Tealive vs Chatime : Settled Out of Court

After almost two years of court and arbitration proceedings, the owners of Tealive and Chatime have finally reached a mutual agreement.In a joint statement released today, 30 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 and both parties have agreed to withdraw all ongoing proceedings in Malaysian courts as well as arbitration in Singapore.

Previously on the 5th July 2018 the Court of Appeal has rejected the application by Tealive’s Loob Holding Sdn. Bhd.(“Loob”) to stay a prohibitory injunction granted in favour of Chatime’s La Kaffa International Co Ltd(“La Kaffa”) in relation to the restraint of trade was granted by the Court of Appeal on 27th June 2018. Loob has now applied to the Federal Courts to reverse the ruling on the prohibitory injunction granted in favour of La Kaffa.

What happened?

La Kaffa terminated the franchise arrangement it had entered into with Loob on the grounds that alleged breaches were committed by Loob such as withholding payments and using unapproved raw materials.

Loob then went on to open Tealive, a similar business to Chatime with a replication of Chatime’s menu, layout, outlets and team.

La Kaffa sought out injunctions against Loob to stop Loob from selling similar products as theirs and to return its properties such as the operating manuals.

The Court of Appeal allowed the injunction to stop Loob (Tealive) from continuing its business in selling similar products as La Kaffa (Chatime) in Malaysia. Loob subsequently sought for a stay on the injunction which was then dismissed by the Court of Appeal.

Loob applied to the Federal Courts to reverse the ruling on the injunction granted in favour of La Kaffa.

Both Partiees have now finally reached a mutual agreement and have decided to settle the dispute out of court.

What is the law?

La Kaffa’s case was largely based on breaches of terms in the agreements as well as s failure to comply with Section 27 of the Malaysian Franchise Act 1998.

La Kaffa claimed that the agreements entered contained terms with regard to the restraint of trade on similar businesses of the franchisor of which Loob was in breach.

Further to this, Section 27 of the Malaysian Franchise Act 1998 requires a franchisee to give a written guarantee to its franchisor that he/she, including its directors, the spouses and immediate family members and employees shall not carry on any other business similar to the franchised business operated by the franchisee during the franchise terms and for two years after the expiration or earlier termination of the franchise agreement.

In the case above, the continuance of Loob operating Tealive outlets similarly in the bubble tea business was a breach of the franchise agreements as well as a contravention of Section 27 of the Malaysian Franchise Act 1998 .

Conclusion

If franchisees were able to compete with the Franchisor at the end of the term of the franchise agreement once they have already been acquainted with the protected business know-how, this may be used to the detriment of the Franchisor and would deter most franchisors from entering into a franchise arrangement to begin with.

Fortunately, the Malaysian Franchise Act requires the Franchisee and its employees to comply with their restraint of trade covenants during the term of the franchise agreement and for a period of two years after the expiration or termination of the franchise agreement. These provisions are not only designed to protect the brand reputation that has been built by the franchisor but to also protect his intellectual property rights.

Key Take-Aways From the Chatime vs. Tealive Case

  • This case between Loob and La Kaffa provides an example to franchisors and franchisees about the operation and enforceability of restraint provisions under Malaysian law.
  • When entering an agreement, parties should identify restraint of trade clauses and assess whether they will be able to comply with the restraint of trade provisions and to be fully aware of the accompanying restrictions. The courts will not necessarily agree that the restraint is unreasonable.
  • If franchising in Malaysia (or considering doing so), franchisors should review their restraint of trade and governing law clauses to ensure they are effective as well as ensure a written guarantee is obtained from the franchisee in accordance with Section 27 of the Malaysian Franchise Act 1998.
  • If you are appointed as a franchisee, you have been granted a right by the franchisor to operate a business using the bran and concepts owned and developed by the franchisor and you are also bound by the rules of the franchise agreement and law.
  • As a franchisee you cannot freely misuse the franchisor’s intellectual property, open a side business with an identical product, or replace ingredients without prior approval from the franchisor.
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