Buying a Franchise in Malaysia: Check Contract Termination Rights

Before buying a franchise, ask an uncomfortable but important question: what happens if the franchisor wants to terminate your contract? A healthy franchise relationship needs clear rules for when things go wrong, not just when sales are growing. Reviewing termination rights helps you identify the risk of losing the right to operate, prepare evidence of compliance and understand liabilities that may remain after the business closes.

1. Distinguish between termination, expiry and an agreed exit

All three situations can lead to an outlet closing, but their legal basis and financial consequences are not necessarily the same.

• Termination before the end of the term: the contract is ended early, for example because of a breach of obligations.
• Expiry without renewal: the contract reaches the end of its term and the relationship does not continue.
• Exit by mutual agreement: both parties agree to end the relationship on negotiated terms.

Do not accept an assurance that you can “leave at any time” without checking the mechanism in the agreement. The right to stop operating does not necessarily release you from debts or contractual claims.

Ask the franchisor to identify every clause covering termination, notice, remedies for breaches and post-exit liabilities. Also check how breaches are defined in the schedules and any manuals referred to in the contract. Important obligations are not always found under the termination heading.

Prepare a one-page summary: who can terminate, on what grounds, through which process and with what financial consequences.

2. Understand the protections under the Franchise Act 1998

Malaysia has specific legislation, the Franchise Act 1998 [Act 590], which has been amended, including through amendments in 2020. Termination rights are not determined solely by the wording of the contract.

Section 31 generally prohibits a franchisor from terminating an agreement before its term expires without good cause. The grounds provided for include a franchisee’s failure to comply with the agreement or related obligations, where the breach remains unremedied after written notice has been given. Under this route, the period allowed to remedy the breach must be at least 14 days.

However, do not assume that every situation guarantees a 14-day opportunity to remedy a breach. The Act also provides for certain circumstances that may justify termination without that notice and opportunity to remedy the breach. Ask a lawyer to explain the exceptions relevant to your contract.

Section 32 addresses non-renewal of an agreement, while section 33 concerns early termination of the franchise term. Clauses that use terms such as “expiry”, “cancellation” and “non-renewal” interchangeably therefore need careful scrutiny.

Seek advice based on the current legislation. Do not assume that a clause is enforceable simply because you have signed it, or invalid simply because it seems one-sided.

3. Test the grounds for termination against real operating situations

Read the clauses using examples of everyday problems. The aim is to establish whether the obligations can be understood, measured and met.

Late payment: Does the contract distinguish between an administrative error and repeated failure to pay? How should you raise an invoice dispute without leaving a formal notice unanswered?

Failed operational audits: Does the report identify specific breaches, evidence and corrective action? If an audit score can trigger termination, ask for the scoring method and the process for reviewing factual errors.

Performance targets: Is failure to meet a target grounds for termination? Make sure targets are clearly stated and ask how supply disruptions or temporary closures are taken into account.

Repeated breaches: Check how the contract defines repetition. Minor breaches that have been remedied may still remain on record, so understand how they could affect subsequent action.

Ask for a written explanation of the process used in practice. You can also ask existing franchisees how breach notices are handled, without requesting confidential details of their disputes. Verbal answers can help you understand how things work, but they are no substitute for clear terms.

4. Calculate liabilities after operations cease

Losing the right to use the brand does not necessarily end all financial obligations. Prepare a list of costs specifically for an early exit, separate from your normal operating budget.

Check the following:

• Outstanding fees and how payments are calculated up to the termination date.
• Claims for damages or payments said to be due for the remaining contract term.
• The cost of removing signage, branding and promotional materials.
• The return of manuals, loaned equipment and confidential materials.
• How branded stock will be handled, including whether there is a written buy-back obligation.
• The resolution of outstanding customer orders, deposits and complaints.

Do not assume that every contractual claim will automatically be enforceable; ask a lawyer to assess its basis and enforceability. Equally, do not assume that the franchisor must buy back stock or equipment without checking the applicable provisions.

5. Establish a notice-handling process before signing

Make sure the postal address, email address and designated recipients for formal notices are correct. Check when a notice is deemed to have been received, as that date may affect the time available to act. Appoint someone to keep records of notices, audit reports, proof of payment and corrective action.

If you receive a notice, record the date of receipt, seek advice promptly and respond in writing. Ask for confirmation that any remedial action has been accepted. Do not assume that a telephone conversation pauses the notice period.

Practical action: Before buying, take your summary of termination rights and list of exit liabilities to a franchise lawyer. Proceed only when you understand the grounds for termination, the opportunities to put problems right and the obligations that remain after the contract ends.