Saudi Arabia Franchise Law – Disclosure And Registration Requirements During The Franchise Relationship

By Melissa Murray, Eddie Chiu

03-2020

The Saudi Arabia Commercial Franchise Law 122/1441 (the Law) is due to take effect in April 2020. The Implementing Regulations are currently in draft but the final form is expected soon. The below provisions are therefore from the draft Implementing Regulations, which may in the coming weeks change.

Franchisors looking to conclude new deals in the country will need to be aware of the disclosure and registration requirements that form part of the Law.

At the beginning of the franchise relationship

franchising

Franchisors will need to provide prospective franchisees with a disclosure document at least 14 days before the parties sign a franchise agreement or the payment of any monies. The content in the disclosure document must be current, correct and complete:

  • Current: If there are any material changes, the franchisor should provide its prospective franchisee with a new disclosure document (or addendum highlighting them) as soon as possible and before the parties sign the franchise agreement or any monies are paid [1].

  • Correct: The disclosure document shall be clear and accurate [2].

  • Complete: The disclosure document needs to cover all the matters prescribed in the draft Implementing Regulations [3].

Once the parties have signed the Franchise Agreement, the Law requires both documents are registered at the Saudi Ministry of Commerce and Investment. Whilst it appears that, from a practical perspective, the documents can be lodged for registration at the same time, it is a requirement under the draft Implementing Regulations that the disclosure document be deposited with the Ministry before the franchise agreement can be lodged for registration [4]. The franchise agreement must be lodged for registration within 90 days after it has been signed by the parties.

Ongoing disclosure obligations during the franchise relationship

Whilst the registration will remain valid for the duration of the franchise agreement, franchisors are nonetheless required to provide certain updates throughout the life of the franchise term.

If the franchisor intends to conclude another franchise agreement in Saudi Arabia in the coming year, then the franchisor must submit to the Ministry a statement of any changes in the information or documents previously submitted [5]. The franchisor must do so within 6 months of the end of the franchisor’s financial year.

If the franchisor has a marketing fund that franchisees are obliged to pay levies into, then the franchisor must submit to each franchisee who has paid the levies an account statement detailing the monies it has received, the amounts paid out from the marketing fund and what those amounts were generally used for [6]. The franchisor must do so within 4 months of the end of the franchisor’s financial year.

At the end of the franchise relationship

Following the termination of expiration of the franchise agreement, the parties should submit an application to the Ministry to cancel the franchise registration and the franchisor should notify the Saudi Authority for Intellectual Property that the franchisee’s licence to use the franchisor’s trademarks have ceased.

Take away and recommendations

Franchisors should familiarise themselves with the disclosure and registration requirements in the Law and the draft Implementing Regulations. Importantly, franchisors are reminded that any disclosure document they issue is current, correct and covers all the items required to be disclosed under the draft Implementing Regulations. A failure to comply with these requirements may result in penalties, including:

  • the franchisee may give notice for the early termination of the franchise agreement,

  • the franchisee may request compensation for any damage it has incurred, whilst the franchise agreement can remain on foot,

  • the franchisee may require the franchisor to re-purchase the assets used exclusively in the business that the franchisee purchased from the franchisor or from approved suppliers it has authorised.

Should you have any questions relating to the above, please contact the authors.


[1]Art 4, Implementing Regs.

[2] Art 7, Franchise Law.

[3] Art. 10, Implementing Regs.

[4] Art 5, Implementing Regs.

[5] Art 7, Implementing Regs.

[6]Art 12, Implementing Regs.