Buying a Franchise in Saudi Arabia: How to Review the Dispute Resolution Clause

You may agree on fees and a location with the franchisor, then skim over the dispute resolution clause as a legal detail. Yet this clause determines the route you will take if you disagree over a key obligation, and the time and costs involved in protecting your rights. In a franchise relationship, a clear process helps resolve disagreements without turning every operational problem into a prolonged confrontation. Review it before signing, not when the first claim arrives.

Start with what the Commercial Franchise Law requires

Franchise relationships in Saudi Arabia are governed by the Commercial Franchise Law and its Implementing Regulations. Article 11 of the Law requires the franchise agreement to set out how any dispute arising from it will be resolved. This means the resolution mechanism is not simply wording to add at the end of the contract; it is a matter the agreement must address clearly.

The Law allows parties to agree to resolve disputes arising from the franchise agreement or the application of the Law through alternative methods, such as arbitration, mediation and conciliation. Choosing a particular method does not automatically make it the best option for every buyer. Its suitability depends on the nature of the contract, where the parties are based, the value of the investment and your capacity to manage dispute proceedings and their costs.

Obtain the full wording of the clause and any rules it refers to. Do not settle for the franchisor saying that ‘the contract is standard’. Compare the clause with the agreement’s annexes, particularly if a technology agreement or separate guarantee sets out a different process. Ask a lawyer to assess the implications of any difference and whether it could lead to parallel proceedings over the same issue.

Make negotiation a defined stage, not an open-ended obstacle

The clause may begin with direct negotiation, followed by mediation, then court proceedings or arbitration. This staged approach can preserve the relationship, but it becomes a burden if it does not specify when each stage starts and ends.

Review the following questions with the franchisor:

• Who receives a notice of dispute on behalf of each party, and by what means?
• What information must the notice contain?
• Does the negotiation period start when the notice is sent or when receipt is confirmed?
• Who has authority to approve a settlement, rather than merely attend a meeting?
• What happens if the other party ignores the request or refuses to participate?

Propose a clear time limit for each stage, with a defined transition to the next if no agreement is reached. Do not assume that negotiation suspends statutory time limits for bringing a claim or automatically preserves all your rights. Ask for legal advice on this point.

It is also important to examine how urgent situations are handled. If the outlet’s assets or evidence relevant to the dispute are at risk, your lawyer should explain whether interim or protective measures can be sought and how the negotiation requirement affects them. The aim is not to bypass an amicable settlement, but to prevent the process from delaying necessary protection.

Compare litigation and arbitration on their actual costs

Do not accept claims that arbitration is always faster or cheaper. Ask for a practical explanation of the proposed route: will the dispute go before the competent court or an arbitral tribunal? If arbitration is chosen, will a specified institution administer it, and which rules will apply?

When considering arbitration, review its seat, language, number of arbitrators, appointment process and allocation of fees and expenses. Distinguish between the legal seat of arbitration and the arrangements for holding hearings, whether in person or online; these are not necessarily the same thing. If the franchisor is based abroad, do not treat signing the contract in Saudi Arabia as sufficient evidence that all proceedings will take place there.

Ask for an initial estimate of the different cost categories, without treating it as a guaranteed price: legal representation, administration and arbitration fees where applicable, accounting experts, translation and travel. Then ask whether these costs seem proportionate to a potential dispute over a modest amount of operating charges.

Also review the governing law and the route for enforcing a court judgment or arbitral award. Saudi franchise law applies to franchise agreements performed within the Kingdom, and you should not assume that choosing a foreign law excludes applicable Saudi provisions. This requires specialist review, particularly for cross-border contracts.

Test the clause against a realistic scenario before agreeing

Choose one hypothetical dispute, such as a demand that you pay an amount you believe is not owed, and ask your lawyer to trace its path: notice, negotiation, commencement of proceedings, submission of evidence and enforcement. At each step, record who is responsible, what documents are required and the potential cost.

Ask what happens to operations during the dispute. Will both parties continue to perform their undisputed obligations? How will disputed amounts be handled? Do not assume that raising an objection allows you to stop payments or suspend operations; doing so could create an additional breach. What you need is clear wording reviewed by a lawyer, not unilateral action in a tense situation.

From the outset, keep a file containing the contract and its annexes, invoices, proof of payment, notices and relevant correspondence. Ask for any agreed amendment to be included in the final signed version rather than relying on a verbal promise.

The practical takeaway: Do not sign until you can explain the dispute process in plain language: whom you notify, when you move to the next step, where the claim will be heard and what it might cost. Clear answers are part of protecting your investment, not a prediction that the relationship will fail.