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- What can you do if the franchise agreement with your partner ends?
If you’ve been paying attention to the falling out between Loob Holdings and La Kaffa over the alleged breach of the franchise agreement between the two, you’d have found that breakups between companies in a franchise agreement can be long, drawn out, complicated affairs.
With news that internationally-acclaimed franchises including Tous Les Jours and Pablo have been shutting down, local proprietors of franchised businesses may be wondering what rights and liabilities they may be subjected to, once the agreement has ended. Or, perhaps you’re thinking of going into the franchise business for yourself.
Firstly, what is a franchise? Many of us use the term haphazardly without taking into account what it actually means, other than the general sense that they all appear to be copies of the same store.
In legalese, a franchise is defined in the Franchise Act 1998 as a contract or an agreement—either expressed or implied, whether oral or written—between two or more persons under a franchise agreement.
As per the Franchise Act 1998, the franchise agreement must be for a term of at least 5 years, with an option to renew if the franchisee wishes to—this is to allow the franchisee the necessary time to assess the way forward.
Once the original franchisor decides to leave, and the term is up, local franchisees may be wondering if they may continue their business, albeit under a different name. Sound familiar?
Termination—How and When?
When it comes to termination, the question of what exactly happens next to franchise operations in the region often comes up. If there has been a breach, the Franchise Act states that the franchisor is required to inform the franchisee of any alleged breach and allow them time to remedy the breach. If that is not remedied, the breach is then said to be sufficient reason for termination.
Confidential information is usually detailed within a franchise agreement beforehand in order to prevent disclosure—trade secrets such as the 11 herbs and spices used by KFC to achieve finger-lickin’ goodness are usually not divulged to the franchisee, with the franchisor often opting to deliver the aforementioned ingredient/material ready-made.
When you see different franchised stores, you’re essentially seeing cloned stores. This concept has its drawbacks, however, as this may be prone to abuse once the agreement has ended or been terminated.
If we apply this to the current case of Chatime/Tealive, the risks and importance of a non-compete becomes apparent—the franchisee can very often become the biggest and most dangerous competitor toward the franchisor once the agreement has ended.
As such, the Franchise Act 1998 does provide for non-competition clauses for a 2 years after the ending of the agreement—most non-compete clauses in other contracts aren’t allowed due to the fact it often restrains trade (stopping someone from making his/her living).
Joining Or Restarting A Franchise
In July, multiple outlets reported that Pablo Cheesetarts had decided to close its outlets in Malaysia—what if local entrepreneurs now wanted to enter into a franchised partnership with an international franchise such as Pablo?
As opposed to a local franchise, a foreign franchisor is required to obtain the Registrar of Franchises’ approval before it intends to sell its business in Malaysia or to a Malaysian franchisee. Once this approval has been gained, partners can prepare a franchise agreement that is governed by the aforementioned Act subject to enforcement of certain measures in the event of breaches.
So if anyone out there would like to reopen Pablo, they just have to make sure that this is done first.
In the Loob/LaKaffa case, it was held that La Kaffa International acted in “bad faith” in terminating the franchise agreement—the Act states the requirement for both parties to act in “an honest and lawful manner”. This was Bryan Loo’s argument against La Kaffa in the court case.
29. (1) A franchisor and a franchisee shall act in an honest and lawful manner and shall endeavour to pursue the best franchise business practice of the time and place.
Therefore, before entering into a franchise agreement, relevant parties have to note that the Malaysian Franchise Association has a code of ethics that regulates its members.
However, the MFA membership is not mandatory for franchisors and franchisees in Malaysia. This is merely a guiding light, rather than a binding legislation like the Franchise Act 1998.
Feature Image Credit: Unsplash