SAUDI ARABIA'S NEW COMPREHENSIVE FRANCHISE LAW: What you need to know about the new law, from disclosure requirements to administrative penalties.

Author:Zwisler, Carl
 
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On October 8, 2019, the Saudi Council of Ministers approved a franchise law that is expected to become effective in April of 2020. After it is formally published in the Official Gazette, the Ministry of Commerce and Investment will issue regulations prescribing the requirements for a Saudi Arabian franchise disclosure document (FDD), setting filing fees and establishing implementing rules and procedures.

The new law contains substantial, positive changes from the bill that was originally proposed in January of 2017. The registration and disclosure requirements, including requirements for all documents to be prepared in Arabic and relationship restrictions, will affect franchisors' cost of doing business. This is because the law apparently eliminates the application of the commercial agency law to franchises, with the ultimate financial impact of the regulation expected to be far less than was originally anticipated.

Franchise Definition

The law defines "franchise" in a way that is fairly consistent with how the term is defined in U.S. franchise regulations--it only seems to apply to arrangements in which the franchisor receives a payment for something other than goods "or services" provided to a franchisee. The final version of the law and regulations will need to clarify when payments for services are excluded from the payment element.

The Experience Requirement

A variation of China's 2+1 standard for franchising is a condition of granting franchises in the Kingdom. Only if "the business to be franchised has been operated in accordance to the Franchise Operations System for at least one (1) year and by at least two (2) persons (which may include the Franchisor or any of [its affiliates] or in two (2) separate units" may a franchisor grant a franchise.

A Saudi master franchisee must not offer subfranchises until it or another franchisee has operated a business like the one to be franchised for at least one year in the Kingdom.

Registration of Franchise Agreement and FDD

Franchise Agreements and Saudi FDDs must be registered as provided in the yet to be published Regulations.

The law fails to specify whether the registration must occur before the sale of a franchise or after the execution of a franchise agreement. It does not distinguish between the obligations of franchisor and master franchisees. It mentions nothing about exemptions.

Franchise Agreement Requirements

Twenty common franchise agreement provisions are required to be included...

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