A legal saga involving a brain development education programme has taken a dramatic turn as the Court of Appeal overturned a High Court ruling that had awarded RM2.3 million in damages to six individuals who had entered into business agreements with Safeway Solutions Sdn Bhd. While the High Court had earlier found in favour of the plaintiffs, declaring the agreements void and awarding substantial compensation, the appellate court ruled that both parties were equally at fault and that no remedy should be granted.
The dispute began in 2019 when Cheah Yee Chen, trading under the name Superbrain Training Centre, and five others sued Safeway Solutions Sdn Bhd (the 1st Defendant) and its director, Lim (the 2nd Defendant), for inducing them into what were described as “licensing agreements” to operate centres based on the company’s “Brain-Zone Full Brain IQ” and “World Class Memory” programmes. The plaintiffs claimed that they were led to believe the programmes were approved by the Ministry of Education and entered into two sets of licensing agreements. However, they later alleged that these were in fact unregistered franchise agreements in violation of the Franchise Act 1998 and were therefore illegal and void.
The High Court agreed with the plaintiffs. Justice Azlan Sulaiman found that the agreements contained all four essential elements of a franchise under Section 4 of the Franchise Act: the right to operate a business using a franchise system, the use of intellectual property, ongoing control by the franchisor, and payment of fees. The Court also held that the agreements breached Section 79 of the Education Act 1996, as the approval obtained from the Ministry of Education only applied to a single institution and did not allow the licensing of programmes to others. Additionally, the Court ruled that the defendants had made fraudulent misrepresentations about having the necessary approvals.
Based on these findings, the High Court declared the agreements void ab initio and ordered the 1st and 2nd Defendants to pay substantial damages: between RM61,500 and RM103,700 per plaintiff in special damages, general damages to be assessed, and exemplary damages of RM300,000 per plaintiff. In total, the award amounted to RM2.3 million, with interest and legal costs also ordered. The Court further lifted the corporate veil, holding the 2nd Defendant personally liable for masterminding the scheme.
However, the defendants appealed the ruling, and in a judgment delivered by a three-member Court of Appeal bench chaired by Justice Ruzima Ghazali, the appellate court quashed the damages award. While the Court of Appeal did not disagree with the High Court’s finding that the agreements bore features of a franchise, it emphasized that both parties had acted in pari delicto—that is, with equal fault in entering into illegal agreements. Consequently, the Court ruled that no remedies could be granted to the plaintiffs based on the illegality of the agreements.
Justice Ruzima noted that courts should not assist parties who willingly enter into unlawful arrangements. Despite the plaintiffs’ claims of being misled, the Court of Appeal held that they shared responsibility in the illegal setup and were therefore not entitled to compensation. As a result, the earlier RM2.3 million judgment was set aside, and the plaintiffs were ordered to pay RM50,000 in costs to Safeway Solutions and Lim.
This case has drawn significant attention from both the business and legal communities for its implications on franchise regulation, contractual misrepresentation, and the application of the in pari delicto doctrine. It highlights the critical need for both franchisors and franchisees—or parties to similar business arrangements—to ensure full compliance with registration and regulatory requirements under the Franchise Act 1998 and Education Act 1996.
The Court of Appeal’s decision follows the precedent set in Dr. HK Fong Brainbuilder Pte Ltd v. SG-Maths Sdn Bhd [2021] 1 CLJ 155, where the Court affirmed that agreements which met the statutory franchise definition but were not registered as required by the Franchise Act would be deemed void ab initio. This principle applies regardless of how parties label their agreements. Consequently, even businesses that attempt to structure franchise-like agreements under alternative labels face the risk of their contracts being invalidated if they fail to comply with registration mandates.
The Safeway ruling reinforces this by emphasizing that parties who knowingly engage in illegal agreements share equal responsibility and cannot expect judicial remedies. This should act as a deterrent to the proliferation of unregistered franchise-like schemes and help curb litigation stemming from such disputes. Importantly, it sends a strong message to business operators and investors alike to exercise due diligence and ensure proper registration, thereby helping to stop the floodgate of litigation from parties who enter into unregistered franchise arrangements despite knowing their non-compliance, only to later seek legal recourse.