Buying a Franchise in Malaysia: Check How Disputes Are Resolved

Before buying a franchise, ask a question that is often overlooked: if a disagreement arises, how can you resolve it? Long-term franchise relationships need a clear process for when ordinary negotiations fail. A dispute resolution clause is more than legal wording: it determines where you can bring a claim, which steps you must follow and what costs you may incur.

1. Map the route from complaint to claim

Find all provisions relating to disputes in the draft agreement, not just the clause headed “dispute resolution”. Also check the sections on notices, governing law, jurisdiction, legal costs and payment obligations. These provisions can affect one another.

Map out the sequence on a single page. For example: a written complaint to the franchise manager, negotiations with senior management, mediation, then arbitration or court proceedings. This is an example to help your review, not a mandatory process that applies to every franchise.

For each stage, ask:

• Who receives the complaint, and who has authority to make decisions?
• When does the response period begin, and how is receipt of the notice proved?
• How long can each stage take?
• What happens next if the other party does not respond?

Avoid a process that allows complaints to get stuck in endless negotiations. Ask for clear deadlines and a defined route to the next stage. Also check whether you can apply for urgent court relief without waiting for every stage to be completed.

2. Distinguish between negotiation, mediation and arbitration

Negotiation allows the parties to work towards a solution themselves. It is usually easier to initiate, but any final agreement should be clearly recorded, including remedial action, implementation dates and who is responsible.

Mediation involves a neutral third party who helps the parties reach an agreement. A mediator does not decide who wins in the way a judge does. Ask how the mediator is selected, how fees are shared and how any settlement will be documented so that its effect is understood.

Arbitration involves an arbitrator who hears the dispute and makes an award that is generally binding on the parties. In Malaysia, the main legal framework is the Arbitration Act 2005. Arbitration is not simply a discussion, and the grounds for challenging an award are limited by law.

If the contract requires arbitration, check its legal seat, the language of proceedings, the number of arbitrators, the appointment method and the rules that apply. The legal seat is not necessarily the same as the physical location of the hearing.

Do not assume arbitration is always cheaper or faster than going to court. Its suitability depends on the value of the claim, the complexity of the evidence and how the contractual process is structured.

3. Assess whether the costs are proportionate to the claim

Rights that look good on paper may be difficult to enforce if pursuing a claim is too expensive. Ask a lawyer for a cost estimate broken down by stage, rather than a single overall figure.

Allow for legal advice, document preparation, mediator or arbitrator fees, administration charges, expert services, translation and travel. Time the operator spends away from the premises also has an operational impact.

Use a scenario relevant to your business. For example, the franchisor disputes transaction records and demands an additional payment, while you believe the system has recorded sales twice. What documents would be needed? Who can access the original records? Would the cost of resolving the dispute be reasonable compared with the amount at stake?

Check whether the contract places all costs on the franchisee regardless of the outcome. Do not assume the winning party will recover every ringgit spent. Ask for an explanation of the court’s or tribunal’s powers to determine costs and the effect of the relevant clause.

4. Check the clauses against Malaysian law

Malaysia’s franchise sector is subject to specific legislation: the Franchise Act 1998 [Act 590], which has been amended, including through amendments in 2020. The Contracts Act 1950 is also relevant to general contractual matters, subject to any applicable specific provisions.

Section 15 of the Franchise Act 1998 requires the franchisor to provide the franchise agreement and disclosure documents to a prospective franchisee at least ten days before the agreement is signed. Use that review period to obtain independent advice on the dispute resolution mechanism, rather than focusing only on fees.

If the brand comes from overseas, look out for clauses choosing foreign law or a forum outside Malaysia. Do not assume these choices automatically displace obligations under Malaysian franchise law. Ask a lawyer to assess the effectiveness of those clauses and the cost of using the chosen process.

Also distinguish between a compliance complaint to the Registrar of Franchises and a contractual claim seeking money or a particular order. A complaint to the authorities does not necessarily resolve a civil claim or stop the limitation period for bringing proceedings from running.

5. Plan your evidence and next steps before signing

Ask for the official complaint channels, address for service of notices and escalation procedure in writing. Make sure assurances that “any problem can be discussed” are backed by a workable process.

Plan how you will retain contracts, invoices, system records, correspondence and operational reports. After important conversations, send a written summary for confirmation. Do not stop making payments or disregard contractual obligations simply because a dispute is ongoing; first obtain advice on your lawful options.

Practical takeaway: Before buying, make sure you know who receives complaints, when you can take the next step and how much it will cost. Choose a brand that provides a clear route to resolution, not just verbal assurances.