The Importance of Registering A Franchise With the Registrar of Franchises - Malaysia
This case highlights the importance of registering a franchise with the Registrar of Franchises and the consequences of not doing so. In particular, the effect and applicability of section 6(1) of the Franchise Act 1998 (“FA 1998”) are discussed.
The subject matter was “Dr. Fong’s Method” of teaching mathematics to students in primary and secondary school, which was developed by Dr. Fong Ho Kheong (“Dr. Fong”). Dr. Fong incorporated the plaintiff, Dr. H K Fong Brainbuilder Pte. Ltd. (“Dr. H K Fong Brainbuilder”), in Singapore which then entered into a Master Licence Agreement dated 18 December 2013 (“MLA 2013”) with the first defendant, Sg-Maths Sdn Bhd (“Sg-Maths”), for the operation and management of the “BrainBuilder” business (“the Business”) in Malaysia.
Both the second defendant (“Lum Sau Leong”) and third defendant (“Leong Chun Piew”) have been Dr. Fong’s “best friends” for 55 years. They own a total of 85% of the paid-up shares in Sg-Maths and are the only directors of Sg-Maths. Dr. Fong held 15% of the paid-up shares in Sg-Maths.
Dr. H K Fong Brainbuilder alleged, amongst others, that Sg-Maths had breached the MLA 2013 when Sg-Maths sub-licensed the Business to Mr. Suhaimi bin Ramly to operate a Brainbuilder Centre at Setapak. The defendants, amongst others, sought in turn for a declaration that the MLA 2013 was invalid .
High Court decision
When the case came before the High Court, the following issues were considered:
Do Malaysian courts have jurisdiction to try this case?
Clause 37 of the MLA 2013 provides as follows:
“The construction, interpretation and enforcement of [MLA 2013] is governed by the laws in force in Singapore and the parties unconditionally and irrevocably submit to the non-exclusive jurisdiction of the Courts in Singapore.”
The High Court decided that the Malaysian High Court has the jurisdiction to hear the case for the following reasons:
Clause 37 does not bar the Malaysian High Court from hearing the case and, even if it did, the contractual clause was held unenforceable because there was a breach of sections 6(1) and 6A(2) of the FA 1998 which rendered the MLA 2013 void.
Does the FA 1998 apply to the MLA 2013?
Although the MLA 2013 was not named a “franchise” contract, the High Court held that the courts are not bound by labels or descriptions given by the parties in the contract.
The High Court perused the MLA 2013 and found that it clearly satisfied all four cumulative conditions of a “franchise” where:
In particular, the High Court Judge found that Dr. H K Fong Brainbuilder had provided Sg-Maths with a “Franchise Operations Manual” and Sg-Maths was required to comply with the manuals.
Dr. Fong had actually referred to Sg-Maths as the Master Franchisee and this is supported by the admission by Dr. Fong that he had been advised by Dr. H K Fong Brainbuilder’s solicitor to register the Business as a franchise.
Has there been a breach of sections 6(1) and 6A(2) of the FA 1998?
As a franchise, the High Court held that both the franchisor and franchisee of the Business are obliged to register the franchise with the Registrar. The requirement that a franchisor should register a franchise extends to include both local and foreign franchisors.
Applying a purposive construction of the FA 1998, the High Court rejected Dr. H K Fong Brainbuilder’s argument that section 6(1) of the FA 1998 only mandates a local franchisor to register its franchise business.
In support, the High Court also had regard to the title of the FA 1998 which states that the FA 1998 is “to provide for the registration of, and to regulate, franchises, and for incidental matters” and the parliamentary debates on the implementation of the Franchise Act (Amendment) Act 2012 on 17 July 2012 which made reference to the purpose and objective of registering a franchise under the FA1998.
The High Court based its decision on the following grounds:
Injustice will be caused to franchisees of foreign franchises as a foreign franchisor would not have to comply with the mandatory provision under section 6(1) of the FA 1998.
Whether the MLA 2013 was void
Based on the High Court’s finding that both the foreign franchisor and franchisee of the Business franchise had failed to register with the Registrar under sections 6(1) and 6A(1) of the FA 1998 respectively, the MLA 2013 was held to be void in its entirety and unenforceable.
The High Court found that the MLA 2013 was void in its entirety notwithstanding clause 48.1 of the MLA 2013 which provides for the severability of any provisions in the MLA 2013 which the Court finds to be invalid without invalidating other provisions of the MLA 2013.
The High Court in this instance did not exercise its discretion to “save” the lawful part of a contract on the following grounds:
The High Court in the present case took a purposive interpretation of the FA 1998 in holding that, although the term “franchise” was not used in the agreement or contract, the arrangement between the parties may still be considered a franchise under the FA 1998.
Owing to the consequences that may result following the non-registration of franchises, it is prudent, not only for self-acknowledged franchise businesses to comply with the FA 1998, but also other businesses to re-examine their business models and consider if they fall within the definition of a “franchise” as provided for by FA 1998.
 There were other issues that were also raised in this case, including
However, as the crux of this article deals with the franchise, these Other Issues will not be discussed here.
 A franchisor shall register his franchise with the Registrar before he can operate a franchise business or make an offer to sell the franchise to any person.
 Before commencing the franchise business, a franchisee who has been granted a franchise from a foreign franchisor shall apply to register the franchise with the Registrar by using the prescribed application form and such application shall be subject to the Registrar’s approval.
 The consideration or object of an agreement is lawful, unless - (a) it is forbidden by a law or (b) it is of such a nature that, if permitted, it would defeat any law.
 Section 4 of the FA 1998.
This article is presented for information purpose only and covers legal issues in a general way.
The contents are not intended to constitute advice on any specific matter and should not be relied on upon as a substitute for detailed legal advice.
© 2018 Shearn Delamore & Co. All rights reserved.
For further information regarding financial services matters, please contact our Intellectual Property Practice Group.
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