In a recent decision by the Court of Appeal in Gerbang Alaf Restaurants Sdn Bhd (formerly known as Golden Arches Restaurants Sdn Bhd) v Chai Su Lin & Anor [2023] 7 AMR 654 the issue of termination of a franchise agreement was considered.
 
Franchising in Malaysia is governed by the Franchise Act 1998 (“the Franchise Act”). The Franchise Act regulates franchising in several respects including the terms of the agreement, registration requirements, disclosure requirements and the conduct of the parties. In relation to termination of a franchise agreement, the Franchise Act provides as follow:
 
“31(1) No franchisor or franchisee shall terminate a franchise agreement before the expiration date except for good cause as provided in subsections (2) and (3).

(a)	the failure of a franchisor or a franchisee to comply with any terms of the franchise agreement or any other relevant agreement entered into between the franchisor and franchisee; and
(b)	the failure of a franchisor or the franchisee to remedy the breach committed by him or any of his employees within the period stated in a written notice given by the franchisor, which shall not be less than fourteen days, for the breach to be remedied.

(a)	makes an assignment of the franchise rights for the benefit of creditors or a   similar disposition of the assets of the franchise to any other person;
(aa)	becomes bankrupt or insolvent;
(b)	voluntarily abandons the franchised business;
(c)	is convicted of a criminal offence which substantially impairs the goodwill associated with the franchisor's mark or other intellectual property; or
(d)	repeatedly fails to comply with the terms of the franchise agreement.”

In the Gerbang Alaf case, Gerbang Alaf Restaurants Sdn Bhd (“the Defendant”), which is the master franchisee for the McDonald’s franchise, terminated a franchise agreement with a franchisee (“the Plaintiff”) on the ground that the Plaintiff had repeatedly failed to comply with the terms of the franchise agreement, relying on Section 31(3)(d) of the Franchise Act. The breaches related to failure by the Plaintiff to maintain the cleanliness of the franchise premises in accordance with the franchise agreement.
 
The Plaintiff disputed the termination and filed a civil suit before the High Court of Malaya seeking, inter alia, a declaration that the notice of termination was wrongful, null and void; a refund of the security deposit; and damages for wrongful termination.
 
The High Court found for the Plaintiff and the Defendant appealed to the Court of Appeal. The issues before the Court of Appeal included: (i) whether the reason for termination of the franchise agreement was sufficiently notified to the Plaintiff; (ii) whether the Plaintiffs were in repeated breach of the franchise agreement; and (iii) whether the rectification or remedying of the earlier breach extinguished the breach and precluded the application of Section 31(3)(d) of the Franchise Act.
 
In relation to the 1^st issue, the Court of Appeal found that sufficient notice had been given to the Plaintiff. In reaching this decision, the court considered not only the final notice of termination but also collectively earlier correspondence between the Plaintiff and the Defendant which the court found should have given the Plaintiff sufficient notice of the reason for termination.
 
In relation to the 2^nd issue, the Court of Appeal found that there was sufficient evidence of repeated breach of the franchise agreement.
 
In relation to the 3^rd issue, the Court of Appeal found that the fact that a failure to comply or a breach of the franchise agreement had been remedied did not extinguish the fact that there was a failure to comply or a breach in the first place. The court further found that if the failure to comply or the breach was repeated, even though the earlier breach had been remedied, the repetitive nature constituted a repeated breach of the franchise agreement.
 
Based on the foregoing the Court of Appeal overturned the decision of the High Court and found that the notice of termination was valid, and that the agreement had been lawfully terminated.
 
Comment
 
This case is noteworthy as it appears to be the first reported decision to consider termination of a franchise agreement pursuant to Section 31(3)(d) of the Franchise Act. It serves as a reminder to both franchisors and franchisees that repeated failure to comply with the terms of the franchise agreement by a party can give rise to a right to terminate the franchise agreement forthwith even if the earlier breaches have been remedied.
 
Case Note by Leela Baskaran (Partner) of the Intellectual Property Practice of Skrine.