For many years, businesses have attempted to structure commercial relationships as licences, distributorships, collaborations or business opportunities in the belief that doing so would avoid the regulatory requirements of the Franchise Act 1998. Recent Malaysian decisions demonstrate that this approach carries considerable legal risk. Increasingly, the courts have shown a willingness to examine the commercial substance of an arrangement rather than the label adopted by the parties.
 
The emerging body of case law reflects several important developments. First, the courts have consistently emphasised that the legal character of an agreement depends on its substantive rights and obligations rather than its title. Secondly, they have adopted a broader and more practical understanding of what constitutes a "franchise system". Thirdly, recent decisions have reinforced the mandatory nature of the registration regime under the Franchise Act, finding unregistered agreements to be null and void and ordering restitution to the franchisee, save where exceptional circumstances may justify withholding such relief. Finally, the courts have been prepared to pierce the corporate veil and find the director or shareholder of a franchisor personally liable for making restitution in certain situations.
 
These developments provide valuable guidance not only for franchisors and franchisees but also for lawyers involved in structuring commercial arrangements that may inadvertently fall within the scope of the Franchise Act. 

1.	Substance Continues to Prevail Over Form

The dominant theme emerging from the recent authorities is that the courts will not permit parties to avoid the Franchise Act merely by adopting different contractual labels. Whether an agreement is described as a licence, distributorship, collaboration agreement or business opportunity is not determinative. Instead, the court examines whether the arrangement satisfies the requirements of section 4 of the Franchise Act. These include the grant of a right to operate a business according to a business system determined by another party, the right to use intellectual property, continuing operational control, and payment of consideration.
 
The inquiry is therefore directed at commercial reality rather than contractual terminology. This approach is evident in WJ Legacy Sdn Bhd v Rins Holding Sdn Bhd [2026] MLJU 2220, Khor Yiap Seng (berniaga sebagai SD Pan Gourmet Resources) v Soo Geok Ki (berniaga sebagai Pan Ya Resources) & Ors [2023] MLJU 752 and Janet Ooi Hui Ming v STC Management Sdn Bhd & Anor [2020] MLJU 2603, and, where agreements described as licences were nevertheless held to be franchise agreements because they possessed all the statutory characteristics of a franchise.
 
The High Court in Dr HK Fong BrainBuilder Pte Ltd v SG-Maths Sdn Bhd & Ors [2018] 11 MLJ 701 held that in determining whether an agreement cloaked as a license agreement was in fact an illegal unregistered franchise, the same approach taken in Barisan Tenaga Perancang (M) Sdn Bhd v Dr. Mansur bin Hussain & Ors [2016]1 MLJU 1251 to determine whether an agreement was unenforceable under the MoneyLenders Act 1951, as set out below, could be adopted: 

This illustrates the strict approach taken by the courts in uncovering a disguised franchise agreement.  
 
Conversely, the High Court in Ha Chee Leng v Chin Yuen See [2025] MLJU 1354 demonstrated that the converse is equally true. Although the parties used terminology such as "franchise", "franchisor" and "franchise fee", the Court held that the arrangement remained a sale of distribution rights because there were no franchise system and no continuing operational control. This case illustrates that franchise terminology alone does not attract the operation of the Franchise Act; the statutory requirements must still be satisfied.
 
Collectively, these decisions reinforce the principle that substance prevails over form. 

2.	A Broader Understanding of "Continuous Control"

Another notable development is the courts' increasingly practical approach towards identifying a franchise system.
 
The Franchise Act requires the franchisor to possess the right to administer continuous control over the franchisee's business operations. Earlier discussions often focused on formal operations manuals or detailed standard operating procedures. The recent authorities demonstrate that the courts are prepared to adopt a far broader approach.
 
In WJ Legacy, the High Court held that a franchise system need not be embodied in a formal manual. Instead, the Court examined the practical controls exercised by the brand owner, including outlet design, mandatory sourcing of ingredients and equipment, approval of promotions, staff training, point-of-sale systems, inspections and operational policies. The question is whether viewed cumulatively, these controls reveal that the putative franchisee was operating inside a controlled system or business format rather than a genuinely independent licence, notwithstanding the absence of a comprehensive operations manual.
 
Similarly, in Janet Ooi, the Court concluded that the defendants exercised continuous operational control through school management manuals, teaching systems, branding requirements, inspections, reporting obligations, approval rights and ongoing supervision. The arrangement therefore extended well beyond a mere licence to use intellectual property.
 
WJ Legacy and Janet Ooi suggest that the courts will evaluate the entire commercial relationship rather than searching for any single defining feature. 

3.	Registration Requirements Remain Strictly Enforced

The recent authorities also reaffirm that compliance with the registration regime under the Franchise Act is mandatory.
 
As far back as 2002, in SP Multitech Intelligent Homes Sdn Bhd v Home Sdn Bhd [2010] MLJU 1845, the High Court held that offering a franchise before registration and without complying with the statutory disclosure requirements rendered the agreement illegal and void, notwithstanding the parties had agreed to hold the agreement in escrow until registration was obtained.
 
Likewise, in Hasjay Group Sdn Bhd & Anor v Eco Passions Sdn Bhd & Ors [2022] MLJU 433, the Court rejected attempts to distinguish between franchisors and master franchisees for the purpose of avoiding registration obligations. Whether acting as a franchisor or master franchisee, the statutory registration requirements remained applicable before the franchise could be offered or operated in Malaysia.
               
In WJ Legacy the court upon finding that the arrangement was an unregistered franchise which was void and unenforceable, ordered restitution of not only the franchise fees and royalties paid under the agreement but also cost of uniforms and renovations. The court declined to order restitution of ingredient costs as the ingredients were consumed in the course of operating the business and the putative franchisee had derived benefit or value from their use.
 
In the case of Janet Ooi, the court was prepared to pierce the corporate veil and find that the sole director and shareholder of the franchisor was personally liable to make restitution to the franchisee of the initial franchise fees, goods and services tax, sums paid for teaching materials, renovation of the premises (including fittings and installation costs), the purchase of story books, staff salary payments, and the total sum for various operational and capital expenses, including tenancy deposit, rental, utility bills, cleaning services, copier charges, and marketing/ advertising expenses.
 
These decisions reinforce that registration is a substantive statutory requirement rather than a procedural formality. 

4.	Restitution Turns on the Facts

One of the recurring consequences of an unregistered franchise agreement has been the grant of restitutionary relief. Malaysian courts have consistently ordered franchisors to refund franchise fees and other monies received under agreements held to be void for non-compliance with the Franchise Act, since as far back as 2002 in the SP Multitech case. More recently WJ Legacy, Janet Ooi and Hasjay reflect the courts' willingness to restore franchisees to their pre-contract position where the franchisor has failed to comply with the statutory requirements.
 
Based on the facts of the case, the High Court in BrainBuilder declined to order restitution on, among others, the grounds of unjust enrichment as there was no evidence that the defendants had been unjustly enriched at the expense of the plaintiff.¹  
 
The recent Court of Appeal decision in Cheah Yee Chen & Ors v Safeway Solutions Sdn Bhd & Ors (Appeal No: W-01(IPCv)(W)-278-06/2023) introduces an important qualification to the above line of authorities. Although the High Court ordered restitution after finding the franchise agreements void for non-registration², the Court of Appeal set aside the restitutionary orders after concluding that the plaintiffs had proceeded with the transaction despite having had the opportunity to conduct due diligence and obtain legal advice regarding the deficiencies in the proposed venture. In those circumstances, the parties were held to be in pari delicto, and restitution was refused.
 
The significance of Safeway is not that it departs from the established principle that restitution will ordinarily follow where an unregistered franchise agreement is void. Rather, it demonstrates that restitution is not an inflexible consequence. The conduct and knowledge of the parties remain relevant, and a court may decline to grant restitution where the claimant knowingly participated in the illegality.
 
Read together with the Franchise (Amendment) Act 2020 which came into force on 28 April 2022 and makes a franchisee’s failure to register a franchise an offence (where previously only failure to register by franchisor was an offence), Safeway may signal a greater willingness to refuse restitution where both parties bear responsibility for non-registration. Future decisions may therefore be more likely to deny restitution where parties are in pari delicto, or equally at fault.   

5.	The Franchise Act Continues to Regulate the Ongoing Relationship

The recent authorities also confirm that the Franchise Act does not merely regulate the formation of franchise agreements but continues to govern the relationship throughout its duration.
 
In Top Leader Sdn Bhd v Revenue Expert Sdn Bhd [2026] MLJU 846, the High Court confirmed that a franchisor may rely directly upon statutory grounds of termination under section 31 of the Franchise Act even where those grounds are not expressly incorporated into the franchise agreement. The Court further held that contractual provisions inconsistent with the Act are unenforceable to that extent. The court referred to the previous Court of Appeal decision in Gerbang Alaf Restaurants Sdn Bhd v Chai Su Lin & Anor [2023] 8 CLJ 337 on the same point.
 
TY Permanas Enterprise Sdn Bhd v Hot & Roll Holdings Sdn Bhd [2026] MLJU 2241 similarly demonstrates the courts’ strict approach to renewal and termination provisions in franchise agreements. The decision is significant in two respects. First, the franchisor could not rely on the franchisee’s non-compliance with renewal conditions as a ground for termination, as the Court found that grounds for termination must be clearly specified in the agreement. Secondly, the franchisor could not contend that the agreement had expired by effluxion of time merely because the franchisee had failed to comply with the renewal conditions. The franchisor had previously allowed renewals despite similar non-compliance and was therefore treated as having waived strict compliance with those requirements. The case underscores the importance for franchisors of enforcing renewal conditions consistently and strictly if they intend to rely on them.
 
These decisions reinforce the legislative policy that franchise relationships are subject to statutory safeguards extending beyond contract formation. 

6.	Practical Implications

Taken together, these decisions carry important practical implications. Businesses proposing licensing, distributorship or business-format arrangements should carefully assess whether the proposed structure satisfies the statutory definition of a franchise. Reliance on contractual labels alone provides no protection where the commercial substance of the arrangement falls within the Franchise Act. Equally, franchisors should ensure that registration and disclosure obligations are satisfied before offering or operating a franchise. Failure to do so may expose the arrangement to challenges on validity, restitutionary claims and regulatory sanctions.
 
For franchisees and investors, proper due diligence remains equally important. While the courts have frequently granted restitution where unregistered franchise agreements are held void, the decision in Safeway demonstrates that relief may not be available where a party knowingly proceeds despite being aware of the legal deficiencies. The introduction of the obligation under the Franchise (Amendment) Act 2020 which makes it an offence for a franchisee to not register the franchise may make it more difficult for franchisees to seek restitution in consequence of an unregistered franchise agreement. 

7.	Conclusion

The recent Malaysian authorities reveal an increasingly coherent body of franchise jurisprudence founded upon substance rather than form. The courts have consistently rejected attempts to avoid the Franchise Act through contractual drafting, adopted a practical approach in identifying franchise systems, reaffirmed the mandatory nature of the statutory registration regime and clarified the principles governing restitution and termination.
 
The central lesson is straightforward: Whether an agreement is called a licence, distributorship, collaboration or franchise is ultimately of little consequence. What matters is the legal and commercial substance of the relationship. Where the statutory elements of a franchise are present, the Franchise Act 1998 will apply with all its attendant rights, obligations and consequences.
 
 
Article by Leela Baskaran (Partner) of the Intellectual Property Practice of Skrine.
 
 

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