The law that governs Franchising in Malaysia is the Franchise Act 1998. According to Section 4(f) Franchise Act 1998 :
“the franchisee operates the business separately from the franchisor, and the relationship of the franchisee with the franchisor shall not at anytime be regarded as a partnership, service contract or agency”
“franchise agreement” means a contract or an agreement made between a franchisor and a franchisee in respect of a franchise in return for any form of consideration but does not include any contract or agreement made for the purpose of direct selling as provided by the Direct Sales Act 1993.
A Franchise agreement should be in writing (Section 18(1) Franchise Act 1998) and would only require the franchisee to pay a fee or other form of consideration for the rights granted by the franchisor.
The Franchisor has the responsibility to provide assistance to the franchisee to operate the business including such assistance as the provision or supply of materials and services, training, marketing, and business or technical assistance ( Section 4(d) Franchise Act 1998).
The Franchisor grants to the franchisee the right to operate a business according to the franchise system as determined by the franchisor ( Section 4(a) Franchise Act 1998)
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 ( Section 4(b) Franchise Act 1998).
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 ( Section 4(c) Franchise Act 1998).
- The Franchise Act 1998 would not apply if the business is operated through the joint venture company itself without any franchise being involved. Another possibility is through an agency or distribution where it would have the advantage of less initial cost investment and generally there will be lower financial rewards than if an ownership share was taken in the local operation. There will also be less control over the way in which a product is marketed.
It is possible for a joint venture company to obtain appropriate licences from proprietors of certain intellectual property rights or if the property are to become the property of the joint venture, to obtain assignments of them. In this case, the joint venture company may set up a licensing agreement with a third party or the party providing the rights though normally the ability to grant these rights will be within the power of participants in the joint venture.
For a licensor, the arrangement offers a guaranteed return with little or no investment risk or start up cost, where he is uncertain of the market and do not wish to get involved in the day to day problems of the licensee’s business or in the direct aspects of production and marketing.
Licences may also be used for the purpose where one of the joint venture parties particularly a foreign party would provide the necessary skills and technology and the local party would be providing land, manpower, and/or market access as in this case.
Licensing agreements will enable the retention of royalty by the licensor which will enable some participation in ongoing business success. Again, though there will be little effective direct control over the licensee’s activities and no direct assurance that the licensee will be fully committed to the development of the business.
In this instance, a licensing agreement between the party providing the skills and the joint venture company must be put in writing and its essential purpose will be set out in the legal rights and obligations relating to everything to be provided such as one’s involvement in developing the business plan for the joint venture company, to have equal representation on the Board of the company, in decisions of the company, nominates the CEO and will also be involved in the restaurant development and fit out, menu development and staff decisions.
The Franchise Act 1998 does not regulate licences and is only concerned with franchises. Therefore it would be possible to enter into a licence agreement without being regulated by the Franchise Act 1998.