ADR in franchise conflicts: The Saudi Arabian approach
As Saudi Arabia’s franchising sector booms under Vision 2030, tailored dispute resolution mechanisms, particularly arbitration, emerge as essential tools for safeguarding franchise relationships and resolving conflicts swiftly and effectively, writes Fahad S. Alieyari.
The economy of the Kingdom of Saudi Arabia is currently experiencing a phase of prosperity, with the franchising sector forming a vital part of it. According to statistics issued in the fourth quarter of 2024, franchise registrations witnessed a growth rate of 866 per cent, surpassing 1,788 franchise entries, and this number continues to rise in a market valued at SAR54 billion.
These figures reflect the success of the legal and regulatory infrastructure, represented by the Saudi Franchise Law and its implementing regulations, as well as other fundamental legislations.
Saudi Arabia’s ambitious economic transformation under Vision 2030 has further fueled the growth of the franchising sector, attracting both local and international investors. With increased regulatory clarity and strong government support, franchising has become a preferred model for expanding consumer-facing businesses in sectors such as food and beverage, retail, and services.
Talking about franchising inevitably leads to discussing trademarks, as a franchise, in its essence, is the granting of the right to use a trademark.
The term “trademark” does not only include the visual elements such as logos or colors, but also extends to everything derived from the brand, such that the franchisor’s business experience is replicated by the franchisee.
A glimpse into alternative dispute resolution
Since ancient times, humans have never ceased to need a judicial system that settles disputes and restores rights to their rightful owners. In reality, mankind has developed various methods of dispute resolution throughout the ages, and the matter has now largely settled on the judiciary being the primary means.
However, the nature of some transactions has driven individuals to seek methods that are more efficient, less harmful, and faster in execution and resolution. Therefore, methods such as mediation and arbitration have emerged.
Moreover, the Kingdom has developed promising institutional avenues for franchise-specific dispute resolution. Notably, the Saudi Franchise Center offers reconciliation services facilitated by specialists with in-depth knowledge of franchise dynamics—providing a practical path toward amicable settlement. In parallel, the Saudi Center for Commercial Arbitration (SCCA) presents a robust platform for handling more complex franchise disputes, supported by specialised arbitration rules, commercial expertise, and flexible procedures. Together, these mechanisms reflect a maturing legal environment tailored to the unique needs of the franchising sector.
What are the most prominent disputes in franchise relationships?
According to the book Fundamentals of Franchising, franchise relationships commonly face legal disputes arising from several recurring factors. These include unrealistic expectations by franchisees, failure by franchisors to provide the agreed-upon support and training, noncompliance with operational standards, territorial encroachment due to the franchisor opening new branches near existing franchisees, disputes over franchise fees or financial underperformance, and misalignment in strategic goals—particularly when franchisors demand strict brand uniformity while franchisees seek more operational autonomy.
Classification of franchise disputes
Franchise-related disputes can generally be divided into two main categories:
(i) Disputes after which the franchise relationship cannot continue.
These are critical disputes that require full legal attention and judicial safeguards to protect rights. Such disputes are more appropriate for litigation in public courts due to their decisive nature—particularly those involving termination of the franchise agreement, non-renewal, or violations of fair competition principles.
(ii) Disputes after which the franchise relationship can continue.
Examples include objections to the franchisor’s decisions or claims related to monthly franchise fees. In these cases, it is preferable to follow alternative dispute resolution procedures.
The alternative path to resolving disputes
Franchise relationships go through phases of growth, decline, and stability—just like any ongoing commercial arrangement. However, the subject matter of franchising requires a unique approach when dealing with periods of decline that escalate into disputes.
This special nature stems from the core components of the franchise itself, which consists of three elements: know-how, trademark, and technical assistance related to transferring knowledge, applying the business model, and utilising intellectual property rights.
Each of these elements is, in and of itself, a trade secret and a proprietary right that must be protected urgently and decisively.
The rights tied to these elements are reciprocal—whether from the franchisor’s or the franchisee’s side. While the franchisor holds exclusive ownership rights over these elements, the franchisee has a contractual right to access and use them.
These components and all matters arising from them are directly affected by the duration of the dispute. Therefore, resolving such disputes swiftly is essential to maintain the legal stability of both parties.
Although the judiciary’s efforts are commendable and appreciated, what disputing parties often lack is clarity around the duration and procedures of litigation.
Hence, there arises a need for an alternative mechanism through which the parties can determine the expected timeframe and procedural flow of the dispute resolution.
The most suitable mechanism to meet this need is a pre-agreed arbitration clause.
The key advantage here lies in the parties’ mutual understanding of the intent behind the arbitration clause prior to contract execution. This necessitates that the clause covers all procedural aspects that precede addressing the substance of the dispute, such as naming the arbitrators, defining their legal and technical qualifications, setting the costs, outlining the process for exchanging briefs, and establishing a time limit for arbitration proceedings.
Such structuring transforms the arbitration clause into a tool that expedites dispute resolution and safeguards the rights of both parties.
Conclusion
There is no doubt that the franchise sector is witnessing significant development, which requires alignment and adaptation across all sectors—including the judicial system. It is also essential to raise awareness within the commercial sector about the available dispute resolution mechanisms, to ensure the continued momentum of this growing industry.
In this context, incorporating a well-structured arbitration clause tailored to the unique nature of franchise relationships stands out as one of the most valuable tools worthy of adoption.
Text by:
Fahad S. Alieyari, lawyer, Saudi Arabia
