My presentation slides for the above seminar can be downloaded here.
In a recent High Court case, the Court held that a licence agreement can qualify as a franchise agreement and a licensor cannot offer to sell or provide a franchise until his franchise is registered in Malaysia.
Munafya Sdn Bhd v Profquaz Sdn Bhd
The Defendant operates an Islamic education system or syllabus for preschool children under the name Children Islamic Center (CIC). CIC is a franchise registered with the Ministry of Domestic Trade, Cooperative and Consumerism (“MDTCC”) and also with the Ministry of Education (“MoE”) (collectively referred as the “Ministries”).
Before the said registrations with Ministries, the Defendant entered into a licence agreement granting the Plaintiff the right to operate the CIC.
After the necessary preparation was done, the Plaintiff discovered that CIC was not registered with the Private Education Division of the MoE. The Plaintiff demand proof of registration but the Defendant failed to do so. However, the Defendant subsequently took steps to register CIC with the Ministries. Before the grant of the registrations, the Plaintiff terminated the agreement and demanded for, among others, a refund of RM35,000.
In allowing the Plaintiff’s claim, the High Court held that, among others:-
1. Notwithstanding that the agreement is in essence a licence agreement and the word “franchise” is not pleaded, the Malaysian Franchise Act 1998 is applicable. Under s. 6(1) of the said act, a franchisor shall register his franchise with the Franchise Registrar before he can make an offer to sell the franchise to any person.
2. In view that the Defendant had failed to register its CIC franchise with the Ministries before the signing of the licence agreement, the Defendant cannot offer or give the CIC licence to the Plaintiff. Therefore, the Plaintiff’s termination is not premature.
The judgement can be downloaded by clicking on the “Pay with a Tweet or Facebook” button below.
The Malaysian Ministry of Domestic Trade, Co-operatives and Consumerism has appointed 1 January 2013 as the date on which the Franchise (Amendment) Act 2012 comes into operation.
For a write up on the changes to the Malaysian Franchise Act 1998, please see our article “Amendment to the Malaysian Franchise Act 1998“
The new Franchise (Amendment) Bill 2012 (“Bill“) was tabled in the Malaysian Parliament in June 2012. At the time of writing, the Bill is not in force. [Postscript: Franchise (Amendment) Act 2012 is in operation as of 1-1-2013 [P.U. (B) 387/2012]]
The Bill amends the Malaysian Franchise Act 1998 (“Act“) to ensure that the Act is consistent and up-to-date with current development of franchise business in Malaysia. It would further strengthen the Act for the purpose of proper administration and enforcement of franchise law in Malaysia.
The amendments amend the Act substantially. In brief, the amendment:-
(1) expands the scope of the law to cover franchise transaction which is concluded outside Malaysia and operated within Malaysia.
(2) introduces new offences and increases fines.
(3) introduces new power to the Registrar of Franchise (“Registrar”).
We will highlight some notable amendments to the Act.
1. Definition of Franchise
The amendment seeks to strengthen the definition of “franchise” by eliminating the elements of franchise which are not crucial to define franchise business. The word ‘franchise’ is now defined as:-
“franchise” means a contract or an agreement, either expressed or implied, whether oral or written, between two or more persons by which—
(a) the franchisor grants to the franchisee the right to operate a business according to the franchise system as determined by the franchisor during a term to be determined by the franchisor;
(b) the franchisor grants to the franchisee the right to use a mark, or a trade secret, or any confidential information or intellectual property, owned by the franchisor or relating to the franchisor, and includes a situation where the franchisor, who is the registered user of, or is licensed by another person to use, any intellectual property, grants such right that he possesses to permit the franchisee to use the intellectual property;
(c) the franchisor possesses the right to administer continuous control during the franchise term over the franchisee’s business operations in accordance with the franchise system; and
(d) in return for the grant of rights, the franchisee may be required to pay a fee or other form of consideration.
2. Amendments to the Requirements for Registration of Franchise
Previously a franchisor is only required to register the franchise before they make an offer to sell it. With the new amendment, a franchisor must also register his franchise before he can operate a franchise business.
If the franchiser fails to do so, he commits an offence and shall, on conviction, be liable—
(a) if such person is a body corporate, to a fine not exceeding RM250,000, and for a second or subsequent offence, to a fine not exceeding RM500, 000; or
(b) if such person is not a body corporate, to a fine not exceeding RM100,000 or to imprisonment for a term not exceeding 1 year or to both,
and for a second or subsequent offence, to a fine not exceeding RM250,000 or to imprisonment for a term not exceeding 3 years or to both.
Further, the newly introduced Sections 6a and 6b will make it compulsory for any franchisee of a local franchisor or local master franchisee and any franchisee of a foreign franchisor to register with the Registrar before commencing the franchise business.
In addition, a franchisee who has been granted a franchise from a local franchisor or local master franchisee shall register the franchise with the Registrar within 14 days from the date of signing of the agreement between the franchisor and franchisee.
3. Power to the Registrar to cancel registration of franchise business
The Registrar may cancel the registration of the franchise from the register if he is satisfied that—
(a) the franchisor has failed to submit his annual report to the Registrar as stipulated under section 16 for the duration of five years continuously;
(b) the franchisor is insolvent; or
(c) the franchisor is no longer granting rights under the franchise.
4. Amendment to Disclosure Documents
Franchisors will be required to file an application to get approval from the Registrar if there are any material changes to the disclosure document. It is an offence is the franchisor fails to do so.
The scope of the compulsory practice to submit disclosure documents 10 days before the franchisee signs the franchise agreement is also expended.
Franchisors must submit to the franchisee any amendments to the disclosure documents 10 days before the franchisee signs the agreement with the franchisor or after the disclosure documents is approved by the Registrar, whichever is applicable.
5. Annual Report
Franchisor is now given more time to submit its annual report to the Registrar which is from 30 days from the anniversary date of the registration to 6 months from the end of each financial year of the franchise business. This is in tandem with the practice of companies regulated under Companies act 1965. It also seeks to make it an offence for any person who breaches this provision.
6. Payment of Franchise fee, etc
Section 19 of the Act is amended to further clarify the obligation of the franchisor to state in writing in the disclosure documents, in the event that the franchisor requires any payment from the franchisee before signing of the franchise agreement.
7. Prohibition against similar business
The scope of prohibition against similar business provided under the section 26 of the Act is widened to cover guarantee by a franchisee including its directors, spouses and immediate family of directors, and his employees to prohibit them from disclosing confidential information.
8. Conduct of parties
A new obligation is imposed in addition to the obligations in section 29 of the Act.
The franchisee shall operate the business separately from the franchisor, and the relationship of the franchisee with the franchisor shall not at anytime be regarded as a partnership, service contract or agency.
9. New termination rights
The new section 31 states that a franchisee cannot terminate a franchise agreement before the expiration date except for good cause. Previously such obligation only binds a franchisor.
“Good cause” now includes the ground of “bankrupt and insolvent”.
10. Extension of franchise term
The new section 34 imposes on the franchisee, at his option, apply for an extension of the franchise term by giving a written notice to the franchisor not less than six months prior to the expiration of the franchise term.
11. Offence of holding out as a franchise
Section 37a introduces the offence of holding out as a franchise.
A person who assumes or uses in relation to its business, the term “franchise” or any of its derivatives or any other words indicating the carrying on of a franchise business, including the use of the word “franchise” or any abbreviation thereof as part of the name or title in documents, agreements, books, advertisements or publications, without approval of registration by the Registrar commits an offence.
Such person shall, on conviction, be liable—
(a) if such person is a body corporate, to a fine not exceeding RM250,000, and for a second or subsequent offence, to a fine not exceeding RM500,000; or
(b) if such person is not a body corporate, to a fine not exceeding RM100,000 or to imprisonment for a term not exceeding 1 year or to both, and for a second or subsequent, offence to a fine not exceeding RM250,000 or to imprisonment for a term not exceeding 3 years or to both.
12. Increase in general penalty
The penalty for the offence where no penalty is expressly will be increased.
If such person is a body corporate, to a fine of not less than RM10, 000 and not more than RM50,000, and for a second or subsequent offence, to a fine of not less than RM20,000 and not more than RM100, 000.
If such person is not a body corporate, to a fine of not less than RM5, 000 and not more than RM25,000 or to imprisonment for a term not exceeding 6 months, and for a second or subsequent offence, to a fine of not less than RM10,000 and not more than RM50,000 or to imprisonment for a term not exceeding 1 year.
13. Increase in penalty for offence prescribed by Regulations
The maximum fine and imprisonment for contravention of regulations prescribed by the regulations made under the Act are increased to RM50,000 and 5 years respectively.
Download [Franchise (Amendment) Bill 2012]