By G. Yeshanthan Nair
Franchising business is often confused with the concept of licensing, which is a common alternative method used by many business owners as both concepts share some similarities with very minimal differences. The confusion occurs as both the concepts grant rights to the other party in exchange for a fee or other consideration. Delving into the case of Khor Yiap Seng v Soo Geok Ki [2023] MLJU 752, we will now uncover the court’s finding on whether an agreement between the two parties was a mere licence or a disguised franchise. As the case unfolds the true nature and requirements of a franchise agreement under the Franchise Act 1998 (FA 1998) are revealed.
Key Takeaways
- The court confirmed that substance prevails over labels: an agreement meeting the four Section 4 FA 1998 conditions is a franchise, even if called a licence.
- Continuous control, use of intellectual property, a proven business system, and franchise fees are the defining elements of a franchise arrangement.
- Failure to register under Section 6 FA 1998 renders a franchise agreement illegal, ineffective, and unenforceable.
- Licensing grants brand use but does not extend to day-to-day operational control unlike franchising, which demands strict compliance.
- The case serves as a clear warning: improper structuring and non-registration of franchise agreements expose businesses to severe financial and legal consequences.
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A Brief Overview!
In March 2019, Khor Yiap Seng (the Plaintiff), received a franchise proposal from Soo Geok Ki (the Defendant), to invest in Panya Bakery franchise. The offer include a five-year franchise for the PANYA brand, a proven franchise system, trade secrets, and ongoing control by the Defendant. In return, the Plaintiff was required to pay the Defendant RM 350,000.00 as a franchise fee to cover all relevant expenses.
The Plaintiff, having agreed with the proposal, paid the franchise fees to the defendant. Upon receiving payment, the Defendant advised the Plaintiff to commence the franchise business even before signing the agreement. However, in June 2019, the Plaintiff was stunned to receive a Licence Agreement instead of the initially agreed-upon Franchise Agreement. The Plaintiff contended that the agreement was deliberately prepared by the Defendant to outsmart the Plaintiff since the Defendant’s business was not registered as a franchise in Malaysia at that time.
The fundamental question raised in court was whether the agreement is truly a Licence or a Franchise Agreement?
The Court’s Evaluation!
The court addressed this pivotal question by assessing the four prerequisites outlined in Section 4 FA 1998. Firstly, it acknowledged that the Defendant granted the Plaintiff the right to operate the franchise business under its franchise system. Secondly, the Defendant provided the Plaintiff with the use of the business’s intellectual property rights. Thirdly, the court recognized the Defendant’s authority to maintain continuous control over the Plaintiff’s business. Lastly, in exchange for these privileges, the Defendant received a franchise fee from the Plaintiff. Upon careful evaluation, the court concluded that, despite being labeled as a Licence Agreement, the arrangement between the Plaintiff and the Defendant fulfilled the criteria of a franchise business and it should be rightfully considered as a Franchise Agreement.
Directing our focus to Section 6 FA 1998, businesses are obligated to register as franchises with the Registrar of Franchise in Malaysia. Unfortunately, the Defendant’s oversight in not registering the Franchise rendered the Franchise Agreement both illegal and ineffective. Furthermore, the Defendant’s proposition of the franchise to the Plaintiff was treated as an offer of a franchise constituting a violation of Section 6 FA 1998 due to non-registration. Consequently, the Court decisively ruled that the franchise agreement is unenforceable due to non-registration, compelling the Defendant to reimburse the Plaintiff in full, an amount totaling RM 350,000.00.
Further Insights into Agreements!
The key difference between a franchise and licensing lies in the extent of control one business exercises over another. In a franchise, the franchisor administers continuous control and directs the franchisees on the day-to-day operations. They spell out exactly how the business should run daily via manuals etc. On the flip side, in a licensing setup, there’s no control over day-to-day activities. Instead, the focus is on overseeing the use of trademarks and ensuring that the products or services offered meets a certain standard and quality associated with the brand.
Just having control over the business doesn’t determine if it’s a franchise. To be considered as a franchise, your business needs to meet the four (4) pre-conditions under Section 4 FA 1998. Even if you were to name the agreement differently, as demonstrated in this case, it wouldn’t change the fact it’s a franchise so long as it satisfies the conditions. This case clearly illustrates the rationale behind the court’s decision which centers upon the contents and nature of the agreement rather than what it’s called.
Wrap-Up!
This case emphasizes the need to grasp the differences between franchising and licensing, highlighting the legal obligation to register a business as a franchise in Malaysia before making an offer or inviting offers. It serves as a warning to businesses, urging caution when drafting franchise agreements to steer clear of legal issues as the court stresses the importance of the agreement’s content over its name!
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