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Franchising has established itself as an important global commercial activity and the ongoing socioeconomic transformation taking place in Saudi Arabia has seen the business model gain ground in the Kingdom too.
Aside from industry regulation, today’s article highlights the salient features of the mechanism governing the termination of franchise contracts.
If a commercial franchise agreement does not stipulate a specific termination mechanism and the parties wish to part ways, as long as the franchisee is a natural person (more on this shortly) liquidation procedures will take place as stipulated under the Kingdom’s bankruptcy law.
Such agreements will also end in the event of the franchisee’s death, loss of eligibility, or if they suffer a health issue that prevents them from running the business effectively.
In such a scenario, the law did not prevent the parties to this agreement from stipulating a clause requiring its transfer in the case of death, disqualification, or health impediment to one or more heirs or another identified person.
A natural person is legally described as an individual human being, whereas a legal person may be a private or public organization.
If the franchisee has a legal capacity, the franchise agreement shall terminate with the issuance of a decision to liquidate the company either voluntarily or through any of the liquidation procedures according to the bankruptcy law. However, the conversion or merger of the firm will not result in the termination of the agreement.
Cases of expiry of a franchise agreement also include the occurrence of any material breach by the franchisor concerning obligations and mechanisms of disclosure or registration stipulated in the law.
As per the law, in such cases, a franchisee is entitled to terminate the agreement by written notice to the franchisor and without any compensation.
The franchisor, however, may not terminate the franchise agreement before its term expires without the written consent of the franchisee, unless the termination has a legitimate reason.
The reason for termination is deemed lawful in any of the following cases:
1. If the franchisee breaches their essential obligations under the franchise agreement and does not address the breach within 14 days from the date on which the franchisor gives written notice to that effect.
2. If the franchisee has been the subject of liquidation procedures, if they assign the franchise business or benefit to creditors or dispose of the assets related to the franchise business to others.
3. If they leave or voluntarily stop the franchising business operations for more than 90 consecutive days.
4. If the franchisee repeatedly fails to comply with the provisions of the franchising agreement or any other deal agreed upon with the franchisor or a person within their group in the matter of the franchise despite the franchisor notifying them in writing of the performance of their obligations.
5. If the franchisee’s operation of the franchise business has a risk to public health and safety, as well as if the franchisee loses any of the licenses necessary to conduct the business.
6. If a franchisee commits material violations of any of the provisions of the regulations in force in the Kingdom that negatively affect the reputation of the franchise business.
7. If they commit an act of commercial fraud while practicing the franchising business and if they infringe on the intellectual property rights of the franchisor during the validity of the franchise agreement as well as any other violation of the law or the agreement.
Dimah Talal Alsharif is a Saudi legal consultant, head of the health law department at the law firm of Majed Garoub and a member of the International Association of Lawyers.
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