There is a legal definition of a franchise in Malaysia. Under Section 4 of the Franchise Act 1998 (“the Act”), a franchise is defined as a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:

a. the franchisor grants to the franchisee the right to operate a business according to the franchise system as determined by the franchisor during a term to be determined by the franchisor;

b. the franchisor grants to the franchisee the right to use a mark, or a trade secret, or any confidential information or intellectual property, owned by the franchisor or relating to the franchisor, and includes a situation where the franchisor, who is the registered user of, or is licensed by another person to use, any intellectual property, grants such right that he possesses to permit the franchisee to use the intellectual property;

c. the franchisor possesses the right to administer continuous control during the franchise term over the franchisee’s business operations in accordance with the franchise system; and

d. in return for the grant of rights, the franchisee may be required to pay a fee or other form of consideration.

A foreign franchisor has several options when structuring its expansion into Malaysia. For example, it may appoint a foreign or local master franchisee, grant franchise rights directly to a local franchisee, or establish a local subsidiary in Malaysia to operate the franchise business.

Each of these structures carries different legal, commercial and regulatory implications, particularly in relation to the registration requirements under the Act, the parties responsible for obtaining and maintaining the relevant registrations, operational control, tax considerations and liability exposure.

Accordingly, the most suitable structure will depend on the franchisor’s commercial objectives, level of involvement in the Malaysian market and long-term expansion strategy.

Malaysia adopts a mandatory franchise registration regime. Pursuant to Section 6 of the Act, both foreign and local franchisors must register their franchise with the Registrar of Franchises before operating a franchise business in Malaysia or offering to sell a franchise to any person for operation in Malaysia. Failure to comply with this requirement constitutes a serious offence under the Act. Upon conviction:

(a) where the offender is a body corporate, it shall be liable to a fine not exceeding RM250,000 (approximately USD62,500) for a first offence, and a fine not exceeding RM500,000 (approximately USD125,000) for a second or subsequent offence; and

(b) where the offender is an individual, it shall be liable to a fine not exceeding RM150,000 (approximately USD37,500) or imprisonment for a term not exceeding one year, or both, for a first offence, and a fine not exceeding RM250,000 (approximately USD62,500) or imprisonment for a term not exceeding three years, or both, for a second or subsequent offence.

Importantly, the offence is generally regarded as non-compoundable. As such, the Registrar of Franchises does not have the power to resolve the contravention through the payment of a compound or administrative penalty. Any alleged breach must therefore proceed through the criminal prosecution process before the courts.

Applications for franchise registration are submitted electronically through the MyFEX 2.0 portal maintained by the Registrar of Franchises, together with supporting documentation including the Franchise Disclosure Document, a template franchise agreement containing the mandatory provisions prescribed under the Act, the franchisor’s audited financial statements for the latest three financial years, certificate of incorporation, franchise business brochure, management accounts for a prototype outlet, operations and training manuals, bankruptcy search results for the franchisor’s directors, and copies of the relevant Malaysian trademark registration certificates.

There are registration requirements under the Act for both franchisors and franchisees.

As regards franchisors, please refer to our response to Question 2 above. It should be noted that, pursuant to Section 4 of the Act, the term “franchisor” includes a master franchisee in relation to its sub-franchisees. Accordingly, a master franchisee is also required to register its franchise under Section 6 of the Act before offering or granting sub-franchises in Malaysia. In practice, however, a master franchisee may only be able to do so after operating the business for at least three years, as the registration application must be accompanied by audited accounts for the preceding three financial years.

For franchisees, Section 6A of the Act requires a franchisee of a foreign franchisor to register the franchise with the Registrar of Franchises before commencing the franchise business. In the case of a franchise granted by a local franchisor or a master franchisee, Section 6B requires the franchisee to register the franchise within 14 days from the date of execution of the franchise agreement.

Failure to comply with the registration requirements under Sections 6A and 6B constitutes an offence under the Act. As no specific penalty is prescribed for contraventions of these provisions, the general penalty provision under Section 39 applies. Upon conviction, a body corporate is liable to a fine of not less than RM10,000 (approximately USD2,500) and not more than RM50,000 (approximately USD12,500) for a first offence, and a fine of not less than RM20,000 (USD5,000) and not more than RM100,000 (USD25,000) for a second or subsequent offence. An individual is liable to a fine of not less than RM5,000 (USD1,250) and not more than RM20,000 (USD5,000) or imprisonment for a term not exceeding six months for a first offence, and a fine of not less than RM10,000 (USD2,500) and not more than RM50,000 (USD12,500) or imprisonment for a term not exceeding one year for a second or subsequent offence.

There is also an ongoing obligation to maintain franchise registrations. Under Section 10A of the Act, a franchise registration remains valid for five years from the date of registration and must be renewed within 30 days after its expiry. In addition, franchisors are required to notify the Registrar of certain material changes relating to the registered franchise and furnish updated information and supporting documents where applicable.

All franchise registration, franchisee registration and renewal applications must be submitted electronically through the MyFEX 2.0 portal.

In terms of practical considerations, the registration process can be document-intensive and requires the submission of extensive supporting documentation. Processing timelines vary depending on the completeness of the application and the Registrar’s queries. In practice, franchisor registrations typically take between three and six months to be approved, although more complex applications may take longer.

Under Section 15 of the Act, a franchisor is required to provide a prospective franchisee, at least ten (10) days before the execution of the franchise agreement, with a copy of the Franchise Disclosure Document, the proposed franchise agreement and all other documents submitted to and approved by the Registrar of Franchises in connection with the franchise registration. The 10-day period effectively serves as a statutory pre-contract disclosure period, allowing the prospective franchisee sufficient time to review the franchise offering and seek independent advice before entering into the franchise agreement.

In addition, Section 18(4) of the Act grants a franchisee a statutory right to terminate the franchise agreement within seven (7) working days from the date of execution of the agreement. Where the franchisee exercises this right, the franchisor is required to refund all monies obtained from the franchisee, less any reasonable expenses incurred by the franchisor in preparing the franchise agreement and any other expenses incurred by the franchisor which are to be deducted from the monies paid by the franchisee.

The same requirement applies in the context of sub-franchising. As a master franchisee falls within the definition of a “franchisor” in relation to its sub-franchisees, a master franchisee is likewise required to provide the prospective sub-franchisee with the relevant disclosure documents, including the documents submitted to and approved by the Registrar of Franchises for the master franchise registration, at least ten (10) days prior to the execution of the sub-franchise agreement.

The Act does not prescribe a separate disclosure format beyond the requirement that the franchisor provide the Franchise Disclosure Document and the documents approved by the Registrar of Franchises. As the disclosure documents form part of the franchise registration process, they are typically prepared in accordance with the requirements of the Act and the Registrar’s administrative practices. There is currently no express statutory requirement that the disclosure documents be provided in the national language. In practice, the Franchise Disclosure Document submitted to the Registrar is not routinely updated annually. Rather, updated disclosure is generally triggered by material changes requiring notification to or approval from the Registrar.

Failure to comply with Section 15 constitutes an offence under the Act. Upon conviction, a body corporate is liable to a fine of not less than RM5,000 (USD1,250) and not more than RM25,000 (USD6,250) for a first offence and, for a second or subsequent offence, a fine of not less than RM10,000 (USD2,500) and not more than RM50,000 (USD12,500). An individual is liable to a fine of not less than RM2,500 (USD625) and not more than RM10,000 (USD2,500) or imprisonment for a term not exceeding six months for a first offence and, for a second or subsequent offence, a fine of not less than RM5,000 (USD1,250) and not more than RM25,000 (USD6,250) or imprisonment for a term not exceeding one year.

The Act does not expressly require a franchisor to re-issue the Franchise Disclosure Document or repeat the disclosure process upon the renewal of a franchise agreement. Based on our reading of Section 15, the statutory disclosure obligation applies prior to the execution of the franchise agreement and it is not entirely clear whether it extends to renewals. Nevertheless, as a matter of prudence and good franchising practice, franchisors should consider providing the franchisee with the latest Franchise Disclosure Document, the proposed renewal franchise agreement and any supporting documents that have been submitted to and approved by the Registrar of Franchises before the franchisee enters into the renewal agreement. This promotes transparency, allows the franchisee to make an informed decision regarding the renewal and reduces the risk of future disputes. Where there have been material changes to the franchise system or the terms of the franchise relationship, it may also be prudent to afford the franchisee a reasonable period to review the updated documents before execution of the renewal agreement.

The Act does not expressly prescribe separate consequences for late, incomplete or inaccurate disclosure. However, where the disclosure provided does not satisfy the requirements of Section 15, the franchisor may be exposed to regulatory action for non-compliance with its statutory disclosure obligations. In particular, if any information contained in the disclosure documents is false, misleading or materially incomplete, depending on the circumstances, such conduct may amount to an offence under Section 37 of the Act, which prohibits the making of false or misleading statements or the omission of material facts in connection with a franchise offering or franchise-related matter.

In addition, any material change to the information contained in the Franchise Disclosure Document or other documents submitted to the Registrar of Franchises should first be notified to, and where required approved by, the Registrar before the updated documents are disclosed to prospective franchisees. Failure to notify the Registrar of, or where required obtain approval for, such material changes may constitute an offence under the Act and could render the disclosure documents non-compliant with the franchisor’s statutory disclosure obligations.

Apart from regulatory consequences, incomplete, inaccurate or misleading disclosures may also increase the risk of contractual disputes, claims for misrepresentation or fraud, and challenges by franchisees regarding the enforceability of certain contractual provisions or the validity of their consent to enter into the franchise agreement.

Where a franchisee intends to use a separate special purpose vehicle (“SPV”) to own and operate each franchised outlet, and each SPV will enter into a separate franchise agreement with the franchisor, the disclosure documents should be provided to each individual SPV franchisee in accordance with Section 15 of the Act. This is because the statutory disclosure obligation is owed to the entity that will be entering into the franchise agreement and assuming the rights and obligations of the franchisee under that agreement. Accordingly, disclosure to the SPV’s parent company alone may not be sufficient to satisfy the requirements of Section 15, notwithstanding that the parent company ultimately owns or controls the SPVs. To minimise regulatory risk and ensure compliance with the Act, the franchisor should provide the required disclosure documents to each SPV that will be a party to a franchise agreement and ensure that the applicable 10-day disclosure period is observed prior to the execution of each franchise agreement.

In Malaysia, although the franchise regime is heavily regulated under the Act, enforcement by the Registrar of Franchises is generally complaint-driven. In practice, the Registrar is unlikely to commence investigations or enforcement action unless a complaint is lodged by a franchisee or another affected party.

In the event of mis-selling by a franchisor, a franchisee may have recourse under both the Act and general principles of Malaysian contract and tort law. The principal legal grounds for such claims include misrepresentation, statutory disclosure breaches, the provision of false or misleading information in connection with the franchise offering, breach of the franchisor’s statutory duty to act honestly and lawfully, and, where applicable, breach of contract.

Depending on the circumstances, a franchisee may:

a. terminate the franchise agreement on the basis of misrepresentation. Whether such relief is available will depend on the nature of the representation, the evidence available and the terms of the franchise agreement. If the franchisee terminates the agreement without sufficient legal basis, such termination may itself constitute a repudiatory breach, exposing the franchisee to claims for damages by the franchisor;

b. lodge a complaint with the Registrar of Franchises where the franchisor has provided false, misleading or materially incomplete information in the Franchise Disclosure Document or other documents submitted in connection with the franchise registration. Such conduct may constitute an offence under Section 37 of the Act. A franchisee may also complain of a franchisor’s failure to comply with Section 29(1) of the Act, which requires parties to a franchise agreement to act in an honest and lawful manner; and/or

c. commence civil proceedings against the franchisor for misrepresentation, fraudulent misrepresentation, negligent misstatement, breach of contract and/or any other applicable cause of action arising from the circumstances of the mis-selling.

As regards contractual limitations of liability, franchise agreements commonly contain disclaimers, non-reliance provisions and entire agreement clauses intended to limit a franchisor’s exposure to claims based on pre-contractual representations. Such clauses may provide that the franchisee has not relied on any representation, forecast, projection or assurance other than those expressly set out in the franchise agreement and that the written agreement constitutes the entire agreement between the parties.  Under Malaysian law, these provisions may strengthen the franchisor’s defence and make it more difficult for a franchisee to establish that it relied upon pre-contractual statements or sales representations. In addition, the parol evidence rule generally limits the extent to which external statements may be relied upon to vary or contradict the terms of a written agreement. Entire agreement clauses reinforce this principle by evidencing the parties’ intention that the written agreement contains the complete contractual bargain.

However, such clauses are not necessarily conclusive. Malaysian courts will consider the precise wording of the relevant clause and the surrounding facts and circumstances. In particular, disclaimers and entire agreement clauses are unlikely to provide complete protection where there is evidence of fraud, fraudulent misrepresentation, deliberate concealment of material facts or other serious misconduct. Furthermore, where there is ambiguity, the courts may apply the contra proferentem principle and construe the provision against the franchisor as the party seeking to rely upon it.

Accordingly, while disclaimers, non-reliance provisions and entire agreement clauses may significantly reduce a franchisor’s exposure to mis-selling claims and make such claims more difficult to establish, they do not automatically bar a franchisee from pursuing claims based on misrepresentation, statutory breaches or fraudulent conduct. The effectiveness of such provisions will ultimately depend on the specific facts of the case and the wording of the relevant contractual documents.

Yes. It is permissible for a franchisor to offer a franchise agreement on a non-negotiable or “take it or leave it” basis. This approach is largely facilitated by Malaysia’s franchise registration regime. As part of the franchise registration process, the Registrar of Franchises reviews the proposed franchise agreement to ensure that it incorporates the mandatory provisions prescribed under the Act and that its terms are generally acceptable for registration purposes. Once the franchise is registered, the franchisor is generally expected to adopt the approved franchise agreement template for all franchisees.

Although the Act does not expressly prohibit the negotiation of franchise agreements, any material amendment to the registered franchise agreement generally requires notification to, and where applicable approval from, the Registrar of Franchises before implementation. While the Registrar has not issued formal guidelines defining what constitutes a “material amendment”, amendments affecting the rights and obligations of the parties, particularly those with financial or commercial implications, are generally regarded as material. Accordingly, as a matter of prudence, franchisors typically adopt a conservative approach and seek the Registrar’s approval for any amendment beyond purely administrative, clerical or editorial changes.

As a result, franchisors would issue a standard form franchise agreement to all franchisees rather than negotiate bespoke arrangements on a franchisee-by-franchisee basis. This not only facilitates regulatory compliance but also promotes consistency across the franchise network.

There are also regulatory considerations associated with offering materially different terms to different franchisees. Section 20 of the Act prohibits certain discriminatory practices by franchisors. In particular, a franchisor must not discriminate between franchisees of the same class in relation to matters such as franchise fees, royalties, goods, services, equipment, rentals or advertising services where such discrimination causes competitive harm to a franchisee competing with another franchisee who receives the benefit of the differential treatment. Consequently, the use of materially different franchise agreements for similarly situated franchisees may, depending on the circumstances, give rise to allegations of discriminatory conduct.

Accordingly, while there is no legal prohibition against negotiating a franchise agreement with a prospective franchisee, the combined effect of the franchise registration regime, the requirement to obtain approval for material amendments and the statutory restrictions on discriminatory conduct means that franchise agreements in Malaysia are commonly offered on a standard-form, largely non-negotiable basis.

In Malaysia, trademarks (including trade dress and business identifiers), know-how, trade secrets and copyright are protected through a combination of statutory and common law rights.

a. Trademarks

Trademarks are protected under the Trade Marks Act 2019 through registration with the Intellectual Property Corporation of Malaysia (MyIPO) or by designating Malaysia under the Madrid Protocol. Registration confers upon the proprietor the exclusive right to use the mark in relation to the registered goods or services and may be renewed indefinitely in successive ten-year periods.

From a franchise perspective, trademark protection is particularly important as the grant of rights to use a trademark is one of the essential elements of a franchise. Under Section 24 of the Act, a franchisor is generally required to register the trademark associated with the franchise before applying to register the franchise itself. Accordingly, franchisors should ensure that the relevant trademarks are properly registered and maintained in Malaysia before commencing franchise operations.

In addition to statutory trademark protection, Malaysia recognises common law rights through the tort of passing off. Accordingly, unregistered trademarks, trade dress, get-up, logos, packaging, store concepts and other distinctive business identifiers may be protected where the proprietor is able to establish goodwill and reputation in the Malaysian market, a misrepresentation by the defendant leading or likely to lead the public to believe that its goods or services are associated with the proprietor, and resulting damage. This can be particularly relevant in the franchise context where a franchisor has developed goodwill in its brand or business format but has not yet secured registration for all elements of its branding.

b. Know-How and Trade Secrets

Know-how, trade secrets, operational systems, business methods and other confidential information are not protected by a dedicated intellectual property statute in Malaysia, although certain aspects of confidential information (example, confidential information contained in the operation manual or obtained while undergoing training organised by the franchisor) are protected under the Act. Protection is derived principally from contractual arrangements, including confidentiality and non-disclosure obligations, as well as the common law action for breach of confidence.

In the franchise context, the franchisor’s systems, operational methods and proprietary know-how often constitute its most valuable assets. These may include operations manuals, standard operating procedures, training programmes, recipes and formulations, product specifications, sourcing arrangements, pricing methodologies and margins, quality control systems, marketing strategies, customer databases, business analytics, software systems, site selection criteria, store design concepts and other proprietary business processes that contribute to the uniformity and commercial success of the franchise system. Accordingly, franchise agreements typically contain detailed confidentiality provisions governing the use, disclosure and protection of such confidential information. Franchisors commonly supplement these provisions with separate non-disclosure agreements for the franchisees’ affiliates, key personnel and immediate family members, where appropriate.

As there is no statutory registration system for know-how or trade secrets, the principal risk for franchisors is the loss of confidentiality through inadequate contractual protection or unauthorised disclosure by franchisees, former franchisees or employees. It is therefore important that the franchise agreement clearly defines the confidential information, restricts its use to the operation of the franchised business, requires its return or destruction upon termination and provides for continuing confidentiality obligations after termination of the franchise relationship.

c. Copyright

Copyright is protected under the Copyright Act 1987 and arises automatically upon the creation of an original work that has been reduced to material form. Registration is not mandatory, although copyright owners may file a Copyright Voluntary Notification with MyIPO as prima facie evidence of ownership and subsistence.

In the franchise context, copyright commonly subsists in operations manuals, training materials, software, marketing materials, website content, photographs, videos, artwork and other proprietary materials supplied by the franchisor. Franchise agreements typically contain provisions confirming the franchisor’s ownership of such materials and restricting the franchisee’s right to use them solely for the operation of the franchised business.

There are no franchise-specific licensing requirements applicable to know-how, trade secrets or copyright. However, franchisors should ensure that the franchise agreement clearly identifies the intellectual property being licensed, expressly reserves ownership of such intellectual property to the franchisor and contains robust confidentiality, intellectual property ownership and post-termination protection provisions.

Particular attention should be given to improvements, adaptations, modifications or enhancements developed by franchisees during the course of the franchise relationship. The franchise agreement should clearly specify whether such improvements vest automatically in the franchisor, are assigned to the franchisor upon creation. Similarly, where franchisees are permitted to translate operations manuals, training materials, marketing materials or other copyrighted works into local languages, the franchise agreement should expressly provide that all translations, adaptations and derivative works remain the property of the franchisor and that any copyright subsisting in such translations or derivative works is assigned to the franchisor.

Failure to adequately address ownership of improvements, translations and derivative works may give rise to disputes regarding intellectual property ownership and may impair the franchisor’s ability to maintain consistency and control across the franchise network. Likewise, failure to adequately protect know-how and trade secrets may result in the loss of confidentiality and a corresponding loss of legal protection.

Yes. Malaysia is a regulated franchise jurisdiction and the Act governs not only the registration and disclosure aspects of franchising, but also various aspects of the ongoing relationship between franchisors and franchisees. In addition, the franchise agreement must contain certain mandatory provisions prescribed by the Act.

Section 18(2) of the Act requires the following matters to be included in the franchise agreement:

a. the name and description of the products and business under the franchise;

b. the territorial rights granted to the franchisee;

c. the franchise fee, promotion fee, royalty or any other payment payable by the franchisee, if any;

d. the obligations of the franchisor;

e. the obligations of the franchisee;

f. the franchisee’s rights to use the mark or other intellectual property rights owned by the franchisor;

g. the conditions under which the franchisee may assign its rights under the franchise;

h. a statement regarding the statutory cooling-off period of not less than seven (7) working days during which the franchisee may terminate the franchise agreement;

i. a description of the mark and other intellectual property rights owned by or associated with the franchisor which are used in the franchise;

j. where applicable, the identity of the franchisor and the rights granted to a master franchisee by the franchisor;

k. the type and particulars of assistance to be provided by the franchisor;

l. the term of the franchise and the terms relating to renewal and extension; and

m. the consequences of termination or expiration of the franchise agreement.

Failure to include the mandatory provisions prescribed by Section 18(2) constitutes an offence under the Act.

In addition to the mandatory contractual provisions, the Act imposes a number of statutory obligations that regulate the ongoing relationship between franchisors and franchisees. These include:

a. the obligation of the franchisor and franchisee to act in an honest and lawful manner and to endeavour to adopt the best franchise business practices applicable at the relevant time and place (Section 29);

b. the obligations of the franchisor and franchisee set out in Section 30;

c. restrictions on termination by the franchisor, which generally prohibit termination before the expiry of the franchise term except in the circumstances prescribed under the Act (Section 31);

d. statutory provisions relating to the renewal and extension of the franchise term (Sections 32 and 34);

e. restrictions against discriminatory practices by franchisors in relation to franchise fees, royalties, goods, services, equipment, rentals and advertising services where such conduct causes competitive harm to franchisees of the same class (Section 20);

f. confidentiality obligations under which the franchisee, including its directors, spouses, immediate family members and employees, must not disclose confidential information obtained through the franchise system during the franchise term and for a period of two years after the expiration or termination of the franchise agreement (Section 26); and

g. non-competition obligations prohibiting the franchisee, including its directors, spouses, immediate family members and employees, from carrying on a business similar to the franchised business during the franchise term and for a period of two years following the expiration or termination of the franchise agreement (Section 27).

Accordingly, the ongoing franchisor-franchisee relationship in Malaysia is governed not only by the terms of the franchise agreement but also by a number of mandatory statutory provisions that cannot be disregarded by the parties.

Further, Section 29(3) of the Act expressly provides that the franchisee shall operate the franchised business separately from the franchisor and that the relationship between the parties shall not be regarded as a partnership, service contract or agency. This provision reinforces the independent contractor nature of the franchise relationship and helps distinguish a franchise arrangement from other forms of commercial relationships.

In Malaysia, the principal competition legislation is the Competition Act 2010 (“CA”). The CA contains two primary prohibitions, namely: (i) anti-competitive agreements under Section 4(1); and (ii) abuse of a dominant position under Section 10(1). Section 4(1) prohibits both horizontal and vertical agreements between enterprises that have the object or effect of significantly preventing, restricting or distorting competition in any market for goods or services. As a franchise agreement is generally a vertical agreement between enterprises operating at different levels of the supply chain, franchise arrangements are subject to the CA.

It should also be noted that, to date, the Malaysian Competition Commission (“MyCC”) has not issued any franchise-specific guidelines addressing the application of the Competition Act 2010 to franchise arrangements. Likewise, there have been no reported enforcement actions or judicial decisions specifically examining common franchise restrictions such as resale price maintenance, exclusive supply obligations, territorial exclusivity, restrictions on online sales or dual distribution models. As a result, there remains a degree of uncertainty as to the extent to which MyCC would seek to regulate franchise agreements under the CA.

In practice, many franchise agreements currently in use in Malaysia contain provisions such as recommended or prescribed pricing, exclusive supply obligations, territorial restrictions, non-compete clauses and controls over online sales channels. While such provisions are commonly regarded as integral to the operation of a franchise system, their compatibility with the CA has not been specifically considered by MyCC in the franchise context. Accordingly, the legality of any particular restriction will ultimately depend on its effect on competition and the specific facts of the case.

Resale Price Maintenance

One of the most significant competition law risks in a franchise context is resale price maintenance (“RPM”). The imposition of minimum resale prices or restrictions that effectively prevent franchisees from determining their own resale prices may be regarded as anti-competitive under Section 4 of the CA. While franchisors commonly issue recommended retail prices (“RRPs”) to promote consistency throughout the franchise network, such recommendations should not operate in practice as fixed or minimum resale prices. Maximum resale prices are generally less likely to raise competition concerns, provided they do not operate as a disguised mechanism for fixing prices. That said, franchisors may argue that certain pricing controls are reasonably necessary to maintain brand consistency, consumer confidence and the uniform operation of the franchise system. The extent to which such arguments would be accepted by MyCC remains uncertain, as there is currently limited Malaysian guidance on RPM in the franchise context.

Exclusive Supply Arrangements

Exclusive supply obligations, whereby franchisees are required to purchase products, ingredients, equipment or services exclusively from the franchisor or approved suppliers, are common in franchise systems and are generally imposed to ensure product quality, consistency and protection of the franchisor’s brand reputation. To date, MyCC has not challenged such arrangements in the franchise context. Nevertheless, depending on the franchisor’s market position and the scope of the restriction, such provisions could potentially be scrutinised under the CA if they substantially restrict competition.

Restrictions on Online Sales and Online Marketplaces

There is currently no franchise-specific prohibition against restricting online sales or prohibiting franchisees from selling through third-party online marketplaces such as TikTok, Shopee or Lazada. Such restrictions are often imposed to maintain quality standards, protect brand image, prevent counterfeiting and ensure compliance with operational requirements. To date, there are no reported Malaysian cases or MyCC decisions addressing the legality of such restrictions in franchise agreements. As such, the assessment would likely depend on the particular facts, including the extent of the restriction and its effect on competition.

Dual Distribution and Hybrid Franchise Models

It is common for franchisors to operate a dual distribution model whereby the franchisor operates company-owned outlets while simultaneously granting franchises. Such arrangements are generally permissible under Malaysian law. However, franchisors should be mindful of the prohibition against discriminatory practices under Section 20 of the Act and should avoid granting preferential pricing, supply terms or other commercial advantages to company-owned outlets in a manner that could adversely affect competing franchisees.

Interaction with the Franchise Act 1998

It should also be noted that the CA does not apply to agreements or conduct to the extent that they are engaged in order to comply with a legislative requirement. Accordingly, where a restriction is imposed to comply with the Act, such as the statutory prohibition against franchisees carrying on a similar business during the franchise term and for two years thereafter, it may be argued that the restriction falls within the legislative compliance exclusion contained in the Second Schedule to the CA. Given the absence of franchise-specific guidance from MyCC, the legality of restrictions commonly found in franchise agreements, including resale price maintenance, exclusive supply obligations, territorial restrictions, online sales restrictions and dual distribution arrangements, remains largely untested in Malaysia. Consequently, the assessment of such provisions will depend heavily on the facts of each case, the parties’ market position and the commercial justification for the restriction.

At present, Malaysia does not have franchise-specific ESG (Environmental, Social and Governance), sustainability or supply chain legislation that directly regulates franchise systems. Nevertheless, franchisors and franchisees remain subject to various generally applicable laws relating to environmental protection, labour and employment, occupational safety and health, anti-corruption, consumer protection, personal data protection and corporate governance, depending on the nature of the business. For franchise systems targeting Muslim consumers, halal compliance is also an important commercial and regulatory consideration. Although halal certification is generally voluntary, it may be essential for franchisors operating in sectors such as food and beverage, cosmetics, pharmaceuticals and consumer goods where access to the Muslim market is a significant business objective. Franchisors seeking halal certification must comply with the relevant standards and requirements prescribed by the Department of Islamic Development Malaysia (JAKIM), including requirements relating to ingredients, sourcing, manufacturing processes, storage, transportation, handling and hygiene. In practice, maintaining halal certification may require franchisors to exercise greater oversight and control over their supply chains and franchise operations to ensure ongoing compliance with halal standards throughout the franchise network.

From an environmental perspective, franchisors operating in sectors such as food and beverage, retail and manufacturing may be affected by environmental laws relating to waste management, pollution control, packaging, recycling and sustainability initiatives. From a social and governance perspective, franchise systems must also comply with employment laws, anti-discrimination requirements, occupational safety and health obligations, anti-bribery and corruption laws, and data protection requirements under the Personal Data Protection Act 2010.

Although ESG compliance is not presently mandated under the Act, ESG considerations are becoming increasingly important in the Malaysian market. Many franchisors are actively incorporating sustainability initiatives, ethical sourcing policies, responsible employment practices and environmental commitments into their franchise systems, recognising that consumers are becoming more conscious of sustainability issues and may favour brands that demonstrate responsible business practices. However, franchisors must also balance such initiatives against the increased operational and compliance costs associated with implementing ESG programmes throughout a franchise network.

In relation to supply chains, franchisors commonly impose sourcing requirements and supplier approval mechanisms to ensure consistency, quality control and compliance with brand standards. Depending on the industry, franchisors may also conduct supplier audits or require compliance with specific ethical, environmental or food safety standards. However, there are currently no franchise-specific supply chain due diligence obligations comparable to those found in certain jurisdictions.

Franchisors should also exercise caution when making ESG-related representations, sustainability claims or environmental marketing statements. Malaysian consumer protection laws generally prohibit false, misleading or deceptive representations in trade or commerce. Accordingly, franchisors should ensure that any claims regarding sustainability, carbon neutrality, environmentally friendly products, ethical sourcing, recycling programmes or other ESG initiatives are accurate, substantiated and capable of verification. Unsupported or exaggerated ESG claims may expose franchisors to allegations of “greenwashing”, regulatory scrutiny, consumer complaints, reputational damage and potential legal liability.

While ESG obligations in Malaysia are presently driven more by commercial, investor and consumer expectations than by franchise-specific regulation, the importance of ESG considerations is expected to increase, particularly for larger franchise systems, multinational franchisors and brands seeking to appeal to environmentally and socially conscious consumers.

Yes. In-term non-compete obligations are expressly recognised and enforceable under the Act.

Section 27 of the Act prohibits a franchisee from carrying on any business similar to the franchised business during the franchise term and for a period of two years after the expiration or termination of the franchise agreement. This statutory non-compete obligation extends not only to the franchisee but also to its directors, spouses, immediate family members of the directors and employees. A contravention of Section 27 constitutes an offence under the Act.

As this restriction is mandated by statute, franchisors are required to incorporate the non-compete provision into the franchise agreement. Accordingly, there is generally little difficulty in enforcing a non-compete obligation that is consistent with Section 27 of the Act.

However, franchisors should exercise caution when seeking to impose restrictions that go beyond the scope of Section 27. For example, restrictions extending beyond the statutory two-year post-termination period or applying to activities that are broader than a “similar business” may be subject to challenge and would need to be assessed under the general principles of Malaysian law relating to restraints of trade.

The Act does not expressly regulate non-solicitation obligations. Nevertheless, franchise agreements in Malaysia commonly contain provisions prohibiting franchisees from soliciting the franchisor’s customers, employees, suppliers or other franchisees during and after the franchise relationship. While there is limited Malaysian authority specifically addressing non-solicitation clauses in the franchise context, such provisions are generally more likely to be enforceable where they are reasonable in scope, duration and designed to protect the franchisor’s legitimate business interests, including its confidential information, goodwill, customer relationships and franchise network.

In practice, the statutory non-compete obligation under Section 27 provides franchisors with a significant level of protection. As a result, non-solicitation clauses are often used as supplementary protections rather than the primary mechanism for preventing competitive conduct by former franchisees.

Yes. Malaysia recognises an obligation of good faith in franchise relationships, principally through the Act. While the Act does not expressly use the term “good faith”, Section 29(1) requires both the franchisor and franchisee to act in an honest and lawful manner and to endeavour to pursue the best franchise practices of the time and place. In addition, Section 29(2) provides that the dealings between the franchisor and franchisee must avoid:

a. substantial and unreasonable overvaluation of fees and prices;

b. conduct that is unnecessary and unreasonable in relation to the risks to be incurred by one party; and

c. conduct that is not reasonably necessary for the protection of the legitimate business interests of the franchisor, franchisee or franchise system.

These statutory obligations effectively impose a duty on both parties to conduct themselves fairly, honestly and reasonably in their dealings with one another throughout the franchise relationship.

As a practical matter, the duty of good faith affects how franchisors and franchisees exercise their contractual rights and perform their obligations. For franchisors, this generally means that they should:

a. provide accurate and truthful information concerning the franchise system and its operation;

b. exercise contractual discretions and powers reasonably and for proper purposes;

c. avoid exploiting their superior bargaining position or imposing requirements that are unnecessary, unreasonable or disproportionate to the legitimate needs of the franchise system;

d. refrain from imposing arbitrary policy changes, unreasonable fees, excessive charges or unfair penalties that may adversely affect franchisees; and

e. administer the franchise system consistently and fairly across the franchise network.

Similarly, franchisees are expected to:

a. operate the franchised business honestly and in accordance with the franchise agreement and system standards;

b. comply with operational requirements and reasonable directions issued by the franchisor;

c. act diligently in protecting and promoting the franchisor’s brand and reputation;

d. refrain from abusing rights granted under the franchise agreement; and

e. cooperate with the franchisor in a manner consistent with the objectives of the franchise system.

Although Section 29 does not create a standalone cause of action for “lack of good faith”, a party’s failure to act honestly, lawfully or in accordance with the standards prescribed under Section 29 may be relevant in regulatory proceedings, contractual disputes and claims arising from the franchise relationship.

As a general principle, a franchisor and franchisee are separate and independent legal entities. This principle is reflected in Section 29(3) of the Act, which expressly provides that the franchisee shall operate the business separately from the franchisor and that the relationship between the parties shall not be regarded as a partnership, service contract or agency.

Notwithstanding this statutory provision, there remains a risk that, in certain circumstances, employees engaged by the franchisee could seek to argue that the franchisor is their employer or joint employer. Such claims would be assessed based on the factual relationship between the parties and the degree of control exercised by the franchisor over the franchisee’s employees. Malaysian courts and labour authorities generally look beyond contractual labels and consider the substance of the relationship when determining employment status.

Factors that may increase the risk of such claims include situations where the franchisor:

a. directly hires, dismisses, disciplines or supervises the franchisee’s employees;

b. exercises substantial control over remuneration, working hours, employment benefits or other employment terms;

c. becomes directly involved in day-to-day management of the franchisee’s workforce;

d. issues instructions directly to the franchisee’s employees rather than through the franchisee’s management;

e. conducts employee performance appraisals or makes decisions relating to promotions, transfers or disciplinary action; or

f. otherwise exercises a degree of control that is more consistent with an employer-employee relationship than a franchisor-franchisee relationship.

By contrast, franchisors are generally entitled to exercise substantial control over brand standards, operational procedures, product quality, customer service standards, training requirements and compliance with the franchise system without necessarily creating employment or agency risk. Such controls are generally regarded as inherent features of a franchise system and are designed to protect the franchisor’s brand, goodwill and business format.

To minimise employment and agency risks, franchisors should consider:

a. including express provisions in the franchise agreement stating that the franchisee is an independent contractor and that neither the franchisee nor its employees are employees, agents, partners or representatives of the franchisor;

b. ensuring that all employment contracts are entered into directly between the franchisee and its employees;

c. avoiding direct involvement in recruitment, dismissal, payroll administration, disciplinary proceedings, employee grievances and other employment-related matters;

d. communicating operational requirements through the franchisee or its designated management personnel rather than directly to individual employees;

e. limiting training and supervision activities to matters relating to brand standards, operational procedures and system compliance;

f. avoiding representations to employees, customers or third parties that may suggest that franchisee personnel are employed by the franchisor; and

g. maintaining clear documentary evidence that the franchisee independently manages and controls its workforce.

In practice, the greatest risk arises where a franchisor moves beyond protecting and enforcing system standards and becomes directly involved in managing the franchisee’s employees. Accordingly, franchisors should focus their oversight on the franchisee’s operation of the franchised business and compliance with brand standards rather than the management of the franchisee’s workforce. There are currently no reported Malaysian franchise cases in which a franchisor has been held liable as the employer of a franchisee’s employees solely by reason of exercising ordinary franchise system controls.

In Malaysia, the risk of a franchisee being deemed the commercial agent of the franchisor is generally low, as franchise and agency relationships are legally distinct. This position is reinforced by Section 29(3) of the Act, which expressly provides that a franchisee shall operate its business separately from the franchisor and that the relationship between the parties shall not at any time be regarded as a partnership, service contract or agency.

Notwithstanding the foregoing, Malaysian courts may look beyond the contractual description of the relationship and examine the substance of the parties’ conduct. Accordingly, agency risks may arise where the franchisor grants the franchisee actual authority to act on its behalf, or where the franchisor’s conduct creates the appearance that the franchisee has authority to bind the franchisor in its dealings with third parties. In such circumstances, issues of actual authority, apparent authority or ostensible authority may arise under general agency law principles.

Factors that may increase agency risk include situations where the franchisee is authorised to negotiate or conclude contracts on behalf of the franchisor, make binding representations on the franchisor’s behalf, collect payments as the franchisor’s representative, procure customers for the franchisor, or otherwise hold itself out as acting for and on behalf of the franchisor rather than operating an independent business.

To minimise this risk, the franchise agreement should clearly state that the franchisee is an independent contractor and not an agent, employee, partner or legal representative of the franchisor. The agreement should further provide that the franchisee has no authority to bind the franchisor, enter into contracts on the franchisor’s behalf, make representations on behalf of the franchisor or incur liabilities in the franchisor’s name.

From an operational perspective, both parties should ensure that their conduct is consistent with the independent nature of the franchise relationship. In particular, franchisors should avoid granting franchisees authority to negotiate or conclude contracts on their behalf, and franchisees should conduct business in their own name and for their own account. Correspondence, marketing materials, websites, invoices and customer-facing communications should clearly identify the franchisee as an independently owned and operated business and should not suggest that the franchisee is acting as the franchisor’s agent.

Provided that the franchise relationship is properly structured and operated in accordance with the Act and established franchising principles, the risk of a franchisee being characterised as the commercial agent of the franchisor should be relatively low.

In Malaysia, there are no statutory restrictions on the amount of royalties that may be charged by a foreign franchisor. However, the Act requires all fees payable by a franchisee, including franchise fees, royalties, advertising contributions and other recurring payments, to be clearly disclosed in the Franchise Disclosure Document and the franchise agreement. In addition, Section 21 of the Act requires the royalty rate charged to the franchisee to be consistent with that disclosed in the Franchise Disclosure Document.

Although the Act does not prescribe any maximum royalty rate, the Registrar of Franchises may scrutinise the fees proposed during the franchise registration process. Where the Registrar considers a royalty rate or other fee to be unusually high, the franchisor may be required to provide clarification or justification before the franchise registration is approved.

From a tax perspective, royalties paid by a Malaysian franchisee to a foreign franchisor are generally subject to Malaysian withholding tax, subject to any applicable relief under a double taxation agreement. Accordingly, foreign franchisors should consider the potential withholding tax implications when structuring royalty payments and determining whether the royalty rate is intended to be gross or net of withholding taxes.

There is no statutory limit under Malaysian law on the rate of interest that may be charged on overdue payments under a franchise agreement. However, any interest rate imposed should be commercially reasonable and should not operate as a penalty. In practice, contractual default interest rates commonly range between 8% and 10% per annum. To enhance enforceability, franchisors often provide that interest shall accrue at a specified rate or, if lower, the maximum rate permitted under applicable law.

In relation to currency controls, payments made by Malaysian residents to non-residents are subject to the Foreign Exchange Policy (“FEP”) administered by Bank Negara Malaysia (“BNM”). For transactions between residents (i.e., Malaysian individuals or entities), payments are generally required to be made in Malaysian Ringgit. However, the FEP permits the use of foreign currency in certain circumstances, subject to compliance with the applicable FEP requirements. Accordingly, the ability to denominate or settle payments in a foreign currency should be assessed having regard to the nature of the transaction and the applicable FEP provisions.

Where a Malaysian franchisee is making payments to a foreign franchisor, there are generally no restrictions requiring such payments to be made in Malaysian Ringgit. Subject to compliance with the FEP, payments may generally be denominated and made in either Malaysian Ringgit or a foreign currency.

Pursuant to Notice 4 (Payment and Receipt) of the FEP Notices effective 1 June 2025:

a. a non-resident may make or receive payments in Malaysian Ringgit in Malaysia to or from a resident or another non-resident for income earned or expenses incurred in Malaysia, or for the settlement of goods and services transactions, subject to the restrictions prescribed under the FEP; and

b. a resident may generally make or receive payments in foreign currency to or from a non-resident for any purpose, except in relation to certain restricted transactions, which would not ordinarily affect franchise arrangements.

There are also generally no restrictions on the commercial structuring of payments under a franchise agreement. Subject to proper disclosure under the Act and compliance with applicable tax laws, franchisors commonly structure their remuneration through a combination of initial franchise fees, ongoing royalties, marketing contributions, training fees, technology fees, management or service fees, product mark-ups and supply-chain related charges. However, franchisors should ensure that the nature of each payment is accurately described and properly documented, as different categories of payments may attract different tax treatments, withholding tax consequences or regulatory considerations.

Accordingly, while Malaysian law affords franchisors considerable flexibility in determining the nature, amount and currency of payments under a franchise arrangement, careful consideration should be given to disclosure requirements under the Act, withholding tax implications and foreign exchange regulations when structuring cross-border franchise payments.

Yes. It is legally permissible to include liquidated damages provisions in franchise agreements to address breaches of restrictive covenants, such as non-compete, non-solicitation, confidentiality and intellectual property protection obligations. While the Act does not specifically regulate liquidated damages, their enforceability is governed by Section 75 of the Contracts Act 1950.

Section 75 provides that where a contract specifies a sum payable upon breach, or contains any other stipulation by way of penalty, the innocent party is entitled to recover reasonable compensation not exceeding the amount stipulated in the contract, regardless of whether actual loss or damage is proved.

The legal position has been clarified by the Federal Court in Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd, which confirmed that Section 75 applies to both liquidated damages clauses and penalty clauses. The relevant principles may be summarised as follows:

(a) a party seeking to enforce a liquidated damages clause is not required to prove actual loss as a precondition to recovery;

(b) the court may award reasonable compensation even where the actual loss is difficult or impossible to quantify;

(c) the amount stipulated in the contract represents the maximum recoverable amount, and the court retains the discretion to award a lower sum if it considers the stipulated amount to be unreasonable in the circumstances;

(d) in determining what constitutes reasonable compensation, the courts may take into account the innocent party’s legitimate commercial interests and whether the stipulated sum is proportionate to the consequences of the breach;

(e) once the existence of the clause and the occurrence of the breach have been established, the innocent party is prima facie entitled to recover the stipulated sum, subject to the defaulting party demonstrating that the amount claimed is unreasonable, excessive or disproportionate; and

(f) a stipulated sum is more likely to be reduced where it is extravagant, unconscionable or out of proportion to the greatest loss that could reasonably be contemplated as flowing from the breach.

In the franchise context, liquidated damages clauses may be particularly useful where the breach is likely to cause harm that is difficult to quantify precisely, such as breaches of non-compete obligations, misuse of confidential information, disclosure of trade secrets, unauthorised use of intellectual property, diversion of customers, damage to goodwill or interference with the integrity of the franchise system. To maximise enforceability, franchisors should ensure that the stipulated amount bears a reasonable relationship to the legitimate interests being protected and the likely consequences of the breach. It is also advisable to differentiate between categories of breaches rather than imposing a single fixed amount for all breaches irrespective of their severity. For example, a higher amount may be justifiable for breaches involving confidential information, non-compete obligations or misuse of intellectual property, whereas a lower amount may be appropriate for administrative breaches or payment defaults.

While it remains prudent to state in the franchise agreement that the stipulated amount represents liquidated damages and a genuine attempt to quantify the anticipated consequences of a breach, Malaysian courts will ultimately look beyond the label used by the parties and assess whether the amount claimed constitutes reasonable compensation within the meaning of Section 75 of the Contracts Act 1950.

Accordingly, liquidated damages provisions are generally enforceable in Malaysia and can be an effective mechanism for protecting franchise systems, provided that the stipulated amount is proportionate, commercially justifiable and capable of being regarded as reasonable compensation for the particular breach in question.

For breaches of restrictive covenants, franchisors should also consider expressly preserving their right to seek injunctive relief in addition to liquidated damages, particularly where the breach involves non-compete obligations, confidential information, trade secrets or intellectual property rights, as monetary compensation alone may not adequately protect the franchisor’s interests.

The principal tax considerations in a franchise arrangement include income tax, withholding tax, sales and service tax (“SST”) and stamp duty.

Payments made by a franchisee to a franchisor under a franchise agreement, including initial franchise fees, royalties, management fees, technical assistance fees, training fees and other recurring payments, may give rise to various tax implications depending on the nature of the payment and the tax residence of the franchisor.

Where royalties are paid by a Malaysian resident franchisee to a foreign franchisor, such payments are generally subject to withholding tax under the Income Tax Act 1967. The current withholding tax rate on royalties is 10% of the gross amount payable, subject to any reduction or exemption available under an applicable Double Taxation Agreement (“DTA”) between Malaysia and the foreign franchisor’s jurisdiction. The Malaysian franchisee is responsible for withholding and remitting the tax to the Inland Revenue Board of Malaysia (“LHDN”).

In addition, payments made to foreign franchisors may be subject to SST implications. While SST is not imposed directly on the foreign franchisor, certain services provided by foreign franchisors to Malaysian franchisees may constitute imported taxable services, in which case the Malaysian franchisee may be required to account for SST under the applicable reverse charge mechanism. The precise SST treatment will depend on the nature of the services provided and the prevailing SST rules at the relevant time.

Franchise agreements in Malaysia are subject to stamp duty under the Stamp Act 1949. While the applicable stamp duty treatment depends on the exact terms and rights granted, it has become standard practice for the Stamp Office to assess these agreements on an ad valorem basis. This applies specifically where the contract involves the transfer or grant of rights and dictates the payment of franchise fees, royalties, or other commercial consideration. Consequently, the total stamp duty payable can be significant depending on the commercial terms of the franchise arrangement.

As stamp duty assessments are highly fact-specific and may vary depending on the structure and contents of the agreement, parties should consider obtaining a formal adjudication from the Stamp Office to ascertain the stamp duty payable. In any event, timely stamping is important to ensure that the franchise agreement is admissible as evidence in Malaysian court proceedings and to avoid penalties for late stamping.

As tax treatment may vary depending on the structure of the franchise arrangement, the nature of the payments involved and the jurisdictions of the parties, franchisors and franchisees should obtain specific tax advice before implementing the proposed franchise structure. This response is intended as a general overview only and does not constitute Malaysian tax advice.

E-commerce in Malaysia is regulated by a combination of generally applicable consumer protection, electronic commerce and data protection laws, which will be addressed in the subsequent question. There is no franchise-specific e-commerce legislation. However, these laws may have practical implications for franchise arrangements where franchisees are permitted or required to sell goods or services online.

The Consumer Protection (Electronic Trade Transaction) Regulations 2024 (“ETTR”), made under the Consumer Protection Act 1999, regulate certain online marketplace transactions and are intended to strengthen consumer protection in electronic trade. The ETTR applies to online marketplace suppliers and online marketplace operators. In broad terms, online sellers are required to disclose prescribed information, ensure that such information is not false or misleading, provide information in the national language, allow purchasers to rectify errors, acknowledge receipt of orders without undue delay and comply with other consumer protection requirements. Online marketplace operators are also subject to obligations, including ensuring that online marketplace suppliers disclose the required information, providing complaint channels and maintaining prescribed records.

While the ETTR does not directly regulate the franchisor-franchisee relationship, it may apply where franchisees sell or advertise goods or services to consumers through online marketplaces or other electronic trade platforms. Accordingly, if e-commerce forms part of the franchise system, the franchise agreement and operations manual should clearly allocate responsibility for compliance with applicable online consumer protection requirements, including product information, pricing, delivery terms, refunds, complaints handling, record-keeping and platform-specific obligations.

From a franchise perspective, a franchisor may generally prohibit, restrict or regulate the use of e-commerce by franchisees, subject to the terms of the franchise agreement and applicable competition law considerations. It is common for franchisors to control online sales channels in order to protect brand image, maintain quality standards, preserve consistency of customer experience, avoid unauthorised discounting and prevent conflict between franchisees’ territorial rights.

In Malaysia, franchise agreements are required to specify the territorial rights granted to the franchisee. As online sales are not confined by geographical boundaries, e-commerce may give rise to practical issues where a franchisee’s online activities reach customers located outside its designated territory or overlap with the territories of other franchisees. There are currently no specific provisions under Malaysian franchise law regulating online sales within or outside a franchisee’s territory. Accordingly, the permissibility and scope of any restrictions will depend primarily on the terms of the franchise agreement, the structure of the franchise network and the application of other relevant laws, including consumer protection, competition and data protection legislation. In principle, franchisors may impose reasonable controls over e-commerce activities where such controls are intended to protect the integrity of the franchise system, maintain brand standards and minimise conflicts between franchisees. Franchisors commonly regulate the manner in which franchisees may engage in e-commerce, including imposing restrictions on independent websites, third-party marketplaces, social media stores and other online sales channels, or requiring all online sales to be conducted through a centralised platform controlled or approved by the franchisor. Franchise agreements should also clearly address the allocation of online orders, customer leads, delivery responsibilities, revenues and customer servicing obligations where multiple franchisees may be affected.

Malaysia’s principal data protection legislation is the Personal Data Protection Act 2010 (PDPA). The PDPA regulates the processing of personal data in commercial transactions and applies to both franchisors and franchisees to the extent that they collect, use, disclose, store or otherwise process personal data relating to customers, employees, suppliers and other individuals.

In a franchise network, personal data is frequently shared between franchisors and franchisees through customer loyalty programmes, point-of-sale systems, e-commerce platforms, mobile applications, CRM databases and marketing initiatives. As a result, data protection compliance is an important aspect of the franchisor-franchisee relationship and should be carefully addressed in both the franchise agreement and operational manuals.

(a) Allocation of controller/processor roles

Under the PDPA, the primary responsibility for compliance rests with the data controller, namely the person who processes personal data or has control over the processing of personal data. Depending on the structure of the franchise system, both the franchisor and franchisee may qualify as separate data controllers in relation to the personal data they independently collect and use.

For example:

• A franchisee that collects customer information at its outlet for local sales, employee management and day-to-day operations will generally act as a data controller in respect of such data.
• A franchisor that determines the purposes for which customer data is collected through a network-wide loyalty programme, mobile application or CRM platform may also be a data controller in respect of the same data.
• Where a franchisee merely inputs customer data into a franchisor-managed system and processes such data strictly in accordance with the franchisor’s instructions, the franchisee may in some circumstances act as a data processor for certain activities.

Accordingly, the franchise agreement should clearly allocate responsibility for PDPA compliance, including data collection, consent management, security obligations, breach notification procedures, responding to data subject requests and regulatory investigations. It is also advisable to include detailed data processing provisions governing the circumstances in which either party may process personal data on behalf of the other.

(b) Use of customer databases

Ownership and use of customer databases is often a key issue in franchise relationships.

Franchisors commonly require franchisees to contribute customer information to a centralised database for purposes such as customer relationship management, loyalty programmes, analytics, operational benchmarking and network-wide marketing. The franchise agreement should therefore clearly specify:

• who owns the customer database and the data contained within it;
• whether franchisees are required to contribute customer data to the central database;
• the purposes for which the franchisor may use the data;
• the extent to which franchisees may access and use customer information collected by other franchisees within the network;
• retention periods and deletion requirements; and
• the handling of customer data upon termination or expiry of the franchise agreement.

Both franchisors and franchisees must ensure that customers are provided with appropriate privacy notices explaining how their personal data will be collected, used and shared within the franchise network. Where personal data is to be used for additional purposes beyond those originally disclosed, further consent may be required.

(c) Cross-border data transfers

Cross-border transfers are particularly relevant where the franchisor is located outside Malaysia or where customer data is stored on overseas servers or cloud-based platforms.

The PDPA permits cross-border transfers of personal data where specified conditions are satisfied, including where:

• the recipient jurisdiction has substantially similar data protection laws;
• the recipient provides an adequate level of protection for the personal data;
• the data subject has consented to the transfer; or
• other prescribed exceptions apply.

The recent amendments to the PDPA have introduced a requirement for organisations to conduct a Transfer Impact Assessment (TIA) before relying on the adequacy-based transfer mechanism. The TIA should assess, among other things, the legal framework of the recipient country, the safeguards implemented by the recipient and the risks associated with the transfer. The Guidelines on Cross Border Personal Data Transfer provide further guidance on conducting such assessments.

Accordingly, where a foreign franchisor requires access to Malaysian customer or employee data, the parties should evaluate whether the proposed transfer satisfies the PDPA requirements, implement appropriate contractual safeguards and maintain records demonstrating compliance.

(d) Marketing and CRM activities

Marketing and customer relationship management activities are central to many franchise systems and often involve extensive processing of personal data.

Franchisors frequently operate network-wide CRM systems, loyalty programmes, mobile applications and promotional campaigns using customer information collected by franchisees. In such cases, the parties should ensure that:

• customers are informed that their data may be used for marketing purposes;
• any required consents are properly obtained and documented;
• customers are provided with mechanisms to withdraw consent or opt out of marketing communications;
• marketing activities are conducted only for the purposes disclosed in the applicable privacy notice; and
• access to CRM systems is restricted to authorised personnel.

Where the franchisor conducts national or regional marketing campaigns using customer data collected by franchisees, the franchise agreement should clearly specify the legal basis for such use, the parties’ respective responsibilities and procedures for handling complaints or requests from data subjects.

Practical implications for franchise relationships

Given the volume of personal data typically processed within a franchise network, franchisors should adopt comprehensive data governance measures, including data protection policies, standardised privacy notices, data sharing arrangements, security standards and breach response procedures. Franchisees should be contractually required to comply with these standards and to cooperate with the franchisor in responding to data breaches, regulatory enquiries and requests from data subjects.

Failure to comply with the PDPA may result in significant penalties, regulatory action and reputational damage. Consequently, data protection compliance should be treated as a core operational and contractual requirement within any franchise system.

A franchisor is generally entitled to restrict the transfer of (a) the franchisee’s rights and obligations under the franchise agreement and (b) ownership interests in the franchisee entity, provided that such restrictions are clearly set out in the franchise agreement.

In practice, franchise agreements commonly prohibit any assignment, transfer or change of control without the franchisor’s prior written consent. Franchisors typically impose conditions before granting such consent, including:

(a) the proposed transferee satisfying the franchisor’s financial, operational and suitability requirements;

(b) the proposed transferee successfully completing the franchisor’s training programme;

(c) the transferee agreeing to enter into the franchisor’s then-current form of franchise agreement;

(d) the franchisee remedying any existing breaches of the franchise agreement;

(e) payment of a transfer, administrative or training fee; and

(f) execution of any ancillary documents required by the franchisor.

Where the franchisee is a corporate entity, the franchise agreement may also restrict changes in shareholding, ownership or control of the franchisee, particularly where such changes would result in a change of the persons responsible for managing the franchised business.

In addition, where the transfer results in a change to any information previously registered with the Registrar of Franchises, the franchisor and/or franchisee should ensure that the appropriate material change application is filed with the Registrar of Franchises within the prescribed timeframe. Failure to notify and update the Registrar of Franchises may constitute an offence under the Act and expose the parties to regulatory sanctions.

Accordingly, while transfer restrictions, approval rights, qualification criteria and transfer fees are generally permissible, they should be clearly documented in the franchise agreement, and any resulting changes should be properly reflected in the franchise registration records to ensure ongoing compliance with the Act.

Under Malaysian law, a franchisor is generally permitted to impose extensive audit rights, reporting obligations and operational controls on a franchisee, provided that such rights and obligations are clearly set out in the franchise agreement and are consistent with the nature of a franchise relationship.

The Act is largely silent on the extent to which a franchisor may impose audit rights, reporting obligations and operational controls on a franchisee. Accordingly, these matters are primarily governed by the terms of the franchise agreement and the operational requirements of the franchise system. As a franchise inherently involves the franchisee operating its business in accordance with the franchisor’s business system, standards and procedures, franchisors are generally entitled to impose reasonable audit, reporting and operational control requirements designed to protect the franchise system, brand, goodwill and intellectual property.

Accordingly, it is common for franchise agreements to require franchisees to:

(a) submit periodic sales, financial and operational reports;

(b) maintain proper books, records and accounts;

(c) permit the franchisor to inspect and audit such records;

(d) grant the franchisor access to premises, point-of-sale systems and relevant business information;

(e) comply with the franchisor’s operations manuals, policies and procedures;

(f) participate in training programmes and quality assurance audits;

(g) maintain prescribed quality, service and operational standards; and

(h) implement marketing, branding and promotional initiatives prescribed by the franchisor.

In practice, franchisors frequently reserve the right to conduct announced or unannounced inspections of franchised outlets and to audit the franchisee’s books and records, particularly where royalties, advertising contributions or other fees are calculated based on the franchisee’s turnover or revenue.

In today’s franchise environment, much of the information that would traditionally have been obtained through periodic reports or physical audits is often accessible to the franchisor remotely through integrated point-of-sale (POS), accounting, inventory management, learning management, customer relationship management (CRM) and other centralised business systems. Consequently, franchisors increasingly require franchisees to utilise designated systems that enable the franchisor to monitor operational and financial performance on a real-time or near real-time basis. As such, it is common for franchisors to have continuous access to sales, inventory, customer and operational data without having to rely solely on periodic reports submitted by the franchisee.

The franchise agreement may also require the franchisee to maintain and retain proper books, records and supporting documents for a specified period. In this regard, franchisees should note that separate statutory record-keeping obligations may apply under Malaysian law. For example, companies are generally required to retain accounting and other prescribed records for at least seven (7) years under the Companies Act 2016, while taxpayers are generally required to retain records relevant to their tax affairs for at least seven (7) years under the Income Tax Act 1967. Franchisors commonly align their audit and record-retention requirements with these statutory retention periods.

However, the franchisor’s rights are not unlimited. Such rights must be exercised in accordance with the franchise agreement and should be reasonably connected to the operation, management and protection of the franchise system. In addition, where audits, reporting obligations or centralised systems involve access to personal data, the parties must ensure compliance with the Personal Data Protection Act 2010.

Accordingly, while the Franchise Act 1998 does not specifically regulate audit rights, reporting obligations or operational controls, Malaysian law generally permits franchisors to impose comprehensive requirements in these areas, provided that they are clearly documented in the franchise agreement and exercised for legitimate franchise management, quality control and brand protection purposes.

The Act  distinguishes between the concepts of an extension and a renewal, although neither term is expressly defined in the Act. Generally, an extension refers to a continuation of the existing franchise agreement for a further period on substantially the same terms and conditions, whereas a renewal typically contemplates the grant of a new franchise term, which may be subject to updated terms and conditions.

Section 34 of the Act specifically regulates extensions. Under this provision, a franchisee may apply for an extension of the franchise term by giving the franchisor at least six (6) months’ written notice before the expiry of the franchise agreement. Unless the franchisee has breached the terms of the franchise agreement, the franchisor is generally required to grant the extension. The extended franchise agreement must contain terms that are similar to, or not less favourable than, those contained in the previous franchise agreement.

Renewal is dealt with differently under the Act. While the Act does not confer an automatic right of renewal upon a franchisee, Section 32 imposes certain restrictions on a franchisor’s ability to refuse renewal. In particular, a franchisor may commit an offence if it refuses to renew a franchise agreement without compensating the franchisee in prescribed circumstances.

Broadly, compensation (whether by way of repurchase of assets, inventory or by such other means as may be mutually agreed) may be required where:

(a) the franchisee is prohibited under the franchise agreement, or by the franchisor’s refusal to waive such restriction, from carrying on a similar business under another mark in the same area following the expiry of the franchise agreement; or

(b) the franchisor fails to provide the franchisee with at least six (6) months’ written notice of its intention not to renew the franchise agreement before its expiry.

Accordingly, it is important that the franchise agreement clearly sets out the conditions and requirements for renewal, including any performance, compliance, operational, financial or other criteria that the franchisee must satisfy in order to be considered for renewal.

Subject to the terms of the franchise agreement, a franchisor may generally refuse renewal where the franchisee has failed to satisfy the agreed renewal criteria or has committed material breaches of the franchise agreement. Common examples include persistent operational non-compliance, failure to meet system standards, failure to pay royalties or other fees, insolvency, abandonment of the business, or repeated breaches of the franchisor’s policies and procedures.

That said, franchisors should exercise caution when relying on historical issues as grounds for refusing renewal. In the recent case of TY Permanas Enterprise Sdn Bhd v Hot & Roll Holdings Sdn Bhd [Suit No. BA-22NCvC-225-06/2024], the court considered the franchisor’s refusal to renew a franchise agreement and emphasised the importance of the franchisor acting consistently with the terms of the franchise agreement and the requirements of the Act. While the decision turned on its specific facts, it suggests that a franchisor may face difficulties in subsequently relying on matters that were known to it at the time of an earlier renewal, but which were not raised or addressed during the renewal process, as grounds for refusing a future renewal. Accordingly, franchisors should ensure that any concerns relating to the franchisee’s performance, compliance or suitability for renewal are identified and addressed during the relevant renewal exercise.

In addition, where a franchisor does not intend to renew a franchise agreement, it is prudent to provide written notice of such intention at least six (6) months before the expiry date in order to minimise the risk of contravening Section 32 of the Act.

The Act does not prescribe a specific formula for calculating compensation payable under Section 32. The amount and method of compensation will depend on the circumstances of the case and may be determined by reference to the repurchase of assets, inventory, equipment or other arrangements mutually agreed between the parties. Accordingly, franchisors commonly include provisions in the franchise agreement dealing with the consequences of non-renewal, including the treatment of inventory, equipment, fixtures and other franchise-related assets.

Termination of a franchise agreement is principally governed by Sections 31 and 33 of the Act, as well as the contractual provisions contained in the franchise agreement.

The Act contains mandatory termination provisions that may override inconsistent contractual termination rights. In particular, Section 31 provides that a franchise agreement shall not be terminated before its expiration date except for “good cause”. Accordingly, contractual provisions purporting to permit arbitrary, unfettered or no-fault termination may be unenforceable to the extent that they are inconsistent with the statutory requirement of good cause.

The circumstances constituting “good cause” under Section 31 are not exhaustive. The Act expressly recognises certain grounds for termination while allowing parties to specify additional grounds in the franchise agreement, provided that such grounds are not inconsistent with the Act.

Where the breach is capable of being remedied, Section 31 requires the aggrieved party to first issue a written notice specifying the breach and provide the defaulting party with an opportunity to remedy the breach.

The statutory cure period must be at least fourteen (14) days from the date of the notice. If the breach is not remedied within the prescribed period, the aggrieved party may terminate the franchise agreement.

Examples of remediable breaches include a franchisor’s or franchisee’s failure to comply with the terms of the franchise agreement or any related agreement entered into between the parties.

Accordingly, contractual provisions that provide for a shorter cure period or seek to exclude the statutory opportunity to remedy may be unenforceable to the extent that they are inconsistent with the Act.

The Act also recognises certain serious breaches that constitute good cause for immediate termination without any prior notice or opportunity to remedy. These include circumstances where the franchisor or franchisee:

(a) makes an assignment for the benefit of creditors or a similar disposition of its assets;

(b) becomes bankrupt or insolvent;

(c) voluntarily abandons the franchised business;

(d) is convicted of a criminal offence that substantially impairs the goodwill associated with the franchisor’s trademark or other intellectual property; or

(e) repeatedly fails to comply with the terms of the franchise agreement.

In such circumstances, the franchise agreement may be terminated immediately.

Separately, Section 33 of the Act permits the parties to terminate the franchise agreement at any time by mutual agreement.

In addition, Section 18(4) of the Act grants a franchisee a statutory cooling-off right. A franchisee may terminate the franchise agreement within seven (7) working days from the date of signing the agreement, without giving any reason and without incurring any penalty. This statutory right cannot be excluded by contract.

Accordingly, while parties are generally free to negotiate contractual termination rights, those rights remain subject to the mandatory requirements of the Act, including the requirement for good cause, the statutory fourteen (14) day cure period for remediable breaches, the right of immediate termination in the circumstances prescribed by Section 31, the parties’ right to terminate by mutual consent under Section 33, and the franchisee’s statutory cooling-off right under Section 18(4).

The Act does not specifically regulate ownership of intangible assets upon the expiry or termination of a franchise agreement. Accordingly, ownership of such assets is primarily determined by the terms of the franchise agreement and the applicable intellectual property, contract and data protection laws.

In most franchise systems, the franchisor retains ownership of the key intangible assets associated with the franchise business, including trademarks, trade names, logos, business systems, know-how, confidential information, operations manuals and goodwill associated with the franchise brand. Unless expressly agreed otherwise, a franchisee does not acquire ownership rights in such assets merely by operating the franchised business.

It is also common for franchise agreements to expressly provide that all goodwill generated through the operation of the franchised business accrues to the benefit of the franchisor and that the franchisee is not entitled to any compensation for such goodwill upon the expiry or termination of the franchise agreement.

The position regarding customer databases and customer data is largely dependent on the contractual arrangements between the parties and compliance with the Personal Data Protection Act 2010. In practice, many franchise agreements provide that customer databases, customer lists and data collected through the franchisor’s systems, loyalty programmes, CRM platforms or point-of-sale systems belong to the franchisor or must be transferred to the franchisor upon termination. Where the franchisee maintains independent databases, the ownership position will depend on the terms of the franchise agreement and the manner in which the data was collected and maintained.

Accordingly, absent an express contractual provision to the contrary, franchisees generally do not acquire ownership of the franchisor’s intellectual property, brand goodwill, customer databases maintained as part of the franchise system or other franchise-related intangible assets upon the expiry or termination of the franchise agreement.

The Act does not prescribe a comprehensive set of post-termination obligations. Accordingly, post-termination rights and obligations are primarily governed by the terms of the franchise agreement, subject to general principles of contract law and competition law.

In practice, Malaysian franchise agreements commonly impose a range of post-termination obligations on franchisees, including:

• immediate cessation of the use of the franchisor’s trademarks, trade names, logos and other intellectual property;
• de-branding of the franchised outlet, including the removal of signage, advertising materials, uniforms and other branded materials;
• return or destruction of operations manuals, confidential information and other proprietary materials belonging to the franchisor;
• transfer or deletion of customer data, databases and records where required under the franchise agreement;
• discontinuance of the use of the franchisor’s business systems, software, social media accounts, websites and email addresses associated with the franchise business;
• payment of all outstanding fees and other amounts due under the franchise agreement; and
• compliance with post-termination restrictive covenants, where applicable.

Post-termination obligations relating to de-branding, cessation of trademark use, return of confidential information and protection of the franchisor’s intellectual property are generally enforceable and are commonly enforced by Malaysian courts. Continued use of the franchisor’s trademarks or branding after termination may expose the former franchisee to claims for trademark infringement, passing off and breach of contract.

Confidentiality obligations are also enforceable, particularly where the restrictions are clearly drafted.

Unlike ordinary commercial agreements, Section 27 of the Act permits a franchisor to prohibit a franchisee from carrying on a business that is similar to the franchised business during the term of the franchise agreement and for a period not exceeding two (2) years after the expiration or termination of the franchise agreement. Accordingly, post-termination non-compete provisions are generally enforceable in the franchise context, provided that they fall within the scope permitted by Section 27 of the Act.

Non-solicitation provisions directed at protecting the franchisor’s customers, employees, confidential information or franchise network are also commonly included in franchise agreements and are generally more likely to be enforceable where they are reasonably drafted and support the legitimate interests protected by the franchise relationship. Accordingly, post-termination obligations such as de-branding, cessation of trademark use, return of confidential information and compliance with a post-termination non-compete of up to two years are generally enforceable in Malaysia and are regularly relied upon by franchisors to protect the integrity of their franchise systems following termination or expiry of the franchise agreement.

The national franchising association in Malaysia is the Malaysian Franchise Association (“MFA”).

Membership in the MFA is not required by law and is not a pre-condition for operating a franchise business in Malaysia. There are no statutory obligations requiring franchisors or franchisees to become members of the MFA.  That said, membership is generally regarded as commercially beneficial, particularly for franchisors and franchisees seeking to expand their presence within the Malaysian franchise sector, build industry connections and remain informed of developments affecting the franchising industry.

The MFA is the principal industry body representing the interests of the franchise sector in Malaysia. Its primary role is to promote the development and growth of franchising, facilitate knowledge-sharing within the industry and serve as a platform for engagement between industry participants and government agencies. The MFA frequently collaborates with the Ministry responsible for franchise matters in Malaysia and other relevant stakeholders on initiatives aimed at developing the franchise ecosystem.

Membership in the MFA may offer a number of practical and strategic benefits, including:

• networking opportunities with franchisors, franchisees, consultants, professionals and industry stakeholders in Malaysia and abroad;
• access to industry updates, market intelligence and developments relating to franchising, including regulatory and policy changes;
• participation in local and international franchise exhibitions, trade missions, conferences, seminars, workshops and training programmes;
• opportunities to promote franchise brands and explore domestic and international expansion opportunities;
• access to educational resources, industry best practices and franchise-related guidance; and
• enhanced visibility and credibility within the Malaysian franchise community.

Membership in the MFA does not generally impose any material legal obligations beyond compliance with the association’s constitution, by-laws, membership rules and applicable codes or policies adopted by the association from time to time. Nor does membership alter or replace any statutory obligations imposed under the Act.

Accordingly, while MFA membership is entirely voluntary, it is generally considered commercially advantageous for franchisors and franchisees that wish to actively participate in and benefit from Malaysia’s franchise ecosystem.

Foreign franchisors are treated differently from domestic franchisors under the Act. A foreign franchisor is required to obtain approval from the Registrar of Franchises under Sections 6 and 54 of the Act before offering or selling a franchise in Malaysia. By contrast, a local franchisor is generally required to register its franchise under Section 6 of the Act.

The official fees payable by foreign franchisors are higher than those applicable to local franchisors. However, apart from the difference in official fees and the applicable approval requirements, the supporting documentation required for the registration of a foreign franchisor is substantially similar to that required for a local franchisor. In both cases, the applicant is generally required to submit, amongst others, the prescribed application forms, franchise disclosure documents, franchise agreement, audited accounts, corporate documents, trademark registration certificates and operational manuals.

It should also be noted that Section 53 of the Act provides that a franchisor who intends to sell a franchise to a person who is not a Malaysian citizen must first obtain the approval of the Registrar of Franchises. This provision may apply where a franchise is granted to a foreign individual or foreign-owned entity.

Apart from the requirements under the Act, foreign franchisors involved in distributive trade activities may also be subject to the Guidelines on Foreign Participation in the Distributive Trade Services Malaysia 2022 issued by the Ministry of Domestic Trade and Cost of Living (KPDN). Depending on the business model and structure adopted, approvals from the Distributive Trade Committee may be required in relation to foreign participation in the distributive trade sector.

Subject to these additional approval and registration requirements, foreign franchisors are generally treated in the same manner as domestic franchisors under the Act in relation to the operation and administration of the franchise.

The Act does not expressly require a franchise agreement to be governed by Malaysian law. Accordingly, the parties are generally free to choose a foreign governing law for the franchise agreement.

However, where the franchise is to be operated in Malaysia, the franchise agreement must nevertheless comply with the mandatory provisions of the Act, including the requirement to incorporate the mandatory terms prescribed under the Act. The choice of a foreign governing law will not exclude the application of the Act to a franchise operating in Malaysia.

Accordingly, while a franchise agreement may be governed by foreign law, it must still comply with the requirements of the Act and any provisions that are inconsistent with the mandatory requirements of the Act may be unenforceable to the extent of such inconsistency.

That said, in recent franchise registration applications, certain officers of the Registrar of Franchises have raised queries or objections where the franchise agreement is governed by foreign law and have requested that the agreement be governed by Malaysian law. However, this does not appear to be a requirement expressly prescribed by the Act and, based on our experience, such practice has been applied inconsistently. There have been instances where franchise agreements governed by foreign law have been accepted for registration, provided that the agreements otherwise comply with the mandatory requirements of the Act.

Accordingly, while it remains legally possible for a franchise agreement to be governed by foreign law, franchisors should be aware that the Registrar of Franchises may, depending on the officer handling the application, raise queries regarding the governing law clause during the registration process.

Franchisors and franchisees may resolve disputes through litigation before the Malaysian courts or through alternative dispute resolution (“ADR”) mechanisms such as mediation and arbitration, provided that such mechanisms are agreed upon by the parties or expressly provided for in the franchise agreement. The Act does not mandate any particular dispute resolution mechanism, although Section 28(2) of the Act expressly recognises the parties’ right to submit franchise-related disputes to arbitration.

In practice, the Registrar of Franchises generally expects franchise agreements submitted for registration to contain an ADR clause, typically providing for mediation, arbitration or a combination of both, although this is not expressly required by the Act.

Mediation is often viewed favourably in franchise disputes as it allows parties to preserve their commercial relationship and explore practical business solutions that may not be available through formal court or arbitral proceedings. It is generally faster, less adversarial and more cost-effective than litigation or arbitration.

Arbitration offers a number of advantages, particularly in cross-border franchise arrangements and where the franchise agreement is governed by foreign law. Arbitration enables parties to select arbitrators with relevant industry expertise, adopt a neutral venue, and maintain confidentiality over commercially sensitive information, including operational know-how, financial information and trade secrets. Arbitration proceedings also offer greater procedural flexibility than court litigation.

In addition, Malaysia is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). As a result, foreign arbitral awards are generally enforceable in Malaysia, and arbitral awards issued in Malaysia are likewise enforceable in many other jurisdictions that are party to the New York Convention. This can be a significant advantage where the franchisor, franchisee or their assets are located in different jurisdictions.

Where a franchise agreement is governed by foreign law, arbitration is often preferred over litigation as arbitral tribunals are generally more accustomed to applying foreign governing laws than domestic courts. Arbitration also avoids potential concerns regarding home-court advantage and provides a neutral forum for resolving disputes involving foreign parties.

For these reasons, many franchisors adopt a tiered dispute resolution clause requiring the parties to first attempt to resolve disputes through negotiation or mediation and, failing settlement, refer the dispute to binding arbitration. Such an approach combines the benefits of an amicable settlement process with the certainty and finality of an enforceable arbitral award.

That said, franchisors commonly include a carve-out provision preserving their right to seek interim or injunctive relief from the courts notwithstanding the existence of an arbitration agreement. This is particularly important in urgent situations involving unauthorised use of trademarks, breaches of confidentiality obligations, misuse of trade secrets, infringement of intellectual property rights or breaches of post-termination non-compete obligations, where immediate court intervention may be required to prevent irreparable harm.

Accordingly, while litigation, mediation and arbitration are all available dispute resolution mechanisms in Malaysia, arbitration is generally regarded as the preferred option for cross-border franchise arrangements, particularly where the franchise agreement is governed by foreign law or involves parties, assets or operations located in multiple jurisdictions.

There is currently no express requirement under the Act for a franchise agreement or franchise disclosure document to be prepared in the national language (Bahasa Malaysia).

In practice, franchise agreements and disclosure documents submitted to the Registrar of Franchises are commonly prepared and filed in English. Accordingly, foreign franchisors are generally able to use their standard English-language franchise documentation for registration purposes, subject to compliance with the requirements of the Act. That said, the Registrar of Franchises retains the discretion to request translations or clarifications in specific circumstances, particularly where supporting documents are in a language other than English or Bahasa Malaysia.

Franchise agreements may be executed using electronic signatures in Malaysia. The legal framework governing electronic signatures is primarily set out in the Electronic Commerce Act 2006, which recognises the validity and enforceability of electronic signatures, subject to the requirements prescribed under the relevant legislation.

Accordingly, provided that the applicable statutory requirements are satisfied, a franchise agreement executed electronically will generally be recognised as valid and enforceable in Malaysia.

As a matter of good practice, franchisors should consider including an express provision in the franchise agreement confirming that the parties consent to the use of electronic signatures and electronic execution. This helps minimise any uncertainty regarding the manner of execution and promotes consistency in the execution of franchise-related documents. In practice, the Registrar of Franchises generally accepts franchise agreements executed electronically for registration purposes, provided that the signatures are clearly identifiable and the agreement otherwise complies with the requirements of the Act.

At present, we do not foresee any major legislative reforms to the Act that are likely to fundamentally alter franchise relationships in Malaysia over the next 12 months. However, there are several regulatory and commercial developments that may affect the franchise landscape.

One notable development is the launch of the National Franchise Policy 2030 (Dasar Francais Negara 2030 or “DFN 2030”) on 7 February 2025. DFN 2030 sets out the Malaysian Government’s strategic roadmap for the development of the franchise sector and focuses on strengthening governance, enhancing industry competitiveness, expanding domestic and international market access, encouraging digitalisation and improving the capabilities of franchise stakeholders. While DFN 2030 does not presently introduce new legal obligations, it may influence future policy initiatives, regulatory priorities and compliance expectations within the franchise sector.

Another significant development is the transfer of responsibility for franchise matters from the Ministry of Entrepreneur and Cooperatives Development (MECD) to the Ministry of Domestic Trade and Cost of Living (KPDN) with effect from 1 April 2026. As the transition continues, franchisors and franchisees may experience changes in administrative practices, regulatory priorities, registration procedures and enforcement approaches. Businesses should therefore monitor any new guidelines, policies or administrative requirements that may be introduced by KPDN.

From a practical perspective, one of the most significant challenges facing franchisors continues to be the detailed registration procedures, extensive documentary requirements and relatively lengthy processing timelines associated with franchise registrations and approvals. As franchise registration remains a prerequisite to offering or operating a franchise in Malaysia, delays in obtaining approvals may impact market entry timelines, expansion plans and commercial roll-out strategies. Businesses intending to enter or expand into the Malaysian market should therefore factor sufficient time into their implementation plans and ensure that the required documentation is prepared as early as possible.

We also anticipate increased regulatory activity relating to the renewal of franchise registrations. Following the implementation of the MyFEX 2.0 registration system and the coming into force of the Franchise (Amendment) Act 2020 in 2022, franchise registrations are now subject to a fixed validity period and periodic renewal requirements. A further practical concern is that many franchisors whose franchises were registered under the former MyFEX 1.0 portal remain unaware that they were required to re-register their franchises through MyFEX 2.0 by the expiry of the grace period at the end of July 2025. Franchisors that failed to complete the re-registration process within the prescribed period are generally required, in accordance with the Registrar’s current administrative practice, to submit fresh applications for registration of their franchises. This may result in additional costs, documentary requirements and processing delays, and could affect their ability to continue offering or operating their franchises in compliance with the Act.

In addition, the first substantial batch of franchise registration renewals under the current framework is expected to fall due in 2027. Given the anticipated volume of renewals, together with the Registrar’s increasingly detailed scrutiny of franchise documentation and compliance records, franchisors should review the status of their registrations and begin preparing well in advance. In particular, they should ensure that their registrations have been properly recorded under MyFEX 2.0 and that their supporting documents and operational arrangements remain complete, accurate and compliant.

Another trend we have observed is the increasing use of licensing structures by businesses seeking to avoid the regulatory requirements associated with franchise registration. However, businesses should exercise caution when adopting such arrangements. Where a licensing arrangement contains the characteristics of a franchise as defined under the Act, it may nevertheless be regarded as a franchise notwithstanding the label adopted by the parties. Failure to register such arrangements may expose the parties to regulatory enforcement action and potential criminal liability under the Act. Notwithstanding the existence of a number of Malaysian court decisions recognising that arrangements structured as licences may nevertheless constitute franchises where the statutory elements of a franchise are present, the use of licence-based models in lieu of franchise registration remains relatively common in practice. This is likely attributable to a combination of factors, including the perceived lack of enforcement against unregistered franchise arrangements, the administrative burden associated with franchise registration, and the time required to obtain the necessary approvals and registrations. As a result, we expect the continued use of such structures to remain an area of regulatory focus and potential enforcement concern going forward.

Overall, while the Malaysian franchise sector remains stable and continues to attract both local and foreign investment, franchisors and franchisees should pay close attention to regulatory compliance, registration requirements and evolving administrative practices to ensure smooth market entry and continued compliance with Malaysian franchise laws.