Understanding the Rights and Responsibilities of Franchisees in Malaysia Under the Amended Franchise Act

This article is relevant to franchisees operating in Malaysia, as well as businesses exploring franchise opportunities. It provides an overview of the key legal rights, obligations and compliance requirements under the Franchise Act 1998 (“Act”) and its subsequent amendments, including the Franchise (Amendment) Act 2020.

Overview of Franchising in Malaysia

Franchising in Malaysia is governed by the Act and regulated by the Franchise Development Division under the Ministry of Entrepreneur and Cooperatives Development (MECD) since December 2023. A franchise allows a franchisor to grant a franchisee the right to operate a business using its system, brand, and intellectual property, while maintaining control, in exchange for fees or other consideration.

In February 2025, the National Franchise Policy 2030 was introduced to strengthen Malaysia’s franchise ecosystem, positioning franchising as a key model for sustainable growth. As businesses are encouraged to franchise, it’s crucial to understand the legal rights and obligations franchisees must comply with under the Act.

(For the distinction between franchising and licensing, refer to our previous article.)

Obligations of Franchisees

1. Registration Requirements

• Franchisees of foreign franchisors must register the franchise before commencement of business, whereas franchisees of local franchisors or master franchisees must register within 14 days of signing the franchise agreement.

• Business Implications: Failing to register is an offence, with fines ranging from RM10,000 to RM50,000 for companies. In practice, franchisees rely on franchisors to complete the registration via the MyFEX 2.0 system, which is only available to active, registered franchisors. Therefore, both franchisees and franchisors should be fully aware of their respective registration obligations before entering into franchise agreements.

2. Display of Franchise Registration

• Section 10B of the Act mandates franchisees to display the franchise registration in a visible location at the business premises.
• Business Implications: This is vital for compliance and reinforces the legitimacy of the franchise operation.

3. Condidentiality and Non-Compete Restrictions

• Sections 26 and 27 of the Act prevent franchisees, their directors, immediate family, and employees from disclosing operational information or engaging in similar businesses during the franchise term and for 2 years post-termination of the franchise.

• Business Implications: While non-compete clauses are typically unenforceable under the Contracts Act 1950, the Act provides a statutory exception. These obligations also extend quite widely beyond those directly involved in the business, so franchisees must monitor and educate relevant parties to avoid breaches, during and even after the franchise relationship ends.

4. General Statutory Obligations

• Franchisees must also act honestly and lawfully (Section 29) and make timely payments of franchise fees, royalties, and other agreed payments (Section 30).

Rights of Franchisees

1. Mandatory Franchise Agreement Terms: Section 18(2) of the Act requires certain terms to be included in all franchise agreements, including clauses on intellectual property, territorial rights, renewal terms, and a cooling-off period of at least 7-working days, during which the franchisee may terminate the agreement (with reasonable fees retained by the franchisor).
2. Pre-Contractual Disclosure: Section 15 of the Act mandates that franchisors provide franchisees with the franchise agreement and related documents at least 10-days before signing, allowing the franchisees reasonable time for review and to seek professional advice. This requirement is an important safeguard to address franchisees commonly being pressured to sign the franchise agreement quickly, without having the benefit of receiving all other related documents and information.  
3. Protection Against Discriminatory Practices: Section 20 of the Act prohibits discriminatory practices by franchisors in fees, services, and advertising unless justified by statutory exceptions.
4. Minimum Franchise Term and Renewal Rights: Section 25 of the Act mandates a minimum term of 5 years for franchise agreements. Under Section 34, if the franchisee has adhered to the agreement, the franchisor is required to renew the franchise on terms that are no less favourable than the original agreement. However, if the franchisor wishes to terminate the franchise, they must follow the termination procedures and penalties set out in the Act, such as providing 6 months’ notice or paying the appropriate compensation to the franchisee.

Conclusion

The Franchise Act is generally seen as a ‘paternalistic legislation’ that seeks to protect franchisees by offering them certain statutory protections, and ensuring that certain mandatory provisions cannot be waived or contracted out of by savvy franchisors. Section 28 of the Act also seeks to invalidate any clauses that attempt to bypass the Act’s requirements. Therefore, before making any payments or signing any franchise agreement with a franchisor, franchisees should fully understand their rights and obligations, conduct reasonable due diligence, consult a legal professional to verify that the franchisor has in fact complied with key mandatory provisions like registration and disclosure obligations, and to identify non-mandatory provisions that may still be open for negotiation with a franchisor.

***

This article was written by Low Rui Thong (Associate) from Donovan & Ho’s corporate practice. 

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.