The Legal Implications of Unregistered Franchises: An Analysis of Dr HK Fong Brainbuilder Pte Ltd v SG-Maths Sdn Bhd & Ors

The Legal Implications of Unregistered Franchises: An Analysis of Dr HK Fong Brainbuilder Pte Ltd v SG-Maths Sdn Bhd & Ors

Introduction

The case of Dr HK Fong Brainbuilder Pte Ltd v SG-Maths Sdn Bhd & Ors[1] is significant in the context of Malaysian franchise law, particularly concerning compliance with the Franchise Act 1998 (“FA 1998”). It highlights the legal implications of failing to register a franchise in Malaysia, addressing complex issues of jurisdiction, governing law, and contract enforceability under statutory mandates. This article analyses the High Court and Court of Appeal decisions, emphasising key principles.

Background Facts of the Case

The core of the case revolves around a Master License Agreement (MLA) formed between Dr. HK Fong Brainbuilder Pte Ltd, founded by Dr. Fong Ho Keong in Singapore, and SG-Maths, a Malaysian company led by Dr. Fong’s close associates—the second and third defendants. This MLA was intended to allow SG-Maths to expand Dr. Fong’s BrainBuilder educational program, a mathematics tutoring initiative featuring “Dr. Fong’s Method,” throughout Malaysia.

The dispute arose when SG-Maths allegedly breached the terms of the MLA by operating similar centres, prompting the plaintiff to terminate the MLA. However, the central legal complication lay in the fact that the MLA was unregistered under the FA 1998, as required for franchises in Malaysia. Despite being advised by legal counsel to register the franchise, Dr. Fong and the plaintiff did not comply.

As a result, they sought recourse in the Malaysian courts to resolve issues arising from the contract’s enforceability and to determine whether related documents, such as guarantees and powers of attorney, were also void due to the MLA’s non-compliance with the FA 1998.

Issues Discussed

  • Whether Malaysia had jurisdiction to hear the case instead of Singapore;
  • Whether Malaysia or Singaporean law governs the Master License Agreement (MLA);
  • Applicability of the FA 1998;
  • Whether a breach of section 6(1) and section 6A(1) of the FA 1998 would render the MLA, as well as the guarantee and power of attorney void; and
  • Potential Remedies under section 66 and section 71 of the Contract Act 1950 and the doctrine of unjust enrichment.

High Court and Court of Appeal Decisions on Key Issues

The High Court first addressed these issues, and the Court of Appeal subsequently affirmed the High Court’s decisions. Below is an analysis of how both courts responded to the questions presented.

1. Jurisdiction and FA 1998 Compliance

In navigating our way towards understanding this case, we must firstly understand as to why the court accepted the MLA as a franchising agreement despite not explicitly using the term ‘franchise’ but rather the term ‘Master License Agreement’. The Judge in this case relied on the case of Tenaga Perancang (M) Sdn Bhd v Dr Mansur bin Hussain & Ors[2] where the court is not limited by how the parties label or describe the agreement but rather how the agreement represents itself. It is apparent that the line between Franchising and Licensing is very fine where franchising requires the franchisee to follow the franchisor’s strict business system, while licensing offers the licensee more flexibility to use brand elements without as much operational control.

In this case, what led the court to decide the MLA to be a franchising agreement was due to the fact that the MLA gives the defendant the right to run a business based on a system established by the plaintiff (acting as the franchisor) which is aligned with section 4(a) of the FA 1998. Evidence such as the plaintiff providing a Franchise Operations Manual (FOM) and including control provisions within the agreement further supports this alignment. Besides that, defendants were given the right to use the proprietary intellectual property and trade secrets associated with the business. Which is aligned with section 4(b) of the FA 1998. Additionally, the plaintiff’s ongoing control over business operations and the requirement for the defendants to provide fees or other forms of consideration align with Sections 4(c) and (e) of the FA 1998.

Concerning the question of jurisdiction, the High Court ruled that it had jurisdiction over the case, applying Malaysian law despite conflicting clauses in the MLA; Clause 56 stating Malaysian law governed the contract, while Clause 37 referred to Singaporean law. The court found that the mandatory requirements of the FA 1998 took precedence, specifically sections 6(1) and 6A(1), which require franchise registration in Malaysia.

The High Court rejected the plaintiff’s argument that section 6(1) of the Act only applies to local franchisors. The High Court Judge believed such an interpretation would contradict the purpose of the law; to allow foreign franchisors to bypass registration is absurd.  The High Court followed the previous High Court case of Lim Seng Kiat & Anor v Jee Hing Lim& Anor[3] where Abu Bakar Jais (JC) held that a franchise agreement was void and unenforceable due to the failure of registration.

The Court of Appeal agreed with the High Court, confirming that jurisdiction had not been disputed and emphasizing the applicability of Malaysian law due to the FA 1998’s relevance. Both courts concluded that the MLA qualified as a franchise under the Act, and since it was not registered, it violated the mandatory provisions of the FA 1998. This breach rendered the MLA illegal and unenforceable, underscoring the importance of statutory compliance in franchise agreements.

2. Impact of the Breach on MLA, Guarantee, and Power of Attorney

The MLA

In order to determine whether the MLA is void, the Court held that it is necessary to look at whether sections 6(1) and 6A(1) of the FA 1998 were intended by Parliament to be mandatory or directory.

The court decided these provisions were mandatory, stating it had “no hesitation” in concluding they were imperative. This interpretation aligns with previous judgments.[4] Furthermore, the use of the word “shall” in sections 6(1) and 6A(1) of the FA 1998 further reinforced the imperative nature of these requirements. The Court of Appeal supported this stance, noting that parliamentary debates clearly indicated the legislature’s intent for strict compliance.

In light of these breaches, the High Court found the MLA (2013) to be void in its entirety under either one or both of the following grounds:

  • (i) The MLA (2013) is forbidden by sections 6(1) and 6A(1) of the FA 1998, falling within the scope of section 24(a) of the Contracts Act 1950 (CA); and/or
  • (ii) The MLA (2013) is of such a nature that, if allowed, would undermine sections 6(1) and 6A(1) of the FA 1998, aligning with section 24(b) of the CA.

The guarantee and power of attorney

As for the related documents (which are the guarantee and power of attorney in this case), the court found that these are void due to the illegality of the MLA. This stance is supported by the Federal Court case of Malayan Banking v Neway Development Sdn Bhd & Ors,[5] where it was held that if a contract is void under any paragraph of section 24 of the CA, any other contract, instrument, or document related to the void contract may also be tainted with illegality and may be rendered void.

Since the guarantee and power of attorney, along with the MLA, formed a single composite transaction, the court ruled that the illegality of the MLA tainted the associated guarantee and power of attorney, rendering them void under section 24 of the CA.

3. Consideration of Remedies

The courts examined the possibility of remedies under Sections 66 and 71 of the Contracts Act, as well as unjust enrichment.

Section 71 (Contracts Act): The court referenced Section 71, which provides relief in cases of non-gratuitous acts where a party may claim compensation for the benefits conferred. However, Section 71 was deemed inapplicable in this case as the performance of the MLA by the first defendant was considered unlawful due to breaches of sections 6(1) and 6A(1) of the FA 1998. Consequently, the court found that no relief could be granted under this provision.

Section 66 (Contracts Act): Section 66 allows for restitution if one party receives an “advantage” under a void contract. The High Court, supported by the Court of Appeal, found that Section 66 could not be invoked in this case because SG-Maths, the first defendant, had made payments to Dr. Fong and the plaintiff for the right to operate the Brainbuilder business under the MLA. As a result, there was no “advantage” gained by SG-Maths under the MLA that needed to be returned. Additionally, the plaintiff did not plead or provide evidence in the statement of claim regarding any advantage received by SG-Maths under a void MLA, further negating the applicability of Section 66.

Unjust Enrichment: The courts also dismissed the claim of unjust enrichment for several reasons. First, the plaintiff’s statement of claim did not specifically allege that the defendants were unjustly enriched at the plaintiff’s expense. Second, the list of issues to be tried did not address restitution based on unjust enrichment. Finally, there was no evidence that the defendants were enriched at the plaintiff’s expense, nor was there proof that any benefit retained by the defendants was unjust. Additionally, evidence indicated that the first defendant had made payments to Dr. Fong and the plaintiff under the MLA, further negating any claim of unjust enrichment.

Key Legal Principles Established

The case reaffirms several significant legal principles.

Firstly, the definition of a “franchise.” This case highlights the importance of understanding the statutory definition of a franchise under the FA 1998. Agreements that meet this definition are subject to mandatory registration requirements, even if the parties do not explicitly consider the contract a franchise.

Secondly, failure to register a franchise under the FA 1998 will render the franchise agreement void. This is because if legislation intends a provision to be mandatory, non-compliance with that provision can render the contract void. In furtherance, all related documents associated with that contract—such as guarantees and powers of attorney will also be void.

Thirdly, the limits on claims for restitution and unjust enrichment under a void contract: The case clarifies that restitution claims under Section 66 of the Contracts Act require clear evidence of an “advantage” gained by the other party. Without this evidence, restitution cannot be claimed. Similarly, for claims of unjust enrichment, the plaintiff must demonstrate that the defendant was unjustly enriched at their expense. In this case, the courts dismissed these claims, as SG-Maths had made payments for the right to operate the business, and no unjust benefit was proven.

Conclusion

The takeaway from this case is that the court is not influenced by the label of the agreement. It allows us to truly understand the difference between licensing agreement and franchising agreement no matter how similar they may seem on its surface. For those concern with the two; franchising poses a stricter business system whereas licensing allows the use of brand elements which can be seen as more flexible.

The decision has far-reaching implications for franchisors and franchisees operating in Malaysia and offers critical guidance for legal practitioners. As this case highlights the importance of strict compliance with local franchise registration; franchisors must ensure their agreements are properly registered to avoid unenforceability. Which is a reminder to legal practitioners to conduct due diligence thoroughly to ensure that the clients have met all statutory obligations, especially in areas where non-compliance invalidates the agreements

In summary, Dr HK Fong Brainbuilder Pte Ltd v SG-Maths Sdn Bhd & Ors underscores the strict requirement for compliance with the FA 1998 in franchise agreements. The case highlights that failure to register a franchise renders the agreement and related documents void, with no available remedies. This ruling sets a vital precedent, reinforcing that statutory obligations must be met to avoid severe legal consequences. For legal practitioners and franchise parties, it serves as a clear reminder of the risks of non-compliance.

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Authors:

  1. Alif Mustaqim
  2. Wan Tasnima

References:

[1] [2018] 11 MLJ 701, [2021] 1 MLJ 549

[2] [2016] MLJU 1251

[3] [2015] MLRHU 1

[4] Zabariah Mohd Yusof J in SP Multitech Intelligent Homes Sdn Bhd v Home Sdn Bhd [2010] MLJU 1845; [2010] 16 MLRH 537 at p 539, Tengku Maimun J in Munafsya Sdn Bhd v Proquaz Sdn Bhd [2012] MLRHU 1 at para 72, and Abu Bakar Jais JC in Lim Seng Kiat & Anor v Jee Hing Lim & Anor [2015] MLRHU 1 at paras 16, and Tea Delights (M) Sdn Bhd v Yeap Win Nee [2015] MLJU 673; [2015] MLRHU 1 at paras 9–16

[5] [2017] 5 MLJ 180 at para 22