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InsiderTAPS (22 March 2018)

Malaysia - Franchise briefing


Franchising case updates in Malaysia

22 March 2018
Lee Lin Li

Franchising in Malaysia is a regulated industry governed by the Franchise Act 1998 (“Act”), and regulated by the Franchise Development Division (“Registrar”) of the Ministry of the Domestic Trade Cooperatives and Consumerism (“MDTCC”). The Act applies to any franchised business operating or to be operated in Malaysia. Regulation requires registration of the franchise and compliance with specific terms of agreement required by statute prior to offering for sale or sale and commencement of the franchise business in Malaysia. It is vital for businesses to be aware of the potential implications of failing to adhere to the rules, and the courts’ overall approach in franchise-related cases.
A franchisor who fails to obtain register a franchise prior to operating a franchise business or offering for sale of its franchise commits an offence. If an offence is committed by a body corporate, a director, manager, secretary or other office bearer acting in similar capacity or assuming management responsibility for the body corporate may be held personally liable for that offence unless he can show that it was committed without his knowledge, consent or connivance and he had taken all reasonable precautions and exercised due diligence to prevent the commission of the offence.

The decision to prosecute lies with the public prosecutor. In addition to a fine and imprisonment, during sentencing, the court may also declare the franchise agreement null and void and order that the franchisor refund payments obtained from the franchisee, or prohibit the franchisor from making any new franchise agreement or appoint any new franchisee.

A recent decision concerning franchising was delivered by the high court in La Kaffa International Co Ltd v Loob Holdings Sdn Bhd and another [2017] 1 LNS 1234; [2017] MLJU 1234 on the issue of construction of Section 26(1) and 27(1) of the Act.  The dispute between both parties involved the “Chatime” bubble tea franchise which was to be resolved through arbitration in Singapore. 

On 5 January 2017, La Kaffa International Co. Ltd (“La Kaffa”) terminated its master franchisee arrangement for the brand “Chatime” under its Regional Exclusive Representation Agreement (“RERA”) with Loob Holding Sdn Bhd (“Loob Holding”), which had 24 more years to go. Among others, La Kaffa is alleging that:-

i.     There is a decrease in Loob Holding’s number of orders for raw materials, including milk tea powder, cocoa powder and Polypropylene (“PP”) cups and it was discovered that Loob Holding has been procuring 3rd party raw materials;

ii.    Loob Holding has been delaying and rejecting La Kaffa’s request to exercise its rights to inspect and audit the books as provided by the RERA; and

iii.   Despite repeated demands, Loob Holding has failed to comply with the terms of RERA and/or failed to make payment of, amongst others, the purchase of raw materials from the Plaintiff.

After the split, Loob Holding set out to transform and rebrand its 161 Chatime outlets to “Tealive”. This prompted La Kaffa to file a suit against Loob Holding for infringing the provisions of the Act and breach of contract. Pending the disposal of the case in arbitration proceedings, both parties filed applications for interim injunctions under Section 11(1) of the Arbitration Act 2005 in the KL high court.

La Kaffa (plaintiff) sought, among others:-

i.    to restrain the Loob Holding (defendant) including its directors, their spouses and immediate family and its employees (Related Parties) from carrying business which is identical or similar to Chatime franchise business under Section 27(1) of the Act; and
ii.    to prohibit them from disclosing, using and converting confidential information procured from the plaintiff under Section 26(1) of the Act.

Should the judge find in favour of La Kaffa, all Tealive outlets will have to cease operations immediately pending disposal of the suit.  The issue in the case was whether the written guarantees under Sections 26(1) and 27(1) of the Act which purport to bind the Related Parties were incorporated into the franchise agreement. The High Court, in construing the provisions, has adopted a strict interpretation in favour of the Related Parties and was of the view that the guarantees were not incorporated into the franchise agreement. Alternatively, even if it was assumed that the provisions have incorporated the guarantees into the franchise agreement, the court is not bound to grant interim injunctions as it is a matter of discretion. In this case, in the absence of any guarantee being given to the plaintiff, there was no question to be tried in respect of whether the defendant has breached the provisions.

Further, the high court found that the balance of convenience lies against the granting of the interim injunction in view that it carries a higher risk of injustice than a refusal of the interim injunction. As such, La Kaffa’s claim was refused. It remains to be seen how the court will apply the non-competition and confidentiality provision which has not been tested before.

women scope 

The interpretation of “exclusion clauses” and “entire agreement clause” in franchise agreements was discussed recently in the Court of Appeal decision of Chiropractic Specialty Centre Sdn Bhd v Orthorelief & Care Sdn Bhd [2017] 1 LNS 1573.  The appellant had appealed against the judgment of the high court which refused to set aside the arbitrator’s award in relation to the franchise agreement. 

The respondent in the court of appeal was the claimant in the arbitration proceeding.  The parties had entered into a franchise agreement and upon the representation of the appellant, the respondent had purchased several machines.  The respondent later discovered that the representations made by the appellant were false.  In the arbitration proceeding, the respondent sought rescission of the agreement and restitution for the value of the machines.  The allegation was denied by the appellant and the appellant cited the respondent’s inability to operate the machines correctly as the reason for the machines’ failure.  The appellant also counterclaimed against the respondent seeking damages for tarnishing the appellant’s reputation, mishandling the equipment, violating the appellant’s intellectual property rights and breaching the franchise agreement. 

Upon the conclusion of the arbitration proceeding, the arbitrator partly allowed the respondent’s claim.  The appellant, dissatisfied with the arbitrator’s award applied to the high court to set aside the award pursuant to Section 37 and 42 of the Arbitration Act.  The application was dismissed by the high court.

In its appeal at the court of appeal, the appellant claimed that the high court erred in law and in fact in dismissing the appellant’s application.  The issue raised by the appellant before the court of appeal was whether misrepresentation will have the protection of exclusion clauses and entire agreement clause of the franchise agreement wherein the clauses expressly negate any representation that is not expressly set out in the agreement itself. 

In its judgment, the court of appeal held that representation and misrepresentation are not one and the same in the legal sense.  The court cited Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyds Rep 611 where it was held that “An entire Agreement clause does not preclude a claim for misrepresentation, for the denial of contractual force to a statement cannot affect the status of a statement as a misrepresentation.”

The court was of the view that clauses in an agreement cannot operate to exclude or nullify the effect of misrepresentation, fraud and deceit.  Even if the clauses are included in the agreement, it would be unenforceable on the ground of public policy depending on the facts and gravity of impropriety of the clause in the contract.  Although Malaysia does not a statute governing unfair contract terms such as the English Unfair Contract Terms Act 1977, the Malaysian courts have maintained the rule of law to arrest oppressive conduct through the concept of “public policy” consideration.

In view that the award given by the arbitrator was not patently unjust or unconscionable or manifestly unlawful, the court of appeal held that the high court was correct not to intervene and set aside the award.  The appeal was accordingly dismissed with costs.

If a business falls within the definition of a franchise, it is important to adhere to the requirements of the Act. Apart from bringing greater protection to Malaysian businesses, the Act is intended to bring about cohesiveness to Malaysian businesses whilst encouraging entrepreneurship, innovation and economic growth. Failure to comply is an offence attracting penal and civil economic consequences. For further reading on cases illustrating the importance of abiding by the requirements of approval and registration under the Act and the courts’ approach, please see our franchise briefing The Long Read: A Tea Dilemma.

If you have any queries or require more information, please feel free to get in touch with us.

Lin lee(Website) 

Lee Lin Li
Tay & Partners
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News & Events

Congratulations to our Dispute Resolution Practice Group who won at the Court of Appeal

Date: 17 August 2017

Former Malaysia Tourism Promotion chairman and Ex-Member of Parliament loses his appeal against AirAsia Berhad to obtain discovery of certain documents in a widely reported defamation suit brought by the leading low-cost airline.

Lead Counsel Leonard Yeoh, appearing for the airline, argued successfully that when relying on the defence of justification, the appellant cannot seek discovery of documents from the respondent (AirAsia Berhad) to justify his statements, especially when the orders sought amounted to a fishing expedition.

Leonard Yeoh represented AirAsia Berhad, assisted by Yeoh Jit Wei and Yeo Yen Hock.

Feel free to read the news reports:

Asialaw Asia Pacific Dispute Resolution Awards 2017 – shortlist announced

Date: 13 July 2017


We are delighted to announce that our Partner, Leonard Yeoh is being awarded as one of the top 5 Disputes Star of the Year Nominees by Asialaw Asia Pacific Dispute Resolution Awards 2017.

The third (3rd) annual Asialaw Asia-Pacific Dispute Resolution Awards 2017 will be held on September 28, 2017. Asia’s leading dispute resolution lawyers will gather at The Grand Hyatt in Hong Kong to celebrate the progress of litigation and dispute resolution in the legal profession, while awards are bestowed to the top dispute resolution lawyers in Asia Pacific.

To see full list of nominees, please go to https://www.asialaw.com/articles/asialaw-dispute-resolution-awards-2017-shortlist-announced/areqgagw and scroll down under disputes star of the year nominees’ category.

IAM Patents 2017 Rankings

Date: 8 June 2017


Delighted to be recognized yet again by IAM Patent 1000 as the world’s leading patent professionals 2017. IAM Patent 1000 – The World’s Leading Patent Professionals recommends those it considers to be the leaders in the field: only those delivering top-quality patent services make the cut. To see full list of rankings, please go to: http://www.iam-media.com/Patent1000/Rankings/Detail.aspx?g=96b61a50-bbc4-43f4-bee1-79e85c32561f

T&P BreakfastTAPS – Key Highlights of the Companies Bill 2015

Date: 10 August 2016

Venue: Tay & Partners Kuala Lumpur

An exclusive breakfast talk was organised by Tay & Partners on 10 August 2016. Our partner and speaker Ms. Teo Wai Sum shared the key highlights of the Companies Bill 2015 which was anticipated to come into force by the middle of 2017 in Malaysia. While enjoying their breakfast, our invitees from different business sectors, engaged in interactive discussion and shared their valuable experience.

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UM Law Career Convention

Date: 26 April 2016

Venue: Faculty of Law, University of Malaya

Tay & Partners was invited by The Law Society of the Faculty of Law, University of Malaya to be a part of their annual Law Career Convention. The Convention was the avenue for participating organisations to recruit prospective job seekers, chambering pupils and attachment students to join their distinguished team. It was targeted to engage participants mainly made up of undergraduates and postgraduates who were currently pursuing law, be it here in Malaysia or worldwide.

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Antitrust in Asia

Date: 25 April 2015

Venue: Singapore

Our Managing Partner, Mr. Tay Beng Chai attended this second edition of the Antitrust in Asia conference which was held in Singapore, on April 25, 2016, jointly organised by Concurrences Review, ESSEC Singapore and Sorbonne-Assas International Law School and discussed the latest antitrust developments in the ASEAN countries. The Panel Sponsors were Baker & McKenzie, White & Case, Linklaters, Clifford Chance and RBB. The media sponsor was PaRR.

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Talk on Fundamentals of Competition Law and Case Study on the MAS/AirAsia Case

Date: 30 March 2016

Venue: KL Bar Auditorium

Our partner, Wong Weng Yew and senior associate, Nicole Leong gave a talk on Fundamentals of Competition Law and Case Study on the MAS/AirAsia Case at a seminar organised by The KL Bar Young Lawyers Committee. The seminar was attended by members of the Bar.


Invest Japan Symposium

Date: 15 March 2016

Venue: Mandarin Oriental Hotel, Kuala Lumpur

The Japan External Trade Organization (JETRO) Malaysia has organised the “Invest Japan Symposium” on 15 March 2016 which was attended by our partners Chang Hong Yun, Wong Weng Yew and Mohd Khairil. The event which was officiated by the Minister of International Trade and Industry is to provide information on Japan's business and investment environment and to stimulate interest in doing business in Japan. The event featured prominent guest speakers, panelists and representatives from companies operating successfully in the Japan market.


Chinese New Year Lou Sang Lunch

Date: 15 February 2016

Venue: China Treasures, Sime Darby Convention Centre

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Tay & Partners Wins for AirAsia

Date: 4 February 2016

 1Picture source: Free Malaysia Today

Tay & Partners represented AirAsia Berhad in a competition law appeal against a decision alleging market sharing between the budget airline and Malaysia Airlines System Berhad. Tay Beng Chai heads the team of Leonard Yeoh, Wong Weng Yew, Nicole Leong and Lynette Yee who secured a landmark victory decision before the Competition Appeal Tribunal which ruled that the Malaysia Competition Commission’s market sharing infringement decision and the financial penalty of MYR10 million must be set aside. This unanimous decision by the five-member tribunal marks the first decision delivered by the Competition Appeal Tribunal after the Competition Act 2010 came into force 4 years ago in Malaysia.

More news at the following links:

Meeting with Russian Delegation

Date: 6 November 2015

Venue: National Chamber of Commerce and Industry of Malaysia

Our partner, Mr. Leonard Yeoh attended a meeting organised by National Chamber of Commerce and Industry of Malaysia with some Russian businessmen who are looking to expanding businesses with the ASEAN countries. About 10 Russian companies from the mineral, media, ceramic, construction and manufacturing sectors were involved in the meeting


Business Tea Talk & Network

Date: 29 October 2015

Venue: EXIM Bank Malaysia

Our Managing Partner, Mr. Tay Beng Chai moderated the open discussion on a talk themed “Going Global” at a business tea talk jointly organised by Malaysian International Chamber of Commerce and Industry (MICCI) and EXIM Bank Malaysia. The talk was aim to provide an avenue for members and corporate guests of MICCI and EXIM Bank Malaysia to meet, share and exchange views on matters concerning business and the economy, particularly on useful tips and elements in expanding businesses across borders. En Baharuddin Muslim, the Vice President of Corporate Banking for Exim Bank presented the topic of “Business and Economic Outlook” and the founder and the Executive Chairman of Silverlake Axis Ltd, Mr Goh Peng Ooi presented to the attendees the topic of “Going Global – The Experience Journey”.

T&P BreakfastTAPS – Introduction to Derivatives

Date: 28 October 2015

Venue: Tay & Partners Kuala Lumpur

Tay & Partners held an exclusive breakfast talk on 28 October 2015 for representatives from financial institutions and the banking industry sector. Our Corporate, Banking & Finance partner En. Mohd Khairil Ezane provided an overview of derivatives transactions in Malaysia and the related regulations. The talk covered the various types of derivatives products, related regulations, ISDA Master Service Agreements, Tahawwut Master Agreement and the latest case law applicable for derivative transactions. The attendees were treated to a scrumptious breakfast whilst sharing their valuable practical experience in dealing with local and international derivative transactions.

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T&P BreakfastTAPS – Intellectual Property

Date: 5 August 2015

Venue: Tay & Partners Kuala Lumpur

An exclusive breakfast talk was organised by Tay & Partners on 5 August 2015. Our partners and speakers Ms. Lee Lin Li and Ms. Lim Bee Yi shared the latest updates in Intellectual Property law, particularly in key areas of protection and enforcement of intellectual property rights in Malaysia. While enjoying their breakfast, our invitees from different business sectors, engaged in interactive discussion and shared their valuable experience.

 IP1   IP2   IP3 

T&P BreakfastTAPS – IR/Employment

Date: 24 June 2015

Venue: Tay & Partners Kuala Lumpur

An exclusive breakfast talk was organised by Tay & Partners on 24 June 2015. Our partner and speaker, Mr. Leonard Yeoh and the Labour & Employment team shared the latest updates in IR, particularly the procedures and laws governing Reductions In Force/Retrenchment. While enjoying their breakfast, our invitees from different business sectors, engaged in interactive discussion and shared their valuable experience.

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T&P BreakfastTAPS – Competition Law

Date: 26 May 2015

Venue: Tay & Partners Kuala Lumpur

An exclusive and first of many breakfast talk was organised by Tay & Partners on 26 May 2015. Our speaker Ms. Nicole Leong presented the latest updates on competition law and discussed selected case studies. While enjoying their breakfast, our invitees from different business sectors, engaged in interactive discussion and shared their valuable experience in relation to competition law in their relevant industry.

 BTCompetLaw1   BTCompetLaw2   BTCompetLaw3 

Data Protection Summit

Date: 12 February 2015

Venue: Parkroyal Hotel Kuala Lumpur

Tay & Partners together with Bird & Bird had presented a half day seminar on Data Protection Summit on 12 February 2015 at Parkroyal Hotel Kuala Lumpur with 53 participants. The seminar provided an overview of the EU data protection regime which was presented by Mr. Gabriel Voisin from Bird & Bird UK and the recent developments in Asia Pacific data protection laws which was presented by Mr. Dharma Sadasivan from ATMD Bird & Bird Singapore. Our partners Ms. Lee Lin Li and Mr. Chang Hong Yun spoke on the Malaysian legislation with particular focus on the transfer of personal data overseas. The seminar also outlined the various ways in which companies should handle issues relating to the transfer of personal data overseas. The speakers also explained the challenges faced by data users.

 DataProtect1   DataProtect2   DataProtect3 

Expanding Your Business Across Borders

Date: 20 January 2015

Venue: Parkroyal Hotel Kuala Lumpur

Tay & Partners had presented a talk entitled “Expanding Your Business Across Borders” together with Bird & Bird and KK Advocates. Our speaker, Ms. Lee Lin Li was joined by Dr. Mark Abel and Mr. Graeme Payne from Bird & Bird UK, Dr. Sven-Michael Werner from Bird & Bird China and Mr. Justisiari Kusumah from KK Advocates Indonesia. The talk was held on 20 January 2015 at Parkroyal Hotel Kuala Lumpur with 60 participants. The seminar outlined the various ways in which franchising can be used as part of an international growth strategy and focused on the regulatory issues that are encountered on entering both the Chinese and Indonesian markets. The seminar also highlighted the challenges that Malaysian companies face when bringing foreign franchise concepts into Malaysia.

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25th Anniversary Dinner

Date: 13 November 2014

Venue: Neo Tamarind Kuala Lumpur

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Breakfast Briefing on Personal Data Protection

Date: 28 November 2013

Venue: Levain Boulangerie & Patisserie

As part of a series of sector specific briefings on the newly implemented Personal Data Protection Act 2010, a talk was held exclusively for a select group of Real Estate and Housing Developers' Association Malaysia (Rehda) members on 28 November 2013 at the Levain Boulangerie & Patisserie. The firm was pleased to have Dr Zainal Abidin, the Deputy Director General from the Personal Data Protection Department as its honorary speaker and the presence of Ms Noreen Iszani, the Head of Registration Unit. Our partners, Ms. Su Siew Ling and Ms. Cheah Chiew Lan, spoke on compliance and legal issues that affect property developers and there were exciting exchanges of questions and issues from the floor. We have put up brief information on the Act on our website.

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Clients’ Appreciation Dinner

Date: 22 November 2012

Venue: Hakka Republic Kuala Lumpur

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