Franchise Law in Malaysia

The Malaysian franchise industry is highly regulated.  The Franchise Act 1998 (“the Act”) was effective since 8 October 1999 and was amended by the Franchise (Amendment) Act 2012 which came into force on 1 January 2013.  The Act applies to the sale and operation of any franchise in Malaysia and regulates almost every aspect of a franchise including registration, disclosure, competition, breaches and relationship.  Apart from these focused franchise laws and regulations, other relevant laws that may affect the franchise industry include the Contracts Act 1950, the Competition Act 2010 and the Guidelines for Foreign Participation in the Distributive Trade Services (2010).  The Malaysian Government has implemented the National Franchise Development Blueprint (2012-2016) with the objective of creating a vibrant market by positioning Malaysia as the franchise hub for the South-East Asia market. 
 
The Franchise Development Division of the Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC) is the governmental agency that regulates and enforces the Act in addition to formulating, planning and implementing initiatives and framing policies in developing and promoting franchises in Malaysia. 
 
There are different registration and approval procedures for foreign franchisors, local franchisors and franchisees of foreign franchisors and local franchisors.  It is compulsory for a franchise to be registered with the MDTCC before an offer to sell the franchise in Malaysia is made or before the franchised business can be operated in Malaysia.  A franchisee of a foreign franchisor must register with MDTCC before commencing the franchise business whereas a franchisee of a local franchisor must register within 14 days from the signing date of the franchise agreement.  While registration and compliance process would involve an extensive disclosure of related franchise documents and information, different procedures and documentation are applicable for different parties, depending on whether it is a foreign or local franchisor or a franchisee to a local or foreign franchisor.  All applications for approval and registration have to be submitted online at Malaysian Franchise Express System(MyFex).  Manual submissions are no longer available. 
 
A franchise is legally defined in the Act to mean an agreement, expressed or implied, oral or written, between two or more persons, by which the franchisor grants to the franchisee the right to operate a business according to the franchise system, using its intellectual property rights such as trade marks and confidential information during a term to be determined by the franchisor.  The franchisor has the right to administer continuous and strict control over the franchisee’s business operations in accordance with the franchise system and in return for the grant of rights, the franchisee may be required to pay a fee or other form of consideration. 
 
The Act also sets out the mandatory provisions required in a franchise agreement, including territorial rights granted to the franchisee, obligations of the franchisor and franchisee, various types of fees payable by the franchisee, a cooling period statement, types of assistance provided by the franchisor, duration of the franchise and effect of termination or expiration and many others.  The franchisee must be given a cooling off period of at least seven working days during which he has the option to terminate the franchise agreement and recover all monies paid by him less the franchisor’s reasonable expenses.  Failure to include any of these mandatory terms in the franchise agreement will render the agreement null and void.  It is not possible for either party to waive compliance or contract out of such mandatory provisions. 
 
In addition to an extensive list of information and documentation required on the franchised business and various operational matters, the Franchisor is required to submit audited accounts for the past three years and financial forecasts for five years and the Registrar would expect the business to be profitable before the franchise is approved.  This requirement has somewhat restricted many new franchisors (those operating for less than three years) from franchising their business in Malaysia.  Due to these restrictions, there are many businesses that referred to their business arrangements a license as opposed to a franchise when they have all the characteristics of a franchise.  Such practice has a serious legal implication and risk.  As long as the arrangement contains all the elements of a franchise (as defined), it would fall within the franchise regime, regardless of the label or name given to the relationship or agreement.  It is not the form that matters but the substance. 
 
It is a criminal offence not to comply with certain provisions of the Act and on conviction, a person may liable to substantial fines and/or jail term of up to five years.  Further, the franchise agreement may be declared null and void and the franchisor may be ordered to refund payment to the franchisee or be prohibited from entering into a new franchise agreement or appointing new franchisee. 
 
Some of the salient features of the Act include the following:

• The franchise agreement and disclosure documents must be given by the local franchisor to the franchisee at least 10 days before the franchisee signs the contract. 
• The franchise agreement must be for a minimum term of five years.  At the end of the term, the franchisor cannot, in the absence of breach by the franchisee, refuse to renew the same without paying compensation to the franchisee.  Earlier termination of a franchise agreement is only possible if both parties agree to the same or by order of a court of law.  Where a franchise agreement is extended, the terms and conditions cannot be less favourable than that contained in the previous agreement.
• A franchisor may only terminate a franchise agreement under certain circumstances stipulated by the Act, namely for good causes.  Accordingly, a franchisor may only terminate a franchise agreement if the franchisee fails to remedy the breach within a specified period stated in a written notice given to the franchisee, which shall not be less than 14 days.  The Act does provide for termination without the notice requirement and opportunity to remedy the breach in certain types of good causes (for example, if the franchisee voluntarily abandons the franchised business or repeatedly fails to comply with the terms of the franchise agreement).  
• There are prohibitions against disclosure of confidential information or conduct of similar business by the franchisee, its directors, spouses and immediate family of the directors and employees during the franchise term and for a period of two years after the termination or expiration of the franchise agreement. 
• The Act also provides that it shall be an unfair franchise and a contravention of the Act for any franchisor to unreasonably and materially discriminate between franchisees where the charges made for franchisee fees, royalties, goods, services, equipment or advertising services if such discrimination causes competitive harm, with some limited exceptions provided for.

 
While some may argue that the franchise industry in Malaysia is overly regulated, the general consensus seems to favor some degree of control and regulation via the franchise legal framework as a point of reference to determine the rights and obligations of the parties involved.  Needless to say, it is important for the regulator to enforce the Act consistently against those who blatantly flouted the laws to provide a level playing field for those who comply.  It is encouraging to note that Malaysia has been regularly cited as one of the countries with a strong legal framework and good governance and policies in promoting franchising. 
 
Jin Nee Wong, a partner of Wong Jin Nee & Teo, is a registered Patent, Trade Mark and Industrial Design Agent in Malaysia.  She is the Past President of LES Malaysia (2000), past Chair of Bar Council IP Committee, former head of IPR Committee of EU-Malaysia Chamber of Commerce and former executive committee member of the Malaysian Franchise Association (MFA).  Jin Nee is one of the panelists appointed by Regional Centre for Arbitration KL (RCAKL) domain name disputes, a certified mediator of the Malaysian Mediation Centre and was a member of Franchise Advisory Board (2007-2009).  Jin Nee’s areas of specialisation include licensing/franchising, brand protection, IP management/strategies and government outreach.  Jin Nee has been consistently identified as one of the leading individuals in IP by Asia Pacific Legal 500, Who’s Who in Trade Mark & Franchise Practices, Chambers, Practical Law Company and many others. 
 
© 2014 Wong Jin Nee & Teo