Pursuant to section 6(1) of the Malaysian Franchise Act 1998, franchisors have to register with the Ministry of Domestic Trade ("MDTCC") before entering into a franchise agreement. As the registration process can be long and cumbersome (up to 6 months), some franchisors enter into franchise agreements before the registration process is completed. This can be a dangerous tactic as a recent High Court decision has shown.
The High Court of Malaya held that a franchisee was entitled to terminate the franchise agreement because the franchisor had not registered with the MDTCC at the time when the parties entered into their agreement.
Although the agreement in question was referred to as a "licence agreement" the judge found that it was essentially a franchise agreement. Under the agreement the "Licensor" had granted the "Licensee" the right to operate a children's training centre under the name of Children Islamic Centre using trademarks owned by the Licensor at a pre-approved location in strict compliance with the provisions of a manual. In addition, the Licensor provided training.
All these provisions are, of course, typical for a franchise agreement. The judge therefore found that the contract was a franchise and should have been registered.
This means that simply calling a franchise agreement a licence agreement will not help franchisors to get around the registration requirement.
In our opinion the best way to deal with situations of this kind is to factor in the time that is needed for the registration process to be completed when negotiating a deal. We have assisted a number of clients with their franchise registration in Malaysia.
By way of update, please also note the amendments to the Malaysian Franchise Act 1998 that we presented in our Franflash of 2 October 2012 are due to come into force on 1 January 2013.
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