They say doing business with close friends is a bad idea. The recent Court of Appeal decision in Dr HK Fong Brainbuilder Pte Ltd v SG-Maths Sdn Bhd & Ors  1 CLJ 155 regarding a franchise business between best friends of 55 years, appears to lend support to this advice.
Dr. Foong Brainbuilder Pte Ltd (“DFB”) is a Singapore company incorporated by one Dr. Fong Ho Kheong (“Dr Fong”) to run the BrainBuilder Business. The business uses a method developed by Dr. Fong called ‘Dr. Fong’s Method’ to teach mathematics to students in primary and secondary schools.
Two of Dr. Fong’s best friends of 55 years were interested to start the BrainBuilder Business in Malaysia. As a result, SG-Maths Sdn Bhd (“SG-Maths”) was incorporated in Malaysia in 2005 with the two friends owning a total of 85% of the shares and Dr Fong the remaining 15%.
DFB entered into a master license agreement with SG-Maths in 2008 which expired in 2012. In 2013, another master license agreement (“MLA 2013”), a guarantee and power of attorney was executed. The MLA 2013 allowed SG-Maths to, among others, operate and manage the BrainBuilder Business in Malaysia.
DFB alleged that SG-Maths had breached the MLA 2013:
- by awarding a sub-license to another party to operate the business; and
- when the two best friends started/operated 3 other competing business with the BrainBuilder Business and used Dr. Fong’s Method which is the confidential information of DFB.
DFB sought to enforce the terms under the MLA 2013 as well as the guarantee and power of attorney, particularly the post-termination provisions whereby DFB would take over SG-Maths’ BrainBuilder Business Centre.
Decision of the Court
The High Court dismissed DFB’s claim. The High Court found that although there was a breach of the MLA 2013, this was a franchise agreement under the Franchise Act 1998 (“FA 1998”) which required registration under FA 1998. Since the Brainbuilder Business under the MLA 2013 was never registered, it was illegal and void and unenforceable.
The High Court rejected the argument that the MLA 2013 was a licence and not a franchise. The Court is not bound by the label or description given by parties to the agreement. The Court found that the operation of SG-Maths’ BraindBuilder Business fulfilled all four prerequisites of a franchise as set out under section 4(a), (b), (c) and (e) of the FA 1998 namely:
(a) the franchisor grants 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) franchisor grants the right to use a mark or trade secret or any confidential information or intellectual property owned including any license the franchisor owns;
(c) the franchisor possesses the right to administer continuous control during the term over the franchisee’s business operations; and
(e) in return for the grant of rights, the franchisee may be required to pay a fee or other form of considerations.
In determining whether the FA 1998 applied to DFB, a foreign franchisor, the High Court applied a purposive approach in interpreting the FA 1998. The High Court also found that as the MLA 2013 is illegal and void, the personal guarantee and the power of attorney is similarly illegal, void and unenforceable.
DFB appealed to the Court of Appeal.
Court of Appeal
The Court of Appeal affirmed the High Court’s decision holding, amongst others, that:
- The High Court was correct to adopt a purposive approach in interpreting the FA 1998 and finding that the requirements to register applies to a foreign franchise. DFB in failing to register the BrainBuilder Business franchise had therefore breached the FA 1998.
- The requirement to register was mandatory and failure to do so meant the franchise was illegal. Although the Courts should normally be slow to strike down commercial transactions for illegality, to hold otherwise would undermine the FA 1998. This is not a situation where a particular illegal term can be severed, since the failure to comply with the FA 1998 rendered the entire MLA 2013 tainted with illegality.
- The three documents (namely, the MLA 2013, the guarantee and the power of attorney) form a single composite transaction as all three documents concern the same BrainBuilder Business and were prepared by the same solicitor and executed on the same day. The MLA 2013 also provided for the execution of the guarantee and the power of attorney. As such, the illegality of the MLA 2013 will consequently taint the guarantee and the power of attorney making the guarantee and the power of attorney likewise, void in its entirety.
Flouting any statutory requirements, in this case the FA 1998, may result in the agreement and all other related agreements, being totally unenforceable. Parties to a contract must therefore be aware of the nature of the transaction and that the relevant laws are complied with.
The Courts in determining what type of contract or agreement is before it will not be bound by the name parties gave it. The Courts will look at the facts surrounding the contract or agreement and parties’ conduct making its determination.
Merely relabelling documents to circumvent statutory requirements will not be, and has never been, sufficient. Parties who do so take the risk that in the event of a dispute, their contracts may not be worth the paper they are written on.
This article was written by Donovan Cheah and Yan Nie Th’ng. Donovan has been named as a Recommended Lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019, 2020 and 2021, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.
Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.