Still not late to highlight the case of Mohd Heidheer bin Abd Karim & Anor v Siti Nabilah bt Mohamad Isa (pemilik tunggal NKT Group Resources) & Ors [2024] MLJU 99, in a summary, 3 broad issues emerge that are of significant importance to Malaysia’s franchise industry:
(a) Label on Agreement is Not What is.
The defendants in this case had labeled their contracts as “Licensing Agreements” in an attempt to avoid the requirements under the Franchise Act 1998. However, the court took a substantive approach by analyzing the actual contents and operational structure of the agreements. It found that despite the “licensing” label, the agreements fulfilled all 4 statutory elements of a franchise: the grant, rights to use intellectual property, continuous control by the licensor and payment of fees. Instead, the legal relationship is determined by the substance of the arrangement. This finding reinforces that mislabelling a franchise as a “license” will not shield a party from legal obligations under franchise law.
(b) Professional Negligence of Legal Advisors
The plaintiffs engaged a solicitor to draft the agreements but were not adequately advised of the legal implications, specifically, that the agreements could fall under the Franchise Act and thus require registration. The court found the solicitor negligent for failing to meet the required standard of care in advising clients who were entering into a regulated business model. Not only did the solicitor fail to differentiate between licensing and franchising, but also did not properly disclose the risk of the agreement being void due to non-compliance with statutory requirements. This serves as a strong caution to legal practitioners: failure to provide comprehensive and competent advice in areas of regulated commercial activity may lead to findings of negligence and liability.
(c) Failure to Register the Business as a Franchise
The most decisive legal issue in this case was the failure of the First Defendant to register the business arrangement as a franchise, as mandated by Section 6 of the Franchise Act 1998. The court found that the agreements were void ab initio (from the beginning) due to non-registration, rendering them unenforceable. The mandatory language of the Act, particularly the use of the word “shall” in Section 6, underscores the legislature’s intention for franchisors to register their franchises before offering them to others. The First Defendant’s failure to register, combined with the franchise-like nature of the business model, resulted in a breach of the Act and invoked Section 24 of the Contracts Act 1950, which deems any agreement that is illegal or contrary to public policy as void. This aspect of the ruling confirms that compliance with franchise registration laws is not optional, and unregistered franchises are both unlawful and subject to legal nullification.
hashtag#dslyfranchise
hashtag#thefranchisecode