Introduction to Franchise Law in Malaysia
Malaysia has become one of Southeast Asia's most vibrant franchise markets, with homegrown brands expanding domestically and internationally alongside well-known global franchises. Governing this ecosystem is the Franchise Act 1998 (Act 590), together with the Franchise Regulations 2012 and the Franchise (Amendment) Act 2020. Whether you are looking to franchise your business or invest in a franchise opportunity, understanding the legal framework is essential to protecting your interests and ensuring compliance.
This guide provides a practical overview of the key provisions that every franchisor and franchisee in Malaysia should know.
What Is a Franchise Under Malaysian Law?
The Franchise Act 1998 defines a franchise as a contract or agreement in which the franchisor grants the franchisee the right to operate a business according to the franchise system. The relationship typically involves the use of the franchisor's trademark, trade name, or branding, adherence to the franchisor's operational methods and standards, and the payment of fees or royalties by the franchisee to the franchisor. Importantly, the Act applies broadly. Even business arrangements that are not expressly labelled as a "franchise" may fall within the scope of the legislation if they exhibit these characteristics.
Who Regulates Franchises in Malaysia?
The Registrar of Franchises, operating under the Ministry of Domestic Trade and Cost of Living (KPDN), is the primary regulatory authority. The Registrar oversees registration, monitors compliance, and has the power to investigate and take enforcement action against parties who breach the Act.
Registration Requirements
Franchisor Registration
Every franchisor intending to sell a franchise in Malaysia must register with the Registrar of Franchises before making any offer or selling the franchise. This is a mandatory requirement under Section 6 of the Franchise Act 1998. The registration application must include details such as the franchisor's business background, financial statements, the franchise system's operational details, and the proposed franchise agreement. Foreign franchisors must also register before granting franchise rights in Malaysia, and they are generally required to appoint a local master franchisee or representative.
Franchisee Registration
Under the Franchise (Amendment) Act 2020, franchisees are also required to register with the Registrar. This must be done within a prescribed period after the franchise agreement is executed. Failure to register as either franchisor or franchisee can result in fines or imprisonment, making compliance non-negotiable.
Disclosure Obligations
One of the cornerstones of Malaysian franchise law is the duty of disclosure. The franchisor must provide the prospective franchisee with a disclosure document at least ten days before the execution of any agreement or payment of any fee.
The disclosure document must contain key information including the franchisor's business background and experience, details of the directors and management team, a description of the franchise system, the financial obligations of the franchisee including fees and royalties, any litigation history involving the franchisor, a list of existing and former franchisees, the territory or area of operation, and a copy of the proposed franchise agreement.
This disclosure requirement exists to ensure that prospective franchisees can make an informed decision. Failing to provide accurate and complete disclosure is an offence and can also render the franchise agreement voidable.
The Franchise Agreement
The franchise agreement is the backbone of the franchise relationship. Under Malaysian law, certain terms must be included in every franchise agreement. These mandatory terms cover the rights granted to the franchisee, the obligations of both parties, the territorial scope of the franchise, the duration of the agreement and renewal conditions, grounds for termination, and the intellectual property rights involved.
The Act also imposes certain protections for franchisees. For example, the franchisor cannot unreasonably refuse to renew a franchise agreement, and the franchisee has the right to associate with other franchisees for lawful purposes without penalty.
Cooling-Off Period
Malaysian franchise law provides franchisees with a cooling-off period. After signing the franchise agreement and making payment, the franchisee has the right to terminate the agreement within a specified period and receive a refund, subject to certain deductions. This provision acts as a safety net for franchisees who may have entered into the agreement prematurely.
Intellectual Property Protection
Franchise arrangements inherently involve the use of trademarks, trade names, and proprietary systems. The Franchise Act requires the franchisor to have proper ownership or authorised use of the intellectual property associated with the franchise. Franchisors should ensure their trademarks are registered with the Intellectual Property Corporation of Malaysia (MyIPO) before offering the franchise, as this strengthens enforcement rights and provides certainty for both parties.
Termination and Dispute Resolution
Grounds for Termination
The franchise agreement may be terminated by either party on grounds specified in the agreement. However, the Act provides certain safeguards. A franchisor cannot terminate a franchise agreement without giving the franchisee an opportunity to remedy a breach within a reasonable period, except in cases of serious misconduct such as fraud or criminal activity. Conversely, the franchisee may terminate the agreement if the franchisor has made material misrepresentations or has failed to comply with the Act.
Effects of Termination
Upon termination, the franchisee must cease using the franchisor's trademarks, trade names, and proprietary materials. Post-termination obligations, including non-compete clauses, must be reasonable in scope and duration to be enforceable under Malaysian law.
Dispute Resolution
The Act encourages mediation and arbitration as alternative dispute resolution mechanisms. Many franchise agreements include arbitration clauses designating the Asian International Arbitration Centre (AIAC) in Kuala Lumpur as the forum for resolving disputes. Litigation in the Malaysian courts remains available, though arbitration is often preferred for its confidentiality and speed.
Practical Tips for Franchisors and Franchisees
For Franchisors
Ensure your franchise is registered before making any offer or accepting any payment. Prepare a thorough and accurate disclosure document, as incomplete disclosure can lead to penalties and jeopardise the validity of your agreements. Register your intellectual property early and keep your registrations current. Document your franchise system comprehensively, including operations manuals and training materials, as these form part of your legal obligations.
For Franchisees
Always request and carefully review the disclosure document before signing anything or making any payment. Engage a lawyer experienced in franchise law to review the franchise agreement, paying close attention to fee structures, territorial rights, renewal terms, and termination provisions. Verify the franchisor's track record by contacting existing and former franchisees listed in the disclosure document. Understand your rights under the Act, including the cooling-off period and your right to associate with other franchisees.
Recent Developments
The Franchise (Amendment) Act 2020 introduced several notable changes, including the requirement for franchisees to register and stricter penalties for non-compliance. The amendments also strengthened the Registrar's powers to inspect and investigate franchise operations. Parties involved in franchise arrangements should stay updated on regulatory developments and ensure ongoing compliance with the latest requirements.
Conclusion
Malaysia's franchise regulatory framework is among the most comprehensive in the region. Both franchisors and franchisees benefit from understanding their obligations and rights under the Franchise Act 1998 and its amendments. Compliance is not merely a legal formality — it protects the business interests of both parties and contributes to a healthier franchise ecosystem in Malaysia.
This article is intended for general informational and educational purposes only. It does not constitute legal advice and should not be relied upon as such. The laws and regulations discussed may have been amended or updated since publication. For advice on your specific situation, please consult a qualified lawyer. Naidu Chambers expressly disclaims any liability for actions taken or not taken based on the contents of this article.