technologies International Inc, a case decided by the United States District Court. Plaintiff (ncc) filed a suit against defendant (Lucent) for the alleged breach of a telecommunications construction contract, which included a choice of law clause that read as follows “This Subcontract is sub-ject to the regulations in force in the Kingdom of Saudi Arabia. Interpretation and execution of the subcontract and settlement of claims arising therefrom shall be subject to and in accordance with the said regulations.” The Court applied rules of Islamic Law, which constitute the source of civil transactions in the Kingdom, including the Key doctrine prohibiting “Garar” or uncertainty. Consequently, in an award of damages for breach of contract, damages are lim-ited to losses that are “actual” and “direct”. Expectation damages may not be allowed nor are recovery for “unrealized gains” or “future profits”.

7.15 The Imperative Nature of the Franchising LawAny agreement whereby the franchisee waives any of his rights stipulated in this law is void.111

7.16 Dispute ResolutionThe Law in Article 25 allows the parties to the franchising agreement to set-tle any disputes that may arise pursuant to the franchising agreement or the application of the franchising law through alternative dispute resolutions such

107 Article (2) which provides that the purchase must take place within 60 days prior from the date of the request that is submitted by the franchisee. The price of the sale should not be less than the original price paid by the franchisee except for the price of the usual use of these assets.

108 Article 20 (B).109 Article 20 (2).110 Article 21.111 Article 23.

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as arbitration, mediation or conciliation. It must be noted however that an arbitral award that contains interest or Riba may not be enforceable because it contradicts Islamic law.

7.17 Administrative PenaltiesThe Law in Article 24 establishes a committee comprising from three members, one of which is a specialist in commercial laws, with the jurisdiction to decide matters involving violations of the Franchising Law and its Implementing Regulations and the authority to impose fines not exceeding sar 500,000 for violations thereof. These decisions may be appealed before the Board of Grievances.

8 Conclusion

The Saudi law on franchising is the first comprehensive and independent law in the Arab region. While other countries rely on a code of conduct, an applica-tion of the distribution trade law or the implementation of the general rule of commercial agency, Saudi Arabia provides a detailed account of the franchis-ing business, its establishment and its operation.

The law attempts to balance the interests of the franchisor and the fran-chisee through several mechanisms, most notably the adoption of good faith as a general principle that applies in determining the obligations of the fran-chisor and the franchisee in a franchising agreement. The law also provides a definition of what constitutes just cause that may justify termination or non renewal of the franchising agreement. In addition, the law grants the fran-chisee the right to claim damages and ask for compensation for any loss he suf-fered as a result of termination of the franchising agreement by the franchisor in violation of the law.

However, the application of the franchising law is subject to the principles of Islamic law, especially the prohibition against interest or Riba in arbitral awards and the limitations of the award of damages which is limited to actual and direct damages.



the status of franchising laws in the arab region

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