By Shevithra Selva Mohan
Introduction
Unjustly ending a franchise agreement is a complex issue, often stirring up a whirlwind of accusations. This can include claims that the franchisor violated the terms of the agreement, infringed on the rights of the franchisee, and even suspicions of the franchisor acting in bad faith or with shady intentions.
In this article, we delve into an important discussion on unlawful termination of Franchise Agreement as we walk through the case of Chai Su Lin & Anor v Gerbang Alaf Restaurants Sdn Bhd.
A Quick Glimpse of What This Article Covers
In this case, the Franchisor granted the Franchisee the right to sub-franchise a restaurant following the McDonald’s System. However, things took a twist when Franchisor decided to end the Franchise Agreement. The reason? The Franchisee repeatedly failed to maintain and operate the restaurant up to McDonald’s high standards, leading to persistent pest issues and instances of infestation. This compromised the safety and integrity of the food therein. The Franchisor contended that the Franchisee had failed to take preventive steps to ensure that the restaurant was always pest-free both before and after any pest treatment.
However, the Franchisee stood firm, asserting that he had taken necessary remedial actions as advised by the Franchisor, and therefore claims that the termination was unjustified.
The Franchisee argued that the Franchisor opted to terminate the Franchise Agreement before the expiration of the 14-days grace period, during which the Franchisee was entitled to remedy any breaches. This action, according to the Franchisee, fails to meet the stipulated requirements of Section 31(2)(b) of the Franchise Act 1998.
The Court’s Final Say?
The court’s decision emphasized that the Franchisor should have granted the Franchisee a 14-days period to rectify the breach. It can be argued that the Franchisee did not receive sufficient time for remedying the breach, as the Franchisor terminated the Franchise Agreement just 8 days after the Franchisee received the store inspection report from the Franchisor.
Furthermore, the court determined that the Franchisor was unable to prove “good cause,” as required by Section 31(3)(d) of the Franchise Act 1998, to justify the termination of the Franchise Agreement. The Franchisor failed to establish that the Franchisee had consistently violated the agreement terms, particularly regarding the maintenance of restaurant cleanliness. It is essential to highlight that the Court stressed the Franchisee’s attempts to address non-compliance, as guided by the Franchisor’s notices for remedy, should not be classified as repeated failures.
As a result, the Franchisor’s reliance on Section 31(3)(d) of the Franchise Act 1998 was found to be mistaken. Consequently, the Court declared the termination of the Franchise Agreement as wrongful and in violation of legal requirements.
What’s Allowed by The Law?
Our case on hand received additional backing from the court’s findings in the Perkayuan OKS No.2 Sdn. Bhd. v Kelantan State Economic Development case. In this legal tussle, the Court emphasized a critical point: for a termination notice to carry weight, it must come with a clearly justified reason. Failing to meet this standard would render the notice ineffective and, in the eyes of the law, simply inadequate.
Likewise, in SPM Membrane Switch Sdn. Bhd. v Kerajaan Negeri Selangor case, the court emphasized another crucial principle. When a contract allows for a grace period to address performance problems, it is vital for the Franchisor to offer a clear and genuine justification for termination. This holds significant importance for the party in default, as the grace period provides a real opportunity to remedy their shortcomings. Without such notice, the chance to rectify performance issues during the grace period loses its purpose and value.
Here’s What We Can Gather!
To wrap up, the court’s decision carries a vital message for Franchisors. When a Franchise Agreement allows for a grace period for the defaulting party to correct their performance issues before the Franchisor can send a termination notice, it’s essential to adhere to these obligations. Failure to do so could lead to an unlawful termination. In situations where there is no grace period, where the Franchisee fails to address their performance problems within the grace period, it becomes essential for the Franchisor to furnish clear and legitimate reasons for the termination.
This legal obligation serves as a vital protection not only for the party in default but also to provide them with a real chance to rectify any shortcomings during the grace period. Wrongfully terminating a franchise agreement does not just constitute a severe breach of contract and legal responsibilities on the part of the Franchisor; it also comes with significant legal and financial consequences for both parties involved. Therefore, it is of utmost importance and in the best interest of both parties to adhere to the agreed terms and conditions within the contract. This will help create a stable and friendly business relationship.
Main Takeaway!
Franchisors are obligated to adhere to well-defined legal regulations, which not only include granting a grace period for addressing issues but also necessitate a valid reason for Franchise Agreement termination. Failing to comply with these legal provisions can result in the termination being deemed unlawful. Therefore, for any franchising inquiries within Malaysia, Indonesia, and other Southeast Asian countries, KASS is prepared to offer comprehensive assistance and guidance.
If you need any assistance or would like to learn more about IP protection, Franchising and Translation, drop us a line at kass@kass.asia!
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