By Yeshanthan Nair
Introduction:
In the dynamic world of Franchise Industry, where opportunity meets ambition, it’s easy to get caught up in the exciting prospect of franchising your business. Yet, there’s a crucial legal requirement in Malaysia that often escapes the attention of many business owners. It’s the law stipulated under S.6 Franchise Act 1998 (FA 1998), which necessitates that a “franchisor must register their franchise with the Franchise Registrar before embarking on any franchise business operations in Malaysia”. Neglecting this fundamental step can lead to significant legal consequences, as demonstrated in the case of Hasjay Group Sdn Bhd & [2022].
What Sparked the Legal Action?
In this case, the First Plaintiff, Hasjay Group Sdn Bhd, known as the Franchisee, entered into a Franchise Agreement in February 2016 with the First Defendant, Eco Passions Sdn Bhd & Ors, who represented themselves as the Franchisor and owner of the Franchise business and trade name “ShakeAway” Worldwide Ltd UK in Malaysia.
The First Defendant said they had permission from “ShakeAway UK” to use their business know-how, logo, and trademark in Malaysia, along with the rights to the “ShakeAway” brand. The First Plaintiff invested RM45,000 in January 2015 and secured a spot at a shopping mall known as The Curve, in mid-2016 for their first Franchise outlet.
Things seemed promising until issues started rising when the Second Defendant, responsible for setting up the Plaintiff’s outlet, repeatedly caused delays in supplying goods and failed to provide adequate support for franchise growth in Malaysia. As if that wasn’t enough, the Plaintiff was further shocked to find out that the First Defendant was not even a registered Master Franchisee, which lead towards the plaintiffs’ decision to cease operating the franchise business.
How the Law Comes into Play?
Franchise businesses in Malaysia are governed by the Franchise Act 1998. So long as the Franchise Agreement is executed in Malaysia and the Business is established in Malaysia, you are automatically bound by the Franchise Act 1998 which requires full compliance of the Act to prevent from committing an offence. In this case, the Franchise Agreement, executed on February 10, 2016, was established in Malaysia, and the franchise operations took place in Malaysia, which therefore falls under the purview of S.3 FA 1998, necessitating that this case be governed by the provisions of this Act.
As far as the law is concerned, S.4 FA 1998 defines a “franchisor” as someone granting a franchise to a franchisee which also in fact includes a master franchisee’s relationship with sub-franchisees. In this case, the foreign entity, ShakeAway UK, is the rightful owner of the ShakeAway franchise business, which satisfies the definition of Franchisor under S.4 FA 1998. Meanwhile the First Defendant also satisfies the legal definition of “Franchisor” by acting as a master franchisee for ShakeAway in Malaysia that provides an “exclusive license” to the First Plaintiff to operate the franchise business.
How to Be in Compliance with the Law?
The law under S.6(1) & S.6A FA 1998 requires Franchisor to register the franchise with the Franchise Registrar before commencing any Franchise operations or offering the franchise for sale in Malaysia. The First Defendant in this case is labelled as a Franchisor in the Franchise Agreement, but no doubt as we read, we understand the reality is much more complex in this case as they play the role of a Master Franchisee of ShakeAway in Malaysia.
The law makes it crystal clear that, so long as the First Defendant satisfies the definition of a Franchisor, the First Defendant shall comply with the law and register with the Franchise Registrar to avoid getting a penalty. In this case, there was no supporting evidence from the First Defendant that shows they had completed the required registration with the Franchise Registrar to open their franchise in Malaysia which undoubtedly made the First Defendant liable under the Act.
The Court’s Decision?
The Court concluded that the Franchise Agreement entered between the First Defendant and the Plaintiffs was unlawful and void ab initio (No legal effect – invalid from the start) in accordance with the Act due to the First Defendant’s failure to register with the Franchise Registrar (S.6 FA 1998) which was then read together with S.24(b) Contracts Act 1950. The Defendants failure to comply with the Act made them liable to a penalty worth RM 865,000.00 plus cost.
How Can You Prevent Yourself from Getting Caught by the Act? – Key Takeaway Tips:
This case serves as an important reminder for potential franchisors, emphasizing how crucial it is to abide by the legal framework when entering the franchise industry in Malaysia. As this case shows, neglecting this crucial step can lead to the Franchise Agreement being declared unlawful and void ab initio, which can result in significant losses and/or damages for both parties and severe penalties to the Franchisor.
Start your Franchise Adventure on the right track and ensure that every action you take aligns with the requirements of the Act. Do seek our advise and our Franchise Legal Consultant at KASS can assist you to Sail Smoothly and Avoid Costly Mistakes! Kickstart and Navigate your Franchise Journey with Confidence.
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