Malaysia – Changes Under The Franchise (Amendment) Act 2020.

Introduction

The Franchise Act 1998 (“FA”) has been the main source of legislation which governs franchise businesses and the relationship between a franchisor and franchisee in Malaysia for more than 20 years.

On 3 December 2019, the Franchise (Amendment) Bill 2019 was passed by the Lower House of the Parliament and received Royal Assent on 20 February 2020. Subsequently, the Franchise (Amendment) Act 2020 (“the Amendment Act”) was gazetted on 6 March 2020. Some of the changes under the Amendment Act are as follows.

The concepts of subfranchise and subfranchisee

The Amendment Act expressly recognises the concepts of “subfranchise” and “subfranchisee” by conferring on these terms their corresponding definitions. These definitions can be found in section 3(d) of the Amendment Act, which are reproduced as follows:

“‘Subfranchise’ means ‘a franchise granted by a master franchisee to a subfranchisee for business purposes under the Act’; and

‘Subfranchisee’ means ‘a subfranchise holder’.”

Registration of a foreign franchisor

Under the existing section 54(1) of the FA1, a foreign franchisor who intends to offer its franchise to a local entity in Malaysia must obtain an approval from the Franchise Registry. In practice and, according to MyFex online registration, section 6(1) of the FA was thought to apply only to local franchisors.

That position, however, was rejected by the High Court in the case of Dr HK Fong BrainBuilder Pte Ltd v SG-Maths Sdn Bhd2 where the High Court held that section 6(1) should apply equally to foreign franchisors; otherwise, it would leave the franchisees of the foreign franchisors in a position worse off than the franchisees of the local franchisors3.

The amendment that is sought to be made by section 4 of the Amendment Act to section 6(1), and which in essence sought to include “foreign person who has obtained an approval to sell a franchise in Malaysia or to any Malaysian citizen under section 54”, appears to firm up the High Court’s view.

With this amendment, it would appear that a foreign franchisor, having obtained the necessary approval from the Franchise Registry to offer its franchise in Malaysia under section 54 of the FA, would now be required under the Amendment Act to file an application to register its foreign franchise pursuant to the newly revised section 6 of the FA, resulting in potentially double registrations.

Be that as it may, this purported “double registrations” does not affect a foreign franchisor which had obtained approval under section 54(1) of the FA before the coming into force of the Amendment Act. It remains to be seen how this would work in practice.

Registration of a franchisee

Section 6B(1) of the FA4 imposes an obligation on franchisees of local franchisors to register the franchise with the Franchise Registry. Such obligation is couched in mandatory terms owing to the use of the word “shall”. Notwithstanding this, section 6 of the Amendment Act5 further introduces a new subsection to section 6B of the FA which seeks to impose penalties against franchisees who fail to comply with section 6B(1).

It is thus important for a franchisee (who has been granted a franchise from a local franchisor or local master franchisee) to register the franchise to avoid being penalised by the Franchise Registry6.

Requirements of a franchise agreement

For a franchise agreement to be valid, certain information are to be included in a franchise agreement as provided under section 18(2) of the FA. This would include, but are not limited to, the following:

• the name and description of the product and business under the franchise;

• the territorial rights granted to the franchisee;

• the franchise fee, promotion fee, royalty or any related type of payment which may be imposed on the franchisee, if any;

• the obligations of the franchisor;

• the obligations of the franchisee;

• the franchisee’s rights to use the mark or any other intellectual property, pending the registration or after the registration of the franchise;

• the conditions under which the franchisee may assign the rights under the

  franchise;

• a statement on the cooling-off period as provided in section 18(4) of the FA;

• a description pertaining to the mark or any other intellectual property owned or related to the franchisor which is used in the franchise;

• if the agreement is related to a master franchisee, the franchisor’s identity and the rights obtained by the master franchisee from the franchisor;

• the type and particulars of assistance provided by the franchisor;

• the duration of the franchise and the terms of renewal; and

• the effect of termination or expiration of the franchise agreement.

   

Section 18(3) of the FA further provides that failure to include the abovementioned information in a franchise agreement shall render the franchise agreement null and void. This drastic effect was removed by section 14 of the Amendment Act.

Implicit in this removal is the suggestion that a franchise agreement need not necessarily be null and void if it omits any of the information outlined under section 18(2). Needless to say, it is still prudent for a franchise agreement to contain the abovementioned information not only because they comprise information which are practical for the operation of a franchise business but also owing to the usage of the word “shall” in section 18(1) of the FA which indicates the mandatory nature of the provision.

Renewal of franchise

Pursuant to section 10 of the FA, “the registration of franchise shall continue to be effective unless the Registrar issues a written order to the franchisor, to suspend, terminate or cancel the registration of the franchise”. In other words, there is no requirement to renew a registered franchise under the current FA unless the Registrar of Franchise (“Registrar”) issues a written order in this regard.

Sections 8 and 9 of the Amendment Act revamp the period of effectiveness of a registered franchise by amending section 10(1) of the FA7 and introducing a new provision, that is, section 10A regarding the renewal of a franchise8. With these amendments:

• The registration of a franchise will be effective for a prescribed period as determined by the Registrar;

• Within 30 days from the expiration date of such registration, the franchisor may apply to the Registrar for the renewal of the registration of franchise; and

• The approval for such renewal would be subject to the conditions that may be imposed by the Registrar.

   

Display of registration of franchise

Section 9 of the Amendment Act9 further introduces a new obligation on the franchisor and franchisee to display the registration of a franchise in a conspicuous position at the place where the franchisor or franchisee carries on his business. The non-compliance of such requirement by the franchisor or franchisee would constitute an offence.