In Dr H K Fong Brainbuilder Pte Ltd v SG-Maths Sdn Bhd & Ors [2021] 1 CLJ 155, the Malaysian Court of Appeal affirmed that an unregistered franchise agreement is void for illegality. This case stressed that franchise registration requirements apply to the peril of foreign and local franchisors alike.
The nixed franchise concerned a 'Brainbuilder' mathematics teaching business which the Singaporean Plaintiff / Appellant had granted the 1st Defendant / Respondent the right to operate and manage in Malaysia under a 'Master Licensing Agreement'. Notwithstanding its innocuous name, both the High Court and Court of Appeal found the 'Master Licensing Agreement' to fall within the definition of a franchise under section 4 of the Franchise Act 1998 ("the Act"), that is to say, an agreement by which a franchisor grants a franchisee the right to operate a business according to a franchise system using the franchisor's trademark and other intellectual property, for a fixed term, where the franchisor possesses the right to administer continuous control over the franchisee's business operations in accordance with the franchise system and, in exchange, the franchisee may be required to pay a fee or other form of consideration.
The High Court had concluded that despite being governed by Singaporean law, the 'Master Licensing Agreement' was void on account that all franchises, local and foreign, must comply with the Act and register with the Malaysian Franchise Registry to operate in Malaysia. The Court of Appeal has upheld the position taken by the High Court.
Both levels of the courts in this case observed that at least four High Court decisions have reached a similar conclusion before. This latest decision is the first from the appellate courts that clearly confirms that the non-registration of a franchise will render a franchise agreement void and unenforceable.
Section 6 Registration or Section 54 Foreign Franchisor Approval?
For practitioners familiar with franchise registry procedures in Malaysia, the courts' pronouncement that a foreign franchisor is required to register specifically under Section 6 is surprising. From our experience at least, since the coming into force of the Act in 1999, the franchise registry has directed foreign franchisors to apply for approval to sell the franchise in Malaysia under Section 54 of the Act, rather than register under Section 6 of the Act. If an approved foreign franchisor then sold a franchise to a local franchisee, the latter would need to register the franchise, but was exempted from producing certain documents such as the operation manual and training manual of the foreign franchisor.
Be that as it may, facts of the 'Brainbuilder' case indicate the Singaporean franchisor had not obtained either Section 54 approval or Section 6 registration. This distinction of 'approval' and 'registration' was consequently not ventilated in the 'Brainbuilder' case. However, the question does appear to be addressed in amendments to the Act which have been passed and are expected to come into force soon. These amendments make clear that a foreign franchisor is required to register under section 6, however the transition provisions provide that a foreign franchisor who has obtained approval pursuant to Section 54 prior to the coming into force of the amendments will be deemed registered under Section 6. A foreign franchisor applying for Section 54 approval after the amendments come into force will need to separately register under Section 6 and it remains to be seen whether the foreign franchisor will then be required to comply with additional requirements or produce additional documents such as the operation manual and training manual when applying for registration.
What Happens if a Franchise Agreement is Void?
The High Court in the present case observed that if the agreement had been valid, it would certainly have been breached by the franchisee's actions. However, since the agreement was void for illegality, the franchisor was precluded from any remedy for breach of the same.
Interesting also, the High Court in the present case refused the 'franchisee' Defendant's counterclaim for a refund of all sums paid to the 'franchisor' under the void agreement. Such a refund was a consequential remedy in the string of previous High Court cases but was not followed in this case. Sadly, entitlement to a refund looks to be a point that only future cases can resolve as the Court of Appeal did not delve into the issue and dismissed the cross appeal for a refund on the procedural ground that it had not been brought by full appeal as it should have (applying Kabushiki Kaisha Ngu v Leisure Farm Corporation Sdn Bhd & Ors [2016] 8 CLJ 149).
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