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Do you remember your first cup of bubble tea?

To the uninitiated, sometime back it looked like popular bubble tea brand Chatime had “changed” or “rebranded” itself into Tealive. This is not entirely true.

What is the Bubble Tea War about?

To recap, there was a dispute between the franchisee of Chatime in Malaysia, Loob Holding Sdn Bhd (“Loob”) and the Chatime franchisor La Kaffa International Co Ltd (“La Kaffa”). It was alleged among other things that Loob had used raw materials that were not approved under the franchise agreement, causing La Kaffa to terminate the franchise agreement. After the termination, Loob started a similar business under the name “Tealive”.

La Kaffa was of the view that Loob having the benefit of the Chatime franchise business in Malaysia, should not be allowed to set up a rival business in breach of the franchise agreement and franchise law.

La Kaffa sought a prohibitory injunction to restrain Loob from operating as Tealive, and a mandatory injunction to compel Loob to return its properties. The High Court dismissed the application for the prohibitory injunction but allowed the mandatory injunction. La Kaffa appealed to the Court of Appeal against the High Court’s decision to refuse the prohibitory injunction, and Loob cross-appealed against the High Court’s decision to allow the mandatory injunction. .

On 27 June 2018, the Court of Appeal allowed La Kaffa’s appeal, and dismissed Loob’s cross-appeal. Essentially, this outcome would mean that unless Loob obtains a stay of execution, Loob is prohibited from carrying on a business similar to Chatime.

What were the Court of Appeal’s findings?

Briefly, the Court of Appeal held, among other things:

  • When a claimant succeeds in a mandatory injunction, it will follow on the same facts that the claimant generally will be able to secure a prohibitory injunction as well. This is because the threshold to grant an interlocutory mandatory injunction is higher compared to the threshold to grant a prohibitory injunction.
  • Where parties have agreed not to do certain acts (in the franchise agreement) and where a statute (the Franchise Act) also provides for such protection, the court is obliged to give effect to ensure the salient terms of the agreement as well as the statute is not breached.
  • The fact that there are clauses in the franchise agreement specifying a monetary penalty for breach does not mean that an injunction cannot be granted. The issue of compensation is remedial in nature. It is an agreed form of compensation which does not override the paramount obligation not to breach a salient term of contract which is also protected by statute.
  • It is not justifiable to refuse the injunction on the grounds that the Tealive business (161 outlets) and livelihood of its 800 employees would be affected, since Loob breached legal obligations related to restraint of trade as well as franchise law.  In crude terms, Loob had overnight changed the name of the business from Chatime to Tealive. The Court of Appeal was of the view that the High Court’s refusal to grant a prohibitory injunction was a flaw which needs to be corrected, especially since Loob was using La Kaffa’s assets in running the Tealive business.

Weren’t parties arbitrating this dispute? Why is this being dealt with in Court?

Parties agreed to arbitrate this dispute in Singapore as per the arbitration clause in the franchise agreement. Section 8 of the Arbitration Act 2005 states that the Malaysian courts shall not intervene in arbitration matters, which the High Court interpreted as meaning that the Court has no jurisdiction to decide on the dispute between La Kaffa and Loob.

The Court of Appeal disagreed. According to the Court of Appeal, the court has very wide powers endowed by the Constitution to sustain the rule of law, and may exercise its inherent jurisdiction to grant relief notwithstanding the relevant statutes may not expressly allow the court to do so. Hence it will not be a correct statement of law to say that the court has lost its inherent jurisdiction to act on matters related to arbitration. Section 8 of the Arbitration Act 2005 advocates a minimum intervention, not no intervention at all.

Is the Court of Appeal’s decision final?

Loob may still appeal to the Federal Court, but they will need to obtain leave first. Unless they obtain a stay of execution, pursuant to the Court of Appeal ruling, Loob may not continue operating its Tealive business.

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This article was written by Donovan Cheah (Partner) and Zi-Han Lim (Associate), with assistance from Denise Tia (Intern).  If you have a query, please contact us.

 

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