 Introduction

 Sources of law of franchise in Malaysia

 The franchise business
 Rights and liabilities of franchisor
 Franchise agreement
 Termination of franchise

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 Franchise is a business system, which was
said to originate from Europe and
expanded rapidly to the USA more than
100 years ago
 The word franchise came from French

word ‘franco’ which means freedom

 Franchise system became very popular

and was considered as an innovative

global discovery in marketing strategy

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 Franchising refers to the methods of
practicing and using another person’s
business philosophy.
 Business philosophy = a business philosophy is a set
of beliefs and principles that a company strives to
work toward. This is often referred to as a mission
statement orcompany vision. It's essentially
the company'soperational blueprint. The business
philosophyexplains the company's overall goals and
its purpose
 The franchisor grants the independent
operator the right to distribute its products,
techniques, and trademarks for a percentage
of gross monthly sales and a royalty fee.
 ‘royalty’ = a payment to employ a trade mark licence

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 Advertising, training and other support
services are commonly made available
by the franchisor.
 Agreements typically last from five to

thirty years, with premature cancellations

or terminations of most contracts bearing
serious consequences for franchisees.

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 In general, the franchise business in
Malaysia has started more than 60 years
ago through companies like Singer, Bata,
petrol stations and distributors of
automobiles
 However it was only noticeable when the

fast food restaurants such as KFC, A&W,

Mc Donalds came into the country around
the 70s and early 80s

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 The scenario continues with the growth
of more products and services using the
franchise system approach, including
automobile related sector (car sales,
service centres, tyre services, sales of
spare parts and accessories) bookshops,
clothes and fashion, retails, cosmetic and
saloons, hotels and tourism agencies,
jewellery etc

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 The Malaysia Franchise Act 1998 makes it
compulsory for franchises to be
registered before an offer to sell the
franchise in Malaysia may be made.
 Before the Act has been introduced, the

franchise industry in Malaysia has to rely

on the available laws.

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 The relevant statutory laws applicable to
franchising in Malaysia are-
 Contract Act 1950
 This is the basis for any contractual

relationship, including franchise

agreement, as the essence of the
contractual obligations and liabilities of
the parties are based on the agreement
signed between them

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 Trademark Act 1976
 One of the important elements in
franchise business is the existence of an
image or the introduction of a product
and a business developed by a
franchisor, who also owns the copyright.
 The protection of the trademark or
service linked to a product or business
system belonging to a franchisor can be
found in Trademark Act 1976

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 Copyright Act 1987
 The legislated documents developed

from the franchisor’s efforts, research

and development (R&D) as guide in the
business, can be protected under the
copyright law.
 An example of such document is an

Operation Manual

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 Patent Act 1983
 -Patent Act can be used to protect
patented design that is owned and
developed for a franchise business
 Common law
 The Tort of Negligence
 Negligence is a tort actionable as a result
of a breach of a legal duty to take care by
one, which results in damage to another.

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 In context of franchising, it arises where
either the franchisor or the franchisee (or
both) could be held liable where some
form of injury occurs to a customer or a
third party, at the franchise premises or
otherwise, or through use of the
franchise products or services.

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 The Law of Passing Of
 The law against passing off is also a
tort, which protects the business
goodwill on the franchise system.
 It enables a franchisor (in certain
circumstances) to prevent a franchise
from carrying out a similar business
(apart from the franchised business)
during the term of the franchise, or
after such term, which seeks to imply a
connection with the franchisor where
none exists, and take advantage of such
association

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 The law on Trade Secret and Breach
of Confidential Information
 An essential part of what makes a

franchise business successful is the

information and trade secrets, which
distinguishable the business from other
concerns, and makes it desirable and
ultimately profitable.
 A thriving franchise is based on a proven

operation and management concept,

which could and should be protected
under the equitable law of confidence

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 Main objective of the Act: To provide for the
registration of, and to regulate, franchise
and for incidental matters
 It applies throughout Malaysia for the selling

of any kind of franchise in Malaysia

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 S. 3(2) - The sale of a franchise is deemed to be in Malaysia
where:
 (a) an offer to sell or buy a franchise:

 (i) is made in Malaysia and accepted within or outside

Malaysia; or
 (ii) is made outside Malaysia and accepted within Malaysia ;

and
 (b) The franchised business is operated or will be operating in

Malaysia

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 S. 4 – ‘Franchise’ means a contract or an
agreement, either expressed or implied,
whether oral or written, between two or
more persons by which:
 (a) The franchisor grants to the franchisee

the right to operate a business according

to the franchise system as determined by
the franchisor during a term to be
determined by the franchisor;

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 (b) The franchisor grants to the
franchisee the right to use a mark, or
trade secret, or any confidential
information or intellectual property,
owned by the franchisor;
 (c) The franchisor possesses the right to

administer continuous control during the

franchise term over the franchisee’s
business operations in accordance with
the franchise system
 (e) In return for the grant of rights, the

franchisee may be required to pay a fee

or other form of consideration.
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 The franchisee operates the business
separately from the franchisor
 their relationship cannot be considered

as a partnership, service contract or

agency

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 S. 4 FA 1998 -
 “Franchisor”- a person who grants a

franchise to a franchisee and includes a

master franchisee with regards to his
relationship with a sub-franchisee
 A franchisor will provide advice to the

franchisee on setting up and running the

business and assists in the supply of
materials and services, marketing, training
and business and technical assistance.

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 S.4 FA 1998 -
 “Franchisee”- a person to whom a
franchise is granted and includes:
 -a master franchisee with regard to his
relationship with franchisor ; and
 -a sub-franchisee with regard to his
relationship with a master franchisee
 “Master franchisee”- a person who has
been granted rights by a franchisor to sub-
franchise to another person, at his own
expense, the franchise of the franchisor

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 Registration
 Ss. 5, 6, 6A and 6B
 S. 6(1) A franchisor shall register his
franchise with the Registrar before he can
make an offer to sell the franchise to any
person
 S. 6(2) Failure to comply - an offence
(unless he gets an exemption from the
Minister)
 The registrar may approve or refuse the
application

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 The issue in this case is whether the agreement known as the
Management Agreement entered into by the pf and df was a franchise
agreement under the Franchise Act 1998.
 Pf contended that the Agreement was a Franchise Agreement principally
because there are clauses in the Agreement that used the words
"franchise fees". In addition, Plaintiff had use the Defendant's logo,
business name of Permai Polyclinic, uniformed colour and dealings with
the Defendant's panel patients - showed that the Plaintiff and the
Defendant were contracting a franchise agreement.
 Df contended that the Agreement was not a franchise agreement as the
Agreement was not registered under the Franchise Act, the Defendant
did not have continuous control over the Plaintiff's business operation of
his Permai Polyclinic Kingfisher and there was no operation manual nor
training manual of the franchise, inter alia. In addition, the Agreement
allowed either party to terminate it without reason by giving the other
party 3 months' notice in writing which was in contravention with
section 18(2) and section 31 (1) of the Franchise Act 1998 and it
therefore could not render the Agreement to be franchise agreement.

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 It is mandatory for a franchise to be registered with the
Registrar under section 6 (1) of the Franchise Act 1998
before a franchisor can operate a franchise business or
make an offer to sell the franchise to any person. Hence, if
a franchise is not duly registered under section 6(1), any
franchise contract or agreement made under such
circumstances will be in contravention of the said provision
of the Franchise Act and thus illegal, ineffective and void.

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 The Plaintiff contended that the agreement is void ab initio
for failure to comply with section 6 and 15 of the Franchise
Act 1998.
 From the facts of the case, when the Plaintiff was offered
the said franchise by the Defendant who is the franchisor,
the Defendant has not register the said franchise. This is a
clear contravention of section 6 (1) and it is an offence by
virtue of section 6 (2) of the same.
 Hence the Defendant has failed to comply with the
provisions of the Franchise Act 1998. Therefore the
agreement was entered in contravention of the same and is
thus not enforceable by law, which renders the said
agreement to be void.

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 Filing requirements
 S7(1) - A franchisor shall make an

application to register his franchise by

submitting to the Registrar the
application in the prescribed form,
together with:
 -A complete disclosure documents with

all the necessary particulars;

 -A sample of the franchise agreement;
 -Operation manual of franchise;

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 -Training manual of the franchise
 -A copy of the latest audited accounts,

financial statements etc;

 -Any additional documents as may be

required by the Registrar

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S. 60 FA 1998
Franchise (Forms and Fees) (Amendment)

Regulations 2007
Disclosure document is a document that

explain and elaborate

 the concept and system in the franchise as

offered by the franchisor.

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 Contents of the document -
 (1) Background of the franchise business
 i.e - name of franchisor, date of Company

incorporation, franchisor’s business

address, franchisor’s business trademark,
nature of franchisor and franchise
business, franchisor business experience
 (2) Personnel involved in the company
 i.e - names, appointment and experience

of members of the Board of Directors and

Senior Executives)

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 (3) Litigation history/court action
 i.e - any legal proceedings that have

been taken or is being taken against the

franchisor)
 (4) Bankruptcy/insolvency
 i.e - whether franchisor has any record

of bankruptcy or winding up
 (5) Franchise fees and other initial fees
 i.e - type and amount payable by the

franchisee, time of payment, whether

such payments are refundable

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 (6) Other financial obligation
 i.e - advertising fee, training fee, service

fee, lease and other fees

 (7) Franchisee’s investment
 i.e - such as fixed assets, inventory,
deposit
 (8) Obligations of a franchisee
 i.e - whether the franchisee is required
to purchase specified equipment or raw
material from the franchisor or specified
supplier; if required, state the terms and
conditions and the types of goods or
services as required)

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 (9) Obligations of a franchisor
 i.e - Franchisor’s obligation prior to the
opening, franchisor’s obligation during
operation, selection of site, training,
initial training- place, duration and course
content, training fees and expenses
payable by the franchisee refresher
training

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 (10) Territorial rights
 i.e - whether territorial rights are given,

whether the franchisor is allowed to operate

within the allocated territory, using similar
or different names.
 S18(2)(b)- the territorial rights granted to

the franchisee (must contain in the

franchise agreement).

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 (11) Intellectual property rights
 i.e - franchisee’s rights to use the trade or

service mark and other any intellectual

property rights and other terms on patents
and copyright)

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 (12) Renewal and termination of franchise business

 (13) Financial statements

 i.e - last three years of financial statement of the
franchisor)

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 Primarily, the relationship of the franchisor
and franchisee is based on contract or
agreement between them
 S 18 –
 A franchise agreement shall be in writing.
 It is advisable that there is a clear terms in

the agreement as regards to their rights

and responsibilities towards each other

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 Franchise agreement basically requires a
franchisee to pay franchise fees or
royalty to a franchisor (the rate shall be
stated in the disclosure documents)- S 21
 A franchisee shall pay the franchise fees,
royalty, promotion fees or any other
payment as stated in the franchise
agreement

 A franchise term shall not be less than 5

years – S 25

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 S 26 - A franchisee shall give a written
guarantee to a franchisor that he and his
employees will not disclose any
information contained in the operation
manual or obtained during training
organised by the franchisor during the
franchise term and for 2 years after the
expiration or earlier termination of the
franchise agreement

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 (1) A franchisee shall give a written
guarantee to a franchisor that the
franchisee and his employees shall not
carry on any other business similar to the
franchised business operated by the
franchisee during the franchise term and for
two years after the expiration or earlier
termination of the franchise agreement.

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 S 28 - Any condition or provision in a
franchise agreement purporting to bind a
franchisee to waive compliance with any
provision of the Act is void, except with
regard to settlement agreement or
arbitration.

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 Conduct of the parties
 S. 29(1) - A franchisor and franchisee shall
act in an honest and lawful manner and
shall Endeavour to pursue the best
franchise business practice.

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 S. 29(2) - Both parties shall avoid the
following conduct;
 (a) substantial and unreasonable
overvaluation of fees and prices;
 (b) conduct which is unnecessary and
unreasonable in relation to the risks to be
incurred by one party; and
 (c )conduct that is not reasonably necessary
for the protection of the legitimate business
interests of the franchisor, franchisee and
franchise system

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 (1) A franchisor shall give a written notice
about a breach of contract by a franchisee
and allow the franchisee time to remedy
the breach.

 (2) A franchisee shall pay the franchisee

fees, royalty, promotion fees or any other
payment as provided in the franchise
agreement.

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 (3) A franchisor shall provide assistance to
a franchisee to operate his business, such
as the provision or supply of materials and
services, training, marketing, and business
or technical assistance.

 (4) A franchisor and a franchisee shall

protect the consumer’s interest at all
times.

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 Termination of franchise agreement
 S. 31(1) - No franchisor shall terminate a

franchise agreement before the

expiration date except for good cause
 S. 31(2) - Good cause includes –
 failure of a franchisee to comply with any

terms of the agreement entered into;

and
 failure of a franchisee to remedy the

breach within the period stated in a

written notice given by the franchisor

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 S. 31(3) - Good cause also includes (without requirement of
notice and opportunity to remedy the breach):
 makes an assignment of the franchise rights for the benefit of

the creditors or disposition of franchise assets to any person;

 voluntary abandons the franchised business;

 convicted of a criminal offence (impairs the goodwill of the

franchisor); or
 repeatedly fails to comply with the terms of the agreement

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 S.32 - A franchisor commits an offence if he
refuses to renew a franchise agreement or
extend a franchise term without
compensating a franchisee … where
 (b) the franchisee has not been given a

written notice of the franchisor’s intent not

to renew the franchise agreement at least
six months prior to the expiration date of
the franchise agreement.

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 The primary issue in this case is whether the non-
renewal of the franchise was A breach of
agreement by the defendant/franchisor or an
exercise of a right conferred under the terms and
conditions of the franchise agreement.
 It was held, the non-renewal of the franchise
agreement by the defendant/franchisor was a
breach of the agreement under the terms and
conditions as to its renewal.

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 Extension of franchise term
 S. 34(1) - At any time before the expiration
term, a franchisee shall give a written
notice to the franchisor to extend the
franchise term
 S 34(2) - Upon the application, a franchisor
shall extend the term to another period.
 Failure to renew the agreement or extend a
term without compensating a franchisee is
considered as an offence

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 S 34(3) - An agreement which has been
extended shall contain similar conditions
or conditions which not less favorable
than in the previous agreement
 In some circumstances, a franchise term

may be terminated:-
 Before the expiry of the 5 years term;
 Both parties agree to a termination ; or
 Where the court has decided that the

agreement should be terminated earlier

than the term

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 The court observed that the Franchise Act 1998
shows the regulation of franchise is through a
system of registration of franchises. The importance
of registration is reflected in the imposition of
penalties. Unless the person, class of persons,
business or industry is exempted from all or any of
the provisions of the Act, including the requirement
of registration, the failure to register before offering
the franchise for sale is an offence. More importantly,
there are statutory obligations for both franchisor
and franchisee. These obligations extend to matters
of termination, renewal and extensions of franchise

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