Buying a Franchise in Malaysia: Check the Dispute Resolution Process

Franchise relationships usually begin with confidence in the brand. Before buying, however, you also need to know how disagreements will be resolved if ordinary negotiations fail. Dispute resolution clauses determine where you can bring a claim, the steps you must follow and the cost of defending your position. Rights that look good on paper may be difficult to exercise if the process is expensive or unclear.

1. Map the route from complaint to decision

Ask for the full draft agreement and find every reference to complaints, notices of dispute, negotiation, mediation, arbitration and court proceedings. Do not read a single clause in isolation: provisions on notices, governing law and legal costs may affect how the process works.

Draw up a simple map answering four questions:

• Who receives the complaint? Distinguish between operational support staff and those authorised to settle claims.
• How must the complaint be submitted? Check the address, delivery method and when notice is deemed to have been received.
• Which steps are compulsory? Establish whether negotiation or mediation is required before further action can be taken.
• When can the process move forward? Look for response deadlines and provisions covering what happens if the other party remains silent.

For example, a dispute over additional charges might be discussed in an outlet’s messaging group for weeks. Yet those conversations may not satisfy the contract’s formal notice requirements. Ask the franchisor to explain how to turn an operational complaint into a formal dispute while preserving the record of earlier communications.

If there is no response deadline, propose a clear timeframe for negotiation. This is a contractual safeguard that must be agreed, not an automatic right you can assume already exists.

2. Distinguish between mediation, arbitration and court proceedings

Mediation involves a neutral third party helping the parties reach an agreement. The mediator is not a judge who decides who wins. If an agreement is reached, pay attention to how the settlement will be recorded and enforced.

Arbitration refers a dispute to an arbitrator for a decision. Do not assume it is merely an informal discussion. Check the applicable rules, how the arbitrator is appointed, the language of proceedings and the place of arbitration. The legal seat of arbitration can also differ from the physical location of a hearing; ask a solicitor to explain the implications.

Court proceedings use the judicial process. If the contract names a particular court or grants exclusive jurisdiction, seek clarification on what this means for you, especially if your premises are far from the named location.

Also ask whether the clause covers all disputes or only certain matters. Do payment claims, trade mark issues and termination disputes follow the same route? Are there exceptions allowing parties to seek urgent orders to protect their rights?

Do not choose solely on the basis of labels such as “faster” or “cheaper”. Ask for an explanation of the actual process. For someone buying a single outlet, a mechanism involving long-distance travel or multiple decision-makers may be disproportionate to the likely value of a claim.

3. Estimate costs and safeguard business records

Before signing, ask a solicitor to help identify the categories of costs that could arise: initial advice, preparing notices, filing fees, mediator or arbitrator fees, experts, travel and management time. These estimates do not guarantee the final total, but they help you assess whether you can afford to use the process.

Read the clauses on who pays upfront and who ultimately bears the costs. Distinguish between a contractual obligation to pay legal costs and a costs order that a court or tribunal may make. Do not assume the winning party will recover all its expenses.

Test the mechanism with a simple example: you dispute an invoice that does not match the fee schedule. What documents are needed, to whom must notice be sent, and how many steps must you complete before obtaining a decision?

Plan how to retain evidence from the outset. Keep the signed agreement, appendices, invoices, proof of payment, system reports and relevant communications. Make sure records remain lawfully accessible if access to the brand’s systems is disrupted.

Check which obligations continue during a dispute. Do not stop paying royalties, close the outlet or make unilateral deductions without legal advice. Such responses could create further disputes even if your original complaint is well founded.

4. Review the clauses under Malaysian law

Malaysia specifically regulates the franchise sector through the Franchise Act 1998 [Act 590], as amended, including the 2020 amendments. Under Section 15, the franchisor must provide a prospective franchisee with the disclosure documents and a copy of the franchise agreement at least 10 days before the agreement is signed.

Use that period to obtain an independent review of the dispute resolution mechanism. Franchise registration is no substitute for assessing whether the mechanism is practical given your financial resources and business location.

If the agreement provides for arbitration, ask a solicitor to assess the clause alongside the Arbitration Act 2005, as amended. If it specifies foreign law or a dispute resolution venue outside Malaysia, do not assume that this overrides applicable mandatory requirements under the Franchise Act.

Also distinguish between reporting legal compliance concerns to the authorities and bringing a contractual claim for payment or compensation. Making a complaint does not necessarily resolve your financial claim or stop the time limit for taking action from running.

Practical takeaway: Before buying, make sure you can explain the dispute resolution route, venue, cost categories and required records on a single page. Resolve any ambiguities through documents reviewed by a solicitor before signing.