La Kaffa International Co Ltd v Loob Holdings Sdn Bhd and Another
Franchising is simply defined as a tit for tat strategy where on one side it helps smaller companies to develop and prosper under the guidance of a bigger company while simultaneously allowing the bigger company to increase and expand their distribution. Guidance in this scenario encompasses being bound by rules of the franchise agreement.
Franchising in Malaysia is governed by the Franchise Act 1998 (Franchise Act), as amended by the Franchise (Amendment) Act 2012 which came into force on 1 January 2013, and the Franchise Regulations 1999 (amended by the Franchise (Forms and Fees) (Amendment) Regulations 2007).
Loob Holding Sdn Bhd (“Loob Holding”) was appointed as a Chatime franchisee in 2011 by La Kaffa International Co. Ltd (“La Kaffa”) and entered into a franchise agreement called Regional Exclusive Representation Agreement (RERA). Chatime outlets mushroomed across Malaysia with 165 outlets being owned and operated by Loob Holdings. Loob Holdings is the master franchisee with the outlets being either directly owned, sub-franchised or a joint venture with sub-franchisee.
“Due to disagreements with Loob Holdings, we have no choice but to make this painful decision”
Executive Vice President, La Kaffa
On 5th January 2017, despite having 24 more years to go, La Kaffa terminated RERA with Loob Holdings. Among others La Kaffa alleged that :
- Loob Holdings has violated Article 7 of RERA which states that Loob Holding can only purchase raw materials from La Kaffa.
- Loob Holdings has violated Article 10 of RERA by delaying and denying La Kaffa’s request to exercise its rights to inspect and audit.
- Despite repeated demands, Loob Holding has failed to comply with the terms of RERA and/or failed to make payment of, amongst others, the purchase of raw materials from the Plaintiff.
The dispute between the parties was to be resolved through arbitration in Singapore. This is due to Article 18 of the RERA which states that the RERA is governed by Singapore laws and any disputes regarding the RERA shall be arbitrated at the Singapore International Arbitration Centre.
“The three franchisees with four stores will maintain the Chatime name. The rest will be rebranded into Tealive from Feb 18 onwards”
CEO, Loob Holdings
Following the termination of RERA, in what appeared to be a well calculated and well maneuvered move, Loob Holdings was able to convince 95% of existing Chatime outlets to join them in new venture under the Tealive brand. At the time of the takeover, Chatime Malaysia accounted for 20% of La Kaffa’s total revenue. La Kaffa therefore commenced proceeding in the Malaysian High Court to obtain injunction (prohibitory and mandatory) against Loob Holdings pursuant to section 26(1) and 27(1) of the Franchise Act 1998. The interlocutory proceeding was issued pending the disposal of the Singapore Arbitral Proceedings under provision relating to application for interim injunction under section 11 of the Malaysian Arbitration Act 2005. As La Kaffa did not seek a perpetual injunction, if the Court grants interim injunction, it would last until the disposal of the Singapore Arbitral Proceeding.
The High Court held that it could not close Tealive down because provision s. 27 of the FA 1998 was not incorporated into the RERA and Loob Holdings and its related parties did not give a written undertaking to cease business for two years. The High Court was of the view that Tealive does not need to close down because Loob Holdings did not promise to close down after the termination of the RERA. The High Court Judicial Commissioner Wong Kian Kheong (as then he was) was of the view that the issue before the Court was whether La Kaffa is entitled to an interim injunction so that it can be used to support, assist, aid or facilitate the Singapore Arbitral Proceedings. Further, the high court found that the balance of convenience lies against the granting of the interim injunction in view that it carries a higher risk of injustice than a refusal of the interim injunction. As such, La Kaffa’s claim was refused.
“the following third parties will be adversely affected by interim restraining injunctions awarded against Loob
(iia) 161 Tealive Franchisees have to close shop immediately;
(iib) the livelihood of about 800 employees of Loob and 161 Tealive Franchisees (Tealive Employees) will be jeopardised;
iic) the families and dependants of Tealive Employees; (iid) the suppliers and contractors of Loob and 161 Tealive Franchisees;
(iie) the bankers and creditors of Loob and 161 Tealive Franchisees; and
(iif) the landlords of the office and business premises of Loob and 161 Tealive Franchisees”
WONG KIAN KHEONG
Judicial Commissioner High Court (Commercial Division)
La Kaffa appealed to the Court of Appeal next and in granting the prohibitory injunction, overturned the High Court’s decision. The Court of Appeal held that firstly, a simple construction of Article 15 of the RERA as well as s. 27 of FA 1998 will demonstrate that there is an obligation for Loob not to compete with La Kaffa’s business even after the termination of the RERA. In simple terms, The Court of Appeal said that the franchise agreement and the Franchise Act both state that the franchisee (Tealive) cannot carry on a competing business after terminating the franchise agreement. The creation of Tealive was, on the face of it, in contravention of the prohibition (doing something despite not being allowed to do it) under the franchise agreement and the Franchise Act. Secondly, In light of Article 15 of the RERA and s. 27 of FA 1998, the High Court ought not to have refused the prohibitory injunction. When parties have agreed not to do certain acts and a statute 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 Court of Appeal held that the court should not allow someone to continue doing something that they aren’t legally allowed to do in the first place. Moreover, The Court of Appeal found it unjustifiable for the High Court to rely that the Tealive bubble tea business consisting of 161 outlets and the livelihood of 800 employees will be affected.
“Courts should not lend its hand to persons who on the face of records are seen to be cheats”
Hamid Sultan Bin Abu Backer, JCA
Court of Appeal
Fortunately for Loob Holdings, despite being dismissed on a majority of 2-1, the stay of execution was granted by the Federal Court. Nevertheless, Tealive will be forced to close down until the disposal of the Singapore Arbitral Proceedings if the Federal Court were to refuse leave for Loob Holdings to appeal to the Federal Court.
In a joint statement released on the 30th August 2018, Loob Holding Sdn Bhd (Tealive) and La Kaffa International Co Ltd (Chatime) announced that both companies have reached an out- of court settlement to amicably resolve all disputes arising from their one time franchise relationship of the Chatime bubble tea brand.
In light of the amicable resolution, both parties have agreed to withdraw all ongoing proceedings in Malaysian courts as well as arbitration in Singapore.