Franchising in Malaysia: Growing Your Business Dream

Franchising has always been a low-cost, quick means of business expansion. The statutes of Malaysia have recently been updated to encourage franchise growth. This article highlights key issues in franchise development for forward-looking growth.

Franchising has been a popular choice of doing business to those who wish to embark in entrepreneurship because they will have access to a recognized company’s brand name and a ready-made business operation. Some of the examples of franchise in Malaysia are 7 Eleven, Big Apple, Secret Recipe, Gloria Jean’s Coffees and Chatime. This industry is regulated by the Franchise Act 1998 (“the FA 1998”) which came into force on 8 October 1999 and the Franchise (Amendment) Act 2012 which came into force on 1 January 2013[1] under the control of the Franchise Development Division (Registry) of the Ministry of Domestic Trade, Co-operatives and Consumerism (MDTCC).[2] This article aims to provide an overview of the regulatory regime of the franchise industry in Malaysia.

The FA 1998 applies to the sale and operation of any franchise in Malaysia where an offer to sell or buy a franchise is made and accepted within or outside Malaysia and the franchise business is operated in Malaysia. “Franchise” refers to an agreement whereby the franchisor grants to the franchisee the right to operate a franchise business during a term to be determined by the franchisor. The franchisor also grants to the franchisee the right to use a mark, a trade secret, any confidential information or intellectual property owned by the franchisor. In return, the franchisee may be required to pay a fee or other form of consideration.

A franchise agreement shall be in writing and should include but not limited to the name and description of the franchise business, the territorial rights granted to the franchisee, the franchise fee or any related type of payment (if any), the duration of the franchise, the terms of renewal and the effect of termination or expiration of the franchise agreement. The full requirements of a franchise agreement are laid down in Section 18 of the FA 1998. Failure to comply with these requirements shall render a franchise agreement to be null and void.

A franchisor shall then submit to a franchisee a copy of the franchise agreement and disclosure documents at least 10 days before the franchisee signs the agreement as stated in Section 15(1) of the FA 1998. Failure to comply with this requirement will be an offence as illustrated in the case of SP Multitech Intelligent Homes Sdn Bhd v Home Sdn Bhd [2010] MLJU 1845. In this case, the defendant (franchisor) failed to submit a copy of the disclosure documents 10 days before the plaintiff (franchisee) signed the franchise agreement to operate a retail smart home concept chain store. In addition, when the offer was made, the business had not been registered with the Registrar. The Registrar’s approval was obtained 5 months later. The Court held that the franchise agreement was tainted with illegality and void.

Additionally, the court in the case of Dr. Premananthan Vasuthevan v Permai Polyclinics Sdn Bhd [2014] 10 CLJ 251 held that it is mandatory for a franchise to be registered with the Registrar before a franchisor could operate a franchise business. Any franchise agreement made prior to registration shall be illegal, ineffective and void. Moreover, in the case of Munafsya Sdn Bhd v Proquaz Sdn Bhd [2013] 2 CLJ 189, when the plaintiff (franchisee) entered into a licence agreement with the defendant (franchisor), the latter failed to register as a franchisor of Children Islamic Centre (“CIC franchise”) with the MDTCC and the Ministry of Education (“MoE”). Consequently, the defendant has no right to offer or give the CIC licence to the plaintiff.

Clearly, it is compulsory for a franchisor to register his franchise with the Registrar of Franchises before he can operate a franchise business or make an offer to sell the franchise to any person (Section 6(1) of the FA 1998). The applications for registration can be made online through Malaysia Franchise Express System (MyFEX) portal. The application fee is RM50 while the registration fee is RM1,000.[3] Based on Section 7 of the FA 1998, a franchisor shall register his franchise by submitting to the Registrar the application in the prescribed form (Form BAF2) together with other documents, for instance, the disclosure documents with all the necessary particulars filled in (Form BAF1), a sample of the franchise agreement, the operation and training manual of the franchise, certified true copy of Registered trade mark or intellectual property mark documents with Intellectual Property Corporation of Malaysia (MyIPO), certified true copy of certificate of incorporation (Form 9 or 13, 24, 44 and 49) and a copy of the latest audited accounts. The application may be withdrawn at any time before it is approved or refused.

Next, the franchisee must register the franchise with the Registrar by using the prescribed registration form within 14 days from the date of signing of the franchise agreement under Section 6B of the FA 1998. If it involves a foreign franchisee, a franchisee shall apply to register the franchise with the Registrar under Section 6A of the FA 1998. The Registrar may impose any conditions for the approval of registration of franchise. Where a franchisee has been granted approval, the franchisee shall register such approval.

Upon receipt of an application for registration, the Registrar may approve or refuse the application, and shall give reason for refusal. An application which is approved may be imposed with conditions and certain amount of fees by the Registrar. The registration shall be effective on the date stated in the written notice given by the Registrar (Section 9 of the FA 1998) and shall continue to be effective unless the Registrar issues a written order to the franchisor to cancel the franchise registration as stated in Section 10 of the FA 1998. A franchise agreement term shall not be less than 5 years (Section 25 of the FA 1998) and there is no early termination except for good cause (Section 31(1) of the FA 1998). So longer term agreements can be especially dangerous (or beneficial, depending upon your perspective). For example, the fate of 1,000 workers who make the popular tea known as Chatime is in limbo because Tiawanese franchisor La Kaffa International Co. Ltd (“La Kaffa”) prematurely terminated its agreement with Loob Holding Sdn Bhd (“Loob Holding”) who is the master franchisee in Malaysia. It has been reported that La Kaffa will officially take over all the 165 Chatime outlets in Malaysia.[4] Despite this, Loob Holding is seeking legal advice on this matter because according to the franchise agreement, they still have twenty-four years to go! The bad publicity, as well the legal risk, in early termination of a franchise is a very powerful forcé. Legal counseling and public relations skill must be utilized.

A Malaysian franchisee also has the right to apply for an extension of the franchise term by giving a written notice to the franchisor at least 6 months prior to the expiration of the term (Section 34(1) of the FA 1998). In Noraimi bt Alias v Rangkaian Hotel Seri Malaysia [2009] 9 CLJ 815, the defendant (franchisor) entered into franchise and premises management agreements with the plaintiff (franchisee) to manage the hotel chain ‘Seri Malaysia’. Even though the agreement provided for a renewal for a further term of 8 years, the defendant refused to renew it. The court held that the expiration of the franchise agreement was not a reason for refusal to renew. The defendant’s act was invalid as it violated the terms of the franchise agreement and the franchisee was awarded compensation for the loss of profits.

Last but not least, both the franchisor and franchisee must act in an honest and lawful manner to pursue the best franchise business practice of the time and place (Section 29 of the FA 1998). This obligation of good faith is actinable. For example, in the case of Lim Seng Kiat & Lim Woo Yen v Jee Hing Lim & Tee Bee Ling [2015] 1 LNS 94, the appellants had misrepresented the respondents (franchisee) that the first defendant was the master franchisee of Malaysia for the brand name ‘COMEBUY’ and had authority to sell the ‘COMEBUY’ franchise. This rendered the franchise agreement to be void ab initio.

In a nutshell, although everyone can start a franchise business in Malaysia, it takes a truly hardworking, dedicated and discipline entrepreneur to start and operate a successful franchise business in Malaysia. Most importantly, the requirements of the Franchise Act 1998, as amended, must be complied by the parties to ensure a smooth running of the business. According to former U.S. Secretary of State Colin Powell, “There are no secrets to success. It is the result of preparation, hard work and learning from failure”. Franchising can turn the risks of expanding your business in a foreign country into manageable business risk. LAWorld is here to help.

For more information please contact Mohamed Ridza, our Malaysia LAWorld member in Kuala Lumpur.

Mohamed Ridza & Co.
Tel. +603-20924822
ridza@rizdalaw.com.my
www.ridzalaw.com.my

Mohamed’s firm has extensive experience in business expansion, finance and corporate transactions.

________________________________________
[1] Wong, J. N. (2014). Franchise Law in Malaysia.
[2] Franchising in Malaysia (2015). News & Insights of Wiley Rein.
[3] Malaysia Franchise Express System (MyFEX) portal at http://myfex.gov.my/portal/
[4] Nee E. A. (2016). Malaysian Chatime franchisees throw support behind master franchisee Loob