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Franchise law

i Legislation

The Act provides a dedicated legislative framework relating to the franchising industry. It provides for the registration of franchises and regulates franchises, including setting out mandatory terms and conditions that have to be contained within a franchise agreement. Contravention of the Act may render a franchise agreement void or expose a franchisor or franchisee to criminal penalties.

Apart from complying with the Act, franchisors and franchisees should also be aware of other relevant legislation such as the Contracts Act 1950, the TMA (and legislation relating to the protection of other IPRs as set out above), the Employment Act 1955 and the Competition Act 2010.

ii Pre-contractual disclosure

Specific pre-contractual disclosure is covered within the Act and it may also generally fall within the scope of the Contracts Act 1950 and common law.

The Act requires a franchisor to provide disclosure documents to a prospective franchisee at least 10 days before the franchisee signs the franchise agreement. The information required to be disclosed to the franchisee includes:

  1. description of the franchise business;
  2. details of intellectual property rights, fees and payments required from the franchisee;
  3. financial obligations;
  4. whether the franchisee is required to purchase or obtain supplies or materials from a designated source;
  5. territorial rights;
  6. franchise terms, including terms for renewal and termination, obligations upon termination; and
  7. audited accounts of the franchisor's business (at present, the Franchise Registry requires a minimum of the latest three years' audited accounts).

In the event that the information within the disclosure documents is false or misleading, the franchisor may be liable to both criminal and civil action under the Act. It is a criminal offence under the Act to make false statements or omissions that render the information within the disclosure documents misleading.

Section 39 of the Act sets out the applicable penalties if a person is found guilty of an offence under the Act where no express penalties have been specified. Upon conviction, a person will be liable:

  1. for the first offence under the Act, to pay a fine of not less than 5,000 ringgit and no more than 25,000 ringgit or to imprisonment of no more than six months; and
  2. for the second or any subsequent offences, a fine of not less than 10,000 ringgit and no more than 50,000 ringgit or imprisonment of no more than one year.

If the alleged offender is a body corporate, it will, upon conviction, attract:

  1. for the first offence under the Act, a fine of not less than 10,000 ringgit and no more than 50,000 ringgit; and
  2. for the second or any subsequent offence, a fine of not less than 20,000 ringgit and no more than 100,000 ringgit.

Further, the court has the power to declare the franchise agreement null and void and may order the franchisor to refund any payments made by the franchisee, and the court may further prohibit the franchisor from entering into any new franchise agreements or from appointing any new franchisees.

In addition to the Act, an aggrieved party may also bring an action for damages for misrepresentation under tort law and, if proven, the court may rescind the franchise agreement. The Contracts Act 1950 also expressly provides for misrepresentation, which potentially renders the contract or agreement voidable at the option of the franchisee.

The franchisor should therefore seek to expressly protect its position within the franchise agreement by ensuring that all projections of profits and revenue and pre-contractual information, where provided to the franchisee pursuant to the disclosure documents under the Act or during the course of negotiations leading to the franchise agreement, do not amount to legally binding representations, guarantees or warranties, to avoid any potential action for misrepresentation or a criminal prosecution under the Act.

iii Registration

There are four categories of registration under the Act, namely registration by:

  1. a local franchisor or master franchisee of a foreign franchisor before offering to sell its franchise to any party;
  2. a foreign franchisor intending to sell its franchise in Malaysia or to Malaysian citizens;
  3. the franchisee of a local franchisor; and
  4. the franchisee of a foreign franchisor.
Local franchisor or master franchisee

Section 6 of the Act requires a local franchisor or a master franchisee of a foreign franchisor to register its franchise with the Franchise Registry before operating a franchise business or offering to sell its franchise to any party. A breach of this Section is an offence under the Act and a person will upon conviction, be liable:

  1. for the first offence under the Act, to pay a fine not exceeding 100,000 ringgit or to imprisonment of no more than one year; and
  2. for the second or any subsequent offence, to pay a fine not exceeding 250,000 ringgit or to imprisonment of no more than three years.

If the alleged offender is a body corporate, it will, upon conviction, attract:

  1. for the first offence under the Act, a fine not exceeding 250,000 ringgit; and
  2. for the second or any subsequent offence, a fine not exceeding 500,000 ringgit.

    The local franchisor is required to submit its application for registration together with all supporting documents, which include the disclosure documents, a sample of the franchise agreement, operation manual, the training manual, its latest audited accounts, financial statements and the auditors' or directors' reports and any other information required by the Registrar.

    The Registrar may approve, impose conditions or reject the application, and all such decisions are communicated in writing to the applicant. In the case of an adverse decision, the applicant may submit an appeal to the Minister within one month of the date of communication of the decision. The Minister's decision is final.

    Foreign franchisor

    Section 54 (read together with Section 6) of the Act requires a foreign franchisor to apply for prior approval before making an offer to sell its franchise in Malaysia or to any Malaysian citizen. The Registrar may approve, impose conditions on or refuse such an application, and the rights of appeal are set out above.

    Franchisee of a local franchisor

    Pursuant to Section 6B of the Act, a franchisee who is granted a franchise by a local franchisor is required to register the franchise with the Registrar within 14 days of the date of signing of the franchise agreement between the franchisor and the franchisee.

    Franchisee of a foreign franchisor

    Upon entering into a franchise agreement with a local franchisee and prior to the commencement of operations, the franchisee of a foreign franchisor is required to make an application to register its franchise with the Registrar pursuant to Section 6A of the Act.

    iv Mandatory clauses

    The Act provides for the inclusion of certain mandatory clauses in a franchise agreement pursuant to Section 18 of the Act, failing which a franchise agreement will be void. Section 18 provides that a franchise agreement will include:

    1. the name and description of the product and business of the franchise;
    2. the territorial rights granted to the franchise;
    3. the franchise fee, promotion fee, royalties, or any other related payment that may be imposed on the franchisee;
    4. the obligations of both the franchisor and franchisee;
    5. the franchisee's right to use the intellectual properties belonging to the franchisor;
    6. the conditions under which the franchisee may assign the rights given under the franchise;
    7. a statement confirming a cooling-off period of at least seven working days during which the franchisee may terminate the agreement and seek the refund of any franchise fee paid to the franchisor subject to reasonable expenses incurred in the preparation of the franchise agreement that may not be refundable;
    8. a description pertaining to the mark or any other intellectual property owned or related to the franchisor that is used in the franchise;
    9. if the agreement is related to a master franchisee, the franchisor's identity and the rights obtained by the master franchisee from the franchisor;
    10. the type of assistance to be provided by the franchisor to the franchisee;
    11. the duration of the franchise (minimum five years) and the terms of renewal; and
    12. the effect of termination or expiration of the franchise agreement.

    Further, the franchisor is required to set up a promotion fund, managed under a separate account, if the franchisee is required to make any payment for the promotion of the franchise.

    v Guarantees and protection

    The Act provides for the following written guarantees to be provided by a franchisee:

    1. the franchisee, including its directors, their spouses and immediate family, and its employees must not disclose any information contained in the operation manual or any information obtained while undergoing training organised by the franchisor during the whole of the franchise term and for a period of two years after the expiration of the agreement; and
    2. the franchisee, including its directors, their spouses and immediate family, and its employees must not carry out any other business similar to the franchised business for the whole of the franchise term and for a period of two years after the expiration of the agreement.

    Failure to provide the above guarantees amounts to an offence under the Act and the penalties are set out above (see Section IV.ii).

    In addition, any written guarantees given by a party will also be enforceable under contract and common law. In the event of failure to provide the guarantees, the franchisor or the aggrieved party may have the option of terminating the agreement and suing for damages for breach of the guarantees given. Alternatively, depending on the nature and extent of the guarantees, the aggrieved party may choose instead to continue with the contractual relationship and claim for damages to put them in such a position as if the guarantees had been performed and fulfilled.