In the franchise industry, one misstep can lead to big trouble, especially when it comes to breaching the franchise. For example, the case of SP MULTITECH INTELLIGENT HOMES SDN BHD v HOME SDN BHD, which involve an unlawful Franchise Agreement. When court ruled that failing to register a business as a franchise in Malaysia breaches the law, the decision sent shockwaves for the involved parties. Not only did this decision reveal a major violation of the Franchise Act, but it also meant the wrongful party had to face hefty legal consequences.
Let's explore how a small mistake ended up causing significant legal liabilities and what it means for franchisors and franchisees in Malaysia.
A Sneak Peek at What's Inside This Article
In this case, the Franchisee was managing operations for a retail home concept chain store franchise. However, upon signing the Franchise Agreement with the Franchisor on October 15, 2001, it was revealed that the business had failed to register the franchise, violating Section 6(1) of the Franchise Act 1998, which mandates the Franchisor to register the franchise with the Registry of Franchise (ROF). It is interesting to take note, that it took approximately five (5) months for the Franchise Registration application to gain official approval, which was finally granted on March 22, 2002.
At the same time, the Franchisee raised a significant concern, claiming that the Franchisor had failed to provide crucial disclosure documents within the required 10-day period before the Franchisee signed the Franchise Agreement—an essential requirement specified in Section 15(1) of the Franchise Act 1998.
As a result, the Franchisee pursued a declaration that the Franchise Agreement was inherently unlawful and null from the outset, also seeking compensation in the form of a refund aiming to recover all payments and benefits given to the Franchisor.
How Things Turned Out Legally?
The court decided the Franchise Agreement signed between the parties was void, attributing this to the Franchisor’s breach of the Act's provisions. This conclusion aligned with Section 2(g) of the Contract Act 1950, where any agreement lacking legal enforceability stands declared as void.
In reaching the decision, the court emphasized that the intention of the parties at the time of entering into the Franchise Agreement, as well as subsequent actions of the parties, were crucial in determining the legality of the agreement.
In the ultimate ruling, it was revealed that the franchise received approval only on 22.3.2002, whereas the agreement was dated 15.1.2001. Consequently, the Franchisor's failure to adhere to the Franchise Act 1998 by not registering the franchise before offering it for sale rendered the agreement unenforceable by law. Hence, the agreement was deemed void, and the court mandated the refund of all payments made and benefits provided to the Franchisor back to the Franchisee.
What it All Adds Up To!
To wrap up, in Malaysia, prior to selling or even offering a franchise for sale, it is imperative for the Franchisor to register their franchise. This essential step demands complete and transparent disclosure about the franchise, aligning with the main requirement for registration..
Neglecting this legal obligation can place a Franchisor in legal jeopardy, constituting a violation under the Act. In the case of a company, the repercussions for not adhering to these regulations are significant, as the Franchisor could face penalties of up to RM250,000 for the first offence and RM500,000 for subsequent violation.
Therefore, the crucial lesson to glean from this is that the Franchisor's failure to register the franchise yields severe repercussions, unmistakably leading to the nullification of the Franchise Agreement due to its unlawful status.
So, in the End!
This case is a clear indication for Franchisors about the importance of complying with regulatory frameworks. It stresses meticulous adherence to registration protocols, highlighting that non-compliance could void the Franchise Agreement and result in significant penalties. This underscores the vital importance of ensuring legality and conformity in Franchise Agreement. Should you require guidance or assistance with franchising inquiries in Malaysia, Indonesia, or other Southeast Asian countries, KASS stands prepared to offer its expertise and support.
