CHATIME VS. TEALIVE – RESTRAINT OF TRADE AND FRANCHISE

Contributed by: Khairul Ikhwan bin Shaperi

Introduction

The business of franchise in Malaysia is a growing sector and with the recent public dispute between the owner of the CHATIME brand, La Kaffa International Co. Ltd (“La Kaffa”) and former master franchisee, Loob Holdings Sdn Bhd (“Loob”) making news, it is apt to look at the recent Court of Appeal decision in the case of La Kaffa International Co Ltd v Loob Holdings Sdn Bhd (Civil Appeal No. W-02(IM)(IPCV)-1261-07/2017) pertaining to the restraint of trade clause.

Brief Facts

The dispute was triggered when Loob breached the Regional Exclusive Representation Agreement (“RERA”) and started a similar business under the brand “TEALIVE” shortly after it exited the “CHATIME” Franchise.  As a result, La Kaffa sought interim injunctions from the Malaysian High Court to restrain Loob from conducting a similar business (prohibitory injunction) pending the disposal of the Singapore International Arbitration Centre (“SIAC”) Arbitration No. 274 of 2016 and for Loob to return its properties to La Kaffa (mandatory injunction).

Pursuant to Article 18 of the RERA, the RERA was governed by Singapore laws and any dispute regarding the RERA was to be arbitrated at the SIAC. As such, the main franchise and contractual dispute was to be arbitrated in Singapore. To date, there is no decision issued for the SIAC Arbitration No. 274 of 2016.

The Malaysian High Court found in favour of La Kaffa but only granted an injunction in part and ordered Loob to return La Kaffa’s properties and to provide the proper account of “TEALIVE”s business to La Kaffa solely to support and aid the SIAC Arbitration No. 274 of 2016.

La Kaffa then filed an appeal in the Court of Appeal against part of the High Court’s judgment whilst Loob also filed an appeal in the Court of Appeal to restrain La Kaffa from interfering with their “TEALIVE” business. The Court of Appeal in allowing La Kaffa’s appeal held that the mandatory injunction and the prohibitory injunction were in order and the High Court ought not to have refused the prohibitory injunction in granting the mandatory injunction and addressed the following issues:

i.  Whether the High Court has failed to find a post-termination non-compete obligation applicable to Loob?

   The Court of Appeal held that the High Court failed to consider Article 15 of RERA and Section 27 of the Franchise Act 1998 in the proper perspective relating to the injunction and had relied on cases where such provisions have not been dealt with. The Court of Appeal held that 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, more so when undertaking to damages is in order.

ii. Whether the High Court’s decision to refuse the prohibitory injunction based on the monetary compensation granted is justified?

    The Court of Appeal held that the issue of compensation is remedial in nature. It is an agreed form of compensation and does not override the paramount obligation not to breach a salient term of contract which is also protected by statute. The Court of Appeal relied on the cases of (i) Pentadbir Tanah Daerah Petaling v. Swee Lin [1993] 3 MLJ 489; (ii) Katran Shipping Co Ltd v. Kenven Transportation Ltd [1992] 1 HKC 538; (iii) AV Asia Sdn Bhd v. Measat Broadcast Network System Sdn Bhd [2014] 1 CLJ 821; and (iv) Plaza Rakyat Sdn Bhd v. Datuk Bandar Kuala Lumpur [2012] 7 MLJ 36 in order to support this proposition. 

iii. Whether the decision in granting an interlocutory injunction is at the absolute discretion of the trial court?

    The Court of Appeal held that the power to grant an interlocutory injunction is at the absolute discretion of the trial court and will rarely be interfered by the appellate court. However, the Court of Appeal held that the instant case is not related to the granting or not granting of the interlocutory injunction. The unique issue in this instant case is that the High Court had granted a mandatory order and provided some recognition in relation to the prohibitory order but did not make the prohibitory order itself. As such, the Court of Appeal is required to interfere with the High Court’s decision in granting the interlocutory injunction.    

iv. Whether the High Court’s decision to consider the effect of the prohibitory injunction on the livelihood of Loob’s employee is correct?

   The Court of Appeal held that the effect of the prohibitory injunction on the livelihood of Loob’s employee is not a justifiable reason as the conduct of Loob in changing the name of their business from “CHATIME” to “TEALIVE” is not only in breach of legal obligation related to the restraint of trade but also a breach of franchise law which does not encourage criminal or tortious conduct of business and goodwill. The Court of Appeal further held that the mandatory injunction granted by the High Court clearly acknowledges the existence of the breach of the said obligation as well as the fact that Loob was using La Kaffa’s asset in running their “TEALIVE” business. As such, the Court of Appeal considered this to be a flaw that needed to be corrected by appellate intervention.  

Conclusion

The Court of Appeal’s decision in allowing La Kaffa’s appeal has empowered franchisors in Malaysia to rely on their franchise agreement or arrangement as well as applicable law in relation to franchises. However, the battle is not over as Loob has filed an application for leave to appeal to the Federal Court and has managed to obtain a stay. It will be interesting to see the Federal Court’s stance on the issue of the restraint of trade for franchise business in Malaysia in the near future.

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