It is no secret that Saudi Arabia is becoming a hot spot for franchising in the Middle East. Opportunities abound and Saudi Arabian companies are increasingly interested in attracting North American, European and other foreign brands.
On January 1, 2017, the Ministry of Commerce and Investment (MOCI) of the Kingdom of Saudi Arabia (KSA) released a proposed Commercial Franchise Law [Royal Decree No. M/5 dated Jumada II 1389 (August 1969)], which aims to regulate franchising in the KSA.
The proposed legislation would address various issues including:
- Encouraging franchise activities;
- Developing a legal framework to regulate the franchisor-franchisee relationship;
- Defining “franchise agreements” in order to better regulate those agreements; and
- Identifying certain thresholds for franchisors such as:
o Requiring that franchise
systems be in operation for at least one year by at least one
o Requiring franchise systems to be in operation in at least two (2) territories for a period of no lesser than one year;
o Requiring that franchisors register or apply to register their trademarks in the KSA prior to delivering a franchise disclosure document (FDD); and
o Requiring the registration of both the franchise agreement and FDD prior to signing a franchise agreement.
In addition, the legislation would consider timelines for releasing or sharing the contents of a FDD prior to executing a franchise agreement.
The legislation also considers a proposal for certain mandatory clauses as well as essential rights and obligations for both franchisor and franchisee, such as the franchisor’s right to protect its reputation and its right to enter the franchised premises as well as the right to determine system standards and the right to directly or indirectly supply the franchisee with franchised products to name a few.
Finally, the proposed legislation aims to exclude certain types of agreements from the ambit of the legislation, such as those for the distribution of products, the licensing of intellectual property as well as employment and lease agreements. Further, the proposed legislation aims to provide guidance on such subjects as ad-fund contributions, terminations, assignments and renewals in addition to compensation in the event of a dispute.
It remains to be seen whether the proposed legislation will ultimately encompass all of the aforementioned elements. It will also be interesting to see if this proposed legislation sets a trend for other neighbouring Middle Eastern countries.
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