The Malaysian Franchise Act 1998 ("FA"), among others, provides for registration of the franchise agreement and the automatic renewal of franchise agreements at the end of the term. The penalties for contravention of the FA have been amended by prescribing different penalties for offences committed by a body corporate and that of non-body corporates such as natural persons or partnerships. This article analyses 2 court cases, which provide an insight into how Malaysian courts interpret the FA's provisions.
The FA is a complex regulation which, inter alia, provides for registration of the franchise agreement and the automatic renewal of franchise agreements at the end of the term.
The penalties for contravention of the FA have been amended by prescribing different penalties for offences committed by a body corporate and that of non-body corporates such as natural persons or partnerships. A body corporate may be liable to a fine of not less than RM10,000 and not more than RM50,000 for a first offence, and a fine between RM20,000 and RM100,000 for a second or subsequent offence. A person who is not a body corporate will be liable to a fine not less than RM5,000 and not more than RM25,000 or an imprisonment term not exceeding 6 months for the first offence, whilst for a second or subsequent offence, the fine shall not be less than RM10,000 and not more than RM50,000 or imprisonment for a term not exceeding 1 year. These penalties apply to offences where no penalty has been prescribed. The penalty for failure by a local franchisor to register its franchise is on the other hand provided, namely, a body corporate may be liable to a fine not exceeding RM250,000 for a first offence, and a fine not exceeding RM500,000 for a second or subsequent offence. A person who is not a body corporate will be liable to a fine not exceeding RM100,000 or an imprisonment term not exceeding 1 year or to both for the first offence, whilst for a second or subsequent offence, the fine shall not be exceeding RM250,000 or imprisonment for a term not exceeding 3 years or to both.
The following 2 cases cast light upon how the Malaysian courts interpret these 2 provisions:
SP Multitech Intelligent Homes Sdn Bhd v Home Sdn Bhd
The plaintiff (franchisee) is in the business of operating a retail smart home concept chain store. It entered into a franchise agreement with the defendant (franchisor) to operate the business on 15 October 2001. When the plaintiff was offered the franchise business, the business had not been registered with the Registrar of Franchise as stipulated under section 6 of the FA. The application to register the franchise business was only approved 5 months later, on 22 March 2002. The plaintiff also asserted that the defendant had failed to submit a copy of the disclosure documents at least 10 days before the plaintiff signed the agreement as required under section 15 of the FA.
The plaintiff filed an action in the High Court against the defendant for breach of sections 6 and 15 of the FA. The plaintiff asked for a declaration that the franchise agreement is unlawful and void ab initio and for restitution in the form of a refund of all payments and benefits received by the defendant.
The defendant argued that it was the parties' intention that the agreement would commence after the registration of the franchise business and the plaintiff was aware that the application to register the business was pending approval at the time the agreement was signed. The defendant further argued that notwithstanding this knowledge, the plaintiff had carried out his obligations under the agreement.
The issue before the High Court was whether the franchise agreement is null and void ab initio by reason of illegality for failure to register the franchise prior to making an offer to sell the franchise and for failure to provide disclosure documents to the plaintiff.
The Court held that the franchise agreement is tainted with illegality as the defendant had contravened sections 6 and 15 of the FA. The Court ordered that all payments made or benefits given to the defendant be refunded to the plaintiff. In coming to this decision, the Court took into account the fact that the plaintiff had made a number of payments to the defendant after the agreement was made but before the approval was granted and concluded that both parties had intended for the business to commence on 15 October 2001 when the franchise agreement was signed.
On the defendant's assertion that the plaintiff was aware the application to register the business was pending and nevertheless had continued to carry out the business, the Court held that the issue of waiver and estoppel is inapplicable in cases of illegality and section 28 of the FA provides that waiver of compliance with any provisions in the FA is void.
Noraimi bt Alias v Rangkaian Hotel Seri Malaysia
The defendant (franchisor) entered into franchise and premises management agreements with the plaintiff (franchisee) on 18 April 1995 for the plaintiff to manage the hotel chain 'Seri Malaysia'. The initial term of franchise was for 8 years, from 21 January 1995 until 21 January 2003. The agreement provided for a renewal of the franchise for a further term of 8 years subject to terms and conditions. The term of the franchise was extended for another 3 years in 2003. Subsequently, the defendant informed the plaintiff that both agreements which had expired on 21 January 2006 would not be renewed.
The plaintiff sued the defendant for breach of both agreements and claimed that the non-renewal of the agreement was a breach of the franchise agreement and a violation of the safeguards under the FA.
The defendant asserted that the franchise had simply come to an end and decided not to renew it. The defendant also claimed that the FA is not applicable since the agreements were made prior to the FA coming into force. The issue before the High Court was whether the non-renewal of the franchise was a breach of agreement by the defendant or an exercise of a right conferred on the defendant under the terms and conditions of the franchise agreement.
The Court held that:
(i) The FA is applicable as its application is not dependent on when a franchise agreement is made. Contractual agreements must be read subject to the FA and give way where there is conflict and found support for this in section 61 of the FA which provided that franchises granted or sold prior to the coming into force of the FA are required to be registered within a grace period of 12 months from the enforcement date of the FA.
(ii) The extension of the term of franchise by 3 years merely meant that the agreement had been mutually varied and the other terms and conditions of the agreement would continue to apply.
(iii) The expiration of the franchise agreement was a reason for termination as provided under the franchise agreement, but not for the refusal to renew. Therefore, the defendant's refusal to renew on the ground that it had expired was invalid as it violated the terms of the franchise agreement.
(iv) The Court noted that under section 32 of the FA, it is an offence not to renew and extend a franchise term without compensation in 2 circumstances, namely (a) the franchisee is barred by or the franchisor has refused to waive the operation of a restraint of trade clause in the franchise agreement 6 months before expiration of the agreement; or (b) the franchisee has not been given at least 6 months' notice of the franchisor's intention not to renew the franchise (second circumstance being held applicable in this case).
The Court also recognised that under section 6 of the FA, the franchise business is required to be registered. From the facts, the franchise business was not registered. Instead of finding that the franchise agreement was illegal and therefore null and void for failure to register under section 6, the Court went on to apply the provisions of the FA and held that there was indeed a breach of the agreement and the provisions of the FA. The Court awarded damages calculated on the net profit per month of the plaintiff for a term of 5 years for which the agreement should have been renewed. The High Court decision has been affirmed on appeal by the Court of Appeal. It is worth noting that neither the High Court nor the Court of Appeal considered the issue of whether non-registration of the franchise under the FA would render the agreement illegal even though the High Court had specifically noted that registration of the franchise is mandatory even if the franchise had commenced prior to the coming into force of the FA. The outcome may have been quite different if this issue was considered.
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