Overview (June 2001)

Legal Framework
Definition of a 'Franchise'
Registration and Disclosure
The Franchisor-Franchisee Relationship
Comment

While an increasing number of countries are considering the introduction of franchise-specific legislation, only a handful of laws are already in force that regulate franchising around the world. Due to the complexity of the relationship between franchisor and franchisee and the diverse areas of law involved in a franchise relationship - particularly relationships that are international in nature - the existing legislation is aimed at disclosure rather than regulating the relationship between franchisor and franchisee. However, Malaysia has made a brave foray into the relatively virgin territory of regulation of franchise relationships through legislation.

Legal Framework

The Malaysian Franchise Act 1998 was enacted on December 24 1998 and came into force on October 8 1999. The act deals not only with the registration and disclosure of franchises, but also with the regulation of the relationship between the franchisor and the franchisee.

Definition of a 'Franchise'

A 'franchise' is defined under Section 4 of the act as an agreement - whether express or implied, oral or written - between two or more persons involving the following factors:

• the granting of the right to operate a business according to the franchisor's franchise system;
  
  
• the granting of the right to use the trademark and/or other intellectual property connected with the franchise system;
  
  
• recognition of the franchisor's right to administer continuous control over the franchise business operations in accordance with the franchise system;
  
  
• assurance of the provision of assistance by the franchisor, such as supply of materials and services, training, marketing, and business and technical assistance;
  
  
• payment of a fee by the franchisee; and
  
  
• acknowledgement that the franchisee's business will be operated separately from that of the franchisor. Their relationship is not that of partnership, service contract or agency.

If any of the above factors are absent from a business relationship, the arrangement is not deemed a franchise pursuant to the act and may fall outside the ambit of the act.

Registration and Disclosure

The act makes it compulsory for franchises to be registered with the Registry of Franchises before an offer to sell the franchise in Malaysia is made. As part of the registration and compliance process, disclosure must be made of related franchise documents and information. The scope of the disclosure requirement is very wide, and includes documents such as the franchise agreement, operations and training manuals, audited accounts of the franchisee, financial statements and any other relevant documents or information which the registrar may require. Following registration the franchisor is also obliged to file annual reports containing the disclosure documents as updated.

The registrar may, at his discretion, allow public inspection of the disclosure documents filed with the registrar, unless in his opinion such inspection is harmful to the parties or is against the public interest.

Non-registration of a franchise is a criminal offence punishable by a fine. In addition, the registrar may also declare the franchise agreement to be null and void, order the refund of monies paid by the franchisee and prohibit the offending franchisor from granting new franchises.

For franchises involving foreign franchisors, the act provides that the registrar's approval must be obtained before the sale of the franchise to a Malaysian franchisee. Approval is not required where the foreign franchisor has sold franchises in Malaysia prior to the Franchise Act's entry into force. Where approval is required, the application process is much simpler than that for a local franchisor. A foreign franchisor may simply apply for approval by way of a letter. However, the local franchisee to whom the franchise is sold must submit a formal registration form, accompanied by the usual franchise disclosure documents, to the registrar.

Where a local franchisor desires to sell a franchise to a foreign franchisee, he too must obtain the prior approval of the registrar. The sale will also be subject to such conditions as the registrar may impose. This stipulation gives the registrar substantial control over the sale of, and terms applicable to, franchises involving foreign franchisees.

A person who wishes to act as a franchise broker in Malaysia must also be registered

The Franchisor-Franchisee Relationship

The Malaysian Franchise Act goes one step further than most existing franchise-specific legislation by seeking to govern many aspects of the agreement/relationship between a franchisor and a franchisee.

The act specifically provides for a list of matters which must be addressed in the franchise agreement, including the obligations of the parties, the fees payable, the type and particulars of assistance, term and renewal issues, and the effect of termination. The absence of any of these compulsory matters will render the franchise agreement null and void. It is not possible for either party to waive compliance with the act or contract out of its provisions. Any waiver or contract to avoid any provision of the act is void.

The franchise agreement and disclosure documents must be given to the franchisee at least 10 days before the franchisee signs the contract. The franchisee is also entitled to a cooling-off period of at least seven working days, during which he has the option to opt out of the franchise agreement and recover all monies paid by him less the franchisor's reasonable expenses.

The franchise agreement cannot be for a term of less than five years. At the end of the term, and if the franchisee has not breached the agreement, the franchisor cannot, in the absence of breach by the franchisee, refuse to renew the agreement without paying compensation to the franchisee. To refuse will be an offence. However, earlier termination of a franchise agreement is possible if both parties agree, or by order of a court of law. Where a franchise agreement is extended, the new terms and conditions cannot be less favourable than those contained in the previous agreement.

A franchisor is also required to register the trademarks relevant to his franchise if they are registrable trademarks. The application for trademark registration must be made before the registration of the franchise under the act.

Comment

While the rationale and motivation behind the Franchise Act 1998 is commendable, its requirements may give pause to franchise players who may be used to a more open and liberal manner of negotiating agreements. Many franchisors will have to adapt their standard franchise agreements and practices to ensure compliance with the act. The act is also silent as to whether its compulsory terms governing the relationship and agreement between the parties will also apply to franchises in existence before the act, but which are renewed after it takes effect.

The consequences of non-compliance may be harsh in some circumstances. Franchise players, whether old or new, will be well advised to seek advice on and closely re-examine contracts to ensure that their provisions are adequate.

For further information on this topic please contact Lina Ong at Ella Cheong & G Mirandah by telephone (+571 310 6614) or by fax (+571 310 6286) or by e-mail ([email protected]).