New Franchise Law in Saudi Arabia
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The Ministry of Commerce and Investment (MOCI) initially issued the draft Franchise Law for public consultation in 2017. The objectives of the legislation were to:
- encourage the conclusion of franchise arrangements in Saudi Arabia, by having in place a clear legal framework governing the relationship between franchisors and franchisees;
- protect franchisees, particularly in the event of the termination of the franchise arrangement or its non-renewal;
- assist potential franchisees in making sound investment decisions, based on the information disclosed by the franchisors; and
- grant to the MOCI authority to publish educative material and proposed templates for contractual arrangements.
Prior to this new law, Saudi Arabia has treated franchise arrangements as commercial agency arrangements and are subject to Commercial Agency Law. This new Franchise Law aims to create a robust set of regulations, which apply specifically to franchise arrangements. Significantly, the new Franchise Law does not cover other agreements such as distribution or intellectual property licensing.
The new Franchise Law introduces a number of noteworthy changes. It changes the eligibility requirements so that in order to have a valid franchise, the franchise concept must have been carried out by at least two companies (which can include the franchisor) in at least two separate locations for a period of at least one year.
The franchisor is now also responsible for registration. The franchisor is required to register:
- the franchise agreement;
- a disclosure document; and
- the trademarks and licenced intellectual property.
All documents provided to the MOCI must be in Arabic (or translated by an in-Kingdom certified translator).
Potentially the most significant change introduced by the new Franchise Law is the obligation to produce, register and submit a disclosure document to MOCI before execution of the franchise agreement. The franchisor must send the disclosure form to the franchisee at least four months prior to signing the franchise agreement. In the event that there is a "substantial change" during the franchise relationship, the franchisor is also obliged to update the disclosure document.
In general, the Franchise Law provides a new, distinct set of regulations for franchise arrangements, which not only provides guidance for the relationship between the franchisor and franchisee but also creates a significantly more robust role for the MOCI. It is likely that the disclosure requirement aims to address the common imbalance of power between franchisors and franchisees, however, the Franchise Law does not specify the exact information to be disclosed and it is likely that in practice it will not be an overly burdensome obligation for fear of dissuading foreign franchisors in what is an increasingly attractive location for franchising opportunities.
For more information on the details of the new Franchise Law, or any questions on international franchising more generally, please contact Gordon Drakes or your regular contact in the franchising team.