Saudi Arabia franchise law update
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Saudi Arabia has now issued its Ministerial Decision No. 00594/1441 on the approval of the Implementing Regulation for the Commercial Franchise Law (‘Implementing Regulations’), which gives guidance and clarity surrounding the commercial franchise law which came into operation in April 2020.
Under Article 8 of the Implementing Regulations, there are terms and conditions that shall be included in the franchise agreement. These are additional to those already required under Article 11 of the Commercial Franchise Law and it is recommended that franchisors should ensure their franchise agreements incorporate these terms and conditions.
A significant part of the Implementing Regulations focuses on transparency in the franchising relationship and the franchisor is obliged to disclose certain information to its prospective franchisee. The type of information to be included in the disclosure document is prescribed in the Implementing Regulations, which also contains translation and registration requirements. Furthermore, franchisors should be mindful of ongoing disclosure obligations relating to expenditure for advertising and marketing activities.
An earlier draft of the Implementing Regulations stated in Article 2(5) that a franchise agreement does not include any ‘agreements concluded to determine sites for conducting franchisees or identifying franchisees in a specific geographical area, and result in the conclusion of a franchise agreement’. This has been removed from the final form of the Implementing Regulations, meaning that franchisors should ensure compliance with their disclosure obligations before collecting any monies or entering into any agreements which precede the conclusion of a franchise agreement, for instance letters of intention or memorandums of understanding.
Finally, the Implementing Regulations provides clarity regarding the franchisee’s assignment of the franchise agreement and places an obligation on the franchisor to approve or reject a franchisee’s request to assign within 30 days of receiving the request.
Franchisors with existing franchise agreements as well as those looking to enter into new franchise agreements in Saudi Arabia should familiarise themselves with the Commercial Franchise Law and the Implementing Regulations, particularly because of the pre-contractual obligations on the franchisor in its dealings with any prospective franchisee.
