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  1 LNS 1234;  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:-
- 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
- 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.
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  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.
Lee Lin Li
Tay & Partners