Plan Your Process for Handling Franchise Agreement Breaches in Malaysia

Before franchising an existing business, decide how you will respond when a franchisee fails to meet their obligations under the agreement. Without a clear process, minor problems can become major disputes, while hasty action can undermine both parties’ rights. In franchising, the process for handling breaches should protect customers and the brand while giving franchisees a reasonable opportunity to put things right.

1. Distinguish operational problems from breaches of the agreement

Not every instance of disappointing performance is a breach of contract. Low sales, for example, do not necessarily entitle a franchisor to terminate the agreement. First, check the actual obligations in the agreement and the applicable operating standards.

Draw up a list of possible situations based on your own business experience. Examples include overdue payments, the use of unauthorised materials, failure to submit reports or use of the brand beyond the permissions granted. For each situation, identify the relevant obligation and the evidence needed.

Use three questions for an initial assessment:

• Which specific obligation is alleged to have been breached?
• Has the franchisee received the instructions and resources needed to comply?
• Does the problem stem from the franchisee, the franchisor or factors beyond either party’s control?

This step prevents the support team from issuing warnings based on dissatisfaction alone. It also helps distinguish a need for guidance from issues that genuinely require a formal notice.

2. Build your process around the Franchise Act 1998

Franchising in Malaysia is specifically governed by the Franchise Act 1998 (Act 590), including amendments in force. Agreements must not be drafted as though the franchisor is free to end the relationship whenever it chooses.

Section 31 governs termination before the agreement expires and requires good cause as provided for in the Act. For breaches subject to a remedial process, written notice and an opportunity to remedy the breach are important requirements. The Act also provides for certain circumstances that need to be assessed separately.

Do not, therefore, use a single termination template for every case. Ask a lawyer familiar with Malaysian franchise law to determine the appropriate type of notice, remedy period and grounds for action. Time limits or powers set out in the contract do not necessarily override the Act’s requirements.

Before offering a franchise, prepare an internal decision flowchart: who assesses the incident, who approves notices, when legal advice is needed and who has authority to make the final decision. This is a recommended management control, not a substitute for legal obligations.

3. Prepare evidence and clear notices

A sound case file should show what happened, rather than simply state that the franchisee “failed to maintain standards”. Keep incident dates, transaction records, correspondence, relevant photographs and the franchisee’s explanation. Restrict access to staff who need it.

For example, if sales reports have not been submitted, record the missing reporting periods, the applicable deadlines and any previous reminders. Also check whether the franchisor’s reporting system experienced any disruption at the time.

A formal notice should clearly explain:

• The details of the incident and the relevant obligation.
• The remedial action required.
• The period allowed for compliance, as reviewed by a lawyer.
• How the franchisee can submit an explanation and evidence of remedial action.
• The possible further action if the breach remains unresolved.

Follow the method for serving notices set out in the agreement, as well as any applicable legal requirements. Keep proof of dispatch and receipt. Do not assume that a brief message from a supervisor necessarily satisfies the requirements for a formal notice.

4. Make remedial action practical and verifiable

An opportunity to remedy a breach should come with practical instructions. Avoid vague demands such as “improve operations immediately”. Specify the outcome required and how compliance will be verified.

If the problem involves the use of unapproved materials, for example, the remedial plan could include setting those materials aside, replacing them with approved alternatives and submitting purchase records. Make sure the necessary supplies are actually available before assessing the franchisee’s failure to comply.

Appoint one co-ordinator to manage communications. The support team can help with implementation, but do not allow several staff members to give conflicting instructions or promise extensions without authority.

Once the relevant period has elapsed, review the evidence objectively. Record whether the breach has been remedied, is continuing or requires further assessment. Written confirmation that the case is closed helps both parties understand their position and reduces the risk of later disputes.

5. Review the decision before escalating action

If remedial action fails, do not immediately block system access, stop supplies or withdraw the right to use the brand without a review. Such steps can have serious contractual and operational consequences. Seek advice on the options available under the facts of the case, the agreement and the Act.

Before making a final decision, also check whether the franchisor has met its own obligations. Inadequate training, conflicting instructions or delayed support may be relevant to the dispute.

Use the experience of each case to improve the process, rather than introduce additional penalties on the spot. Before changing franchise documents submitted for registration, check the requirements for the Registrar’s approval of material amendments under Section 11.

Practical action: Before recruiting your first franchisee, prepare a breach-handling workflow, an evidence checklist and a notice template for a lawyer to review. A clear process is more useful than a tough termination clause that is difficult to enforce lawfully.