Buying a Franchise in Malaysia: Check Your Right to Remedy Breaches

Before buying a franchise, ask a question that is often overlooked: what happens if you breach the contract? Late payments, failure to maintain standards and administrative errors can have different consequences. Buyers entering Malaysia’s franchise market need to understand not only their obligations, but also the notification process and their opportunities to remedy breaches before the franchise relationship is terminated.

1. Distinguish between breaches that can be remedied and grounds for termination

Do not read the termination clause in isolation. Look also for terms such as default, non-compliance, suspension of operations and failure to follow the manual. Obligations that could trigger action may be spread across the agreement, its schedules and other documents referred to in the contract.

Draw up a short list matching each obligation to the consequences of failing to meet it. For example, is submitting a report late treated as seriously as using unapproved materials? Is there an opportunity to correct a first mistake, or does the contract treat it as grounds for immediate action?

Ask the franchisor to explain in writing:

• Which breaches can normally be remedied through payment, repairs or submission of documents?
• What circumstances are said to allow termination without an opportunity to remedy the breach?
• How are repeated breaches defined and recorded?
• Does a failure at one outlet affect agreements for other outlets?

Pay particular attention to clauses linking a default under the franchise agreement to other contracts. Do not dismiss a dispute over a single invoice as minor until you understand its implications for the wider contractual relationship.

2. Understand the protections under the Franchise Act 1998

Malaysia specifically regulates franchising through the Franchise Act 1998, as amended, including the 2020 amendments. Termination rights are not simply a matter for the franchisor to determine without regard to the Act.

Broadly, Section 31 prohibits a franchisor from terminating an agreement before its expiry without good cause. The circumstances covered include a franchisee’s failure to comply with the agreement’s terms or related obligations where the breach remains unremedied following written notice and the specified remedy period. Under this route, the period allowed to remedy the breach must be at least 14 days.

However, do not assume that every breach must be given the same opportunity for remedy. The section also provides for certain circumstances that may constitute grounds for termination without that notice and opportunity to remedy the breach. Ask a solicitor to check each contractual ground for termination against the relevant statutory provisions.

Under Section 15, the franchisor must provide the disclosure document and a copy of the franchise agreement at least 10 days before the agreement is signed. Use this time to review the default clauses, not just the fee schedule.

Distinguish between statutory rights and any additional protections you wish to negotiate. A longer remedy period or an internal warning procedure, for example, needs to be clearly set out in the documents and should not be assumed to apply automatically.

3. Check whether the notice procedure works in practice

An opportunity to remedy a breach is of limited use if the notice goes to an address nobody monitors. Check the named recipient, the address for service, the delivery methods and when a notice is deemed to have been received.

If the franchisee is a company, make sure internal procedures ensure that notices addressed to it promptly reach someone authorised to act. Do not rely solely on an outlet manager or conversations with the franchisor’s operations staff.

Ask for clarification about what a notice will contain. To make remedial action easier, it should identify the obligation allegedly breached, details of the incident and the action required. These are important points to clarify or negotiate; do not assume that every detail must legally be provided in your preferred form.

Test the procedure with a hypothetical situation: the franchisor requires repairs to the premises, but spare parts are not yet available. Would you need to submit a purchase order, a contractor’s schedule or details of temporary measures? Who can approve an extension, and how is that approval recorded?

Also check how the franchisor confirms that remedial work is complete. Without written confirmation that the matter is closed, an old issue may continue to appear on the non-compliance record even after action has been taken.

4. Assess the cost of putting things right before buying

An opportunity to remedy a breach may still involve substantial expense and effort. List potential costs such as emergency repairs, retraining, follow-up inspections and lost sales if operations are temporarily suspended.

Ask who sets reinspection charges and where the basis for those charges is stated. If the franchisor can carry out remedial work and recover the cost from you, check the scope of that power, the evidence required to support the expenditure and the process for disputing the amount.

Before signing, prepare a one-page action checklist covering:

• The person responsible for receiving and reviewing notices.
• The time allowed for action for each type of breach.
• The evidence to retain to demonstrate that a breach has been remedied.
• The channels for obtaining written confirmation or legal advice.

Compare brands on the clarity of their procedures, not simply the length of the remedy period. A clear process helps both parties restore compliance and maintain a constructive franchise relationship.

Practical takeaway: Before buying, make sure you understand what can trigger termination, when an opportunity to remedy a breach applies and how successful remedial action is confirmed. Ask a solicitor to review any unclear clauses before accepting the risks.