Malaysia's Bubble Tea War
A dispute between a franchisor, La Kaffa International Co. Ltd. ('La Kaffa') and a franchisee, Loob Holding Sdn. Bhd. ('Loob') over the "Chatime" bubble tea franchise has resulted in an interesting ruling from the Malaysian courts that will serve as a warning to both existing franchisors and those looking to expand their business into Malaysia.
La Kaffa is a company established under the laws of the Republic of China (Taiwan) and is based in Taiwan. Loob is a company incorporated in Malaysia. Loob was appointed the master franchisee for the Chatime bubble tea franchise in an agreement between the parties called a Regional Exclusive Representation Agreement ('RERA') and it quickly expanded to 165 outlets throughout Malaysia.
The relationship turned sour when La Kaffa alleged that Loob had breached RERA by (among other reasons):
- failing to purchase all raw materials from La Kaffa, as required;
- failing to allow La Kaffa to inspect/audit Loob's accounts, books and records; and
- failing to pay for raw materials purchased from La Kaffa.
The dispute was arbitrated in Singapore International Arbitration Centre and in January 2017, La Kaffa terminated the RERA.
Loob subsequently started its own bubble tea franchise, "Tealive". Out of the 165 Chatime franchisees in Malaysia, 161 converted into Tealive franchisees.
La Kaffa filed an application for an interim injunction in order to restrain Loob from (amongst other things):
- carrying on business which is identical or similar to the Chatime franchise;
- disclosing, using and converting La Kaffa's confidential information; and
- passing off La Kaffa's goodwill.
Loob also filed an application for an interim injunction to restrain La Kaffa from interfering with the Tealive franchise business.
Protections offered by the Franchise Act 1998
La Kaffa sought to rely on provisions of the Franchise Act 1998 ('FA 1998') under Malaysian law, relating to post-termination of a franchise agreement.
Section 26 (1) and 27 (1) of the FA 1998, respectively, require that the franchisee shall give the franchisor written guarantees that the franchisee and its employees will not:
- disclose to anyone information in the franchise's operation manual or obtained whilst undergoing training from the franchisor; or
- carry on any other business similar to the franchised business operated by the franchisee,
during the franchise term or for two years after its expiration or earlier termination.
The High Court of Kuala Lumpur ruled that although the above provisions state that the franchisee "shall" give these guarantees, they are not directly incorporated into a franchise agreement. The Court stated that if this was the intention, Parliament would have expressly provided for such implied incorporation. In other words, relying on the Franchise Act is not enough – a franchisor must include express terms in its franchise agreement.
As a result, the High Court dismissed the injunctions against Loob, allowing it to continue to operate the Tealive franchise.
What it all means
Franchisors already operating in Malaysia should check that they have complied with the requirements of the Franchise Act generally and also that their franchise agreements contain the appropriate obligations and restrictions, both against the franchisee and its 'related parties' (such as directors, employees, and their spouses and immediate family).
Franchisors looking to expand into Malaysia should take advice on the general requirements of the Franchise Act and have their agreement reviewed by a local franchise law specialist.
Both categories should also consider whether they can/wish to be able to enforce such guarantees against 'related parties' (such as directors, employees, and their spouses and immediate family) and ensure that these parties are included under any such guarantees.
For more information on this topic, please contact Gordon Drakes or your usual contact within Fieldfisher's Brand Development Team.
Co-authored by Alex Harbin. With thanks also to Foong Cheng Leong.