The “Tealive-Chatime” Saga – Passing Off Pending Arbitration / Dispute Resolution?

Recently, members of the public and the business community alike were entranced by the dispute between the Taiwan based beverage company, La Kaffa International Co Ltd and a Malaysian company, Loob Holdings Sdn Bhd arising over the ‘Chatime’ and ‘Tealive’ brands.

Although the saga had recently reached its conclusion vis-à-vis settlement between both parties, the legal issues arising therein are still worthy of discussion. Specifically, could a franchisee engage into a similar business to compete with the franchisor pending the resolution of any dispute under the franchise agreement? In this article, we attempt to decode the workings behind this saga on this issue from the legal perspective:

The Facts

“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” – John Adams

As such, we rely on the findings of the High Court judge and the Court of Appeal judge on the material facts of the dispute. The story goes on below:

  1. La Kaffa entered into an agreement with Loob which appointed Loob as the master franchisee of Chatime in Malaysia.
  2. Subsequently, La Kaffa alleged that Loob had breached the franchise agreement by, among others, failing to perform a few obligations under the agreement. A notice of arbitration has been sent to commence arbitration proceedings in Singapore. Likewise, Loob gave a notice of a counterclaim in the arbitration proceedings.
  3. A few months later, La Kaffa terminated the agreement.
  4. Then, Loob started its Tealive franchise. 161 Chatime franchises in Malaysia ‘converted’ to be Tealive franchises.
  5. La Kaffa sued Loob at Court and sought to, among others, an injunction to restrain Loob from passing off La Kaffa’s goodwill via its Tealive business.
  6. In response, Loob filed another suit against La Kaffa to stop it from interfering with Loob’s Tealive franchise business.

Decisions of the Court

Before delving into the decisions, it is pertinent to understand the underlying rules of granting injunctions that forms the basis of the courts’ decisions in the following order:

  1. There must be at least a serious question to be tried in respect of the cause of action;
  2. If yes, whether damages constitute an adequate remedy for the plaintiff;
  3. If no, whether the balance of convenience lies in favour for an injunction to be granted;
  4. If the balance of convenience lies in favour of granting an interm restraining injunction, whether there is any policy or equitable consideration which would deter the grant of the injunction?

 

High Court

Briefly, the High Court decided that there is a serious question to be tried, and that damages are adequate remedy, and that the balance of convenience lies heavily towards Loob in not granting the injunction against it. La Kaffa’s prayers for injunctive relief against Loob were refused.

However, the High Court ordered Loob to return all proprietory information in relation to the Chatime franchise to La Kaffa. Further, Loob was required to submit monthly accounts on profit to La Kaffa pending the conclusion of the arbitration proceedings. The rationale was that in the event that Loob loses in the arbitration proceedings, the arbitral panel would have an easier time to quantify the damages payable to La Kaffa by Loob. This is known as the ‘minimalist’ approach in arbitration law where the Court would seek to distance itself from interfering with the functions of the arbitral panel in deciding the merits of the dispute and in an application for injunction pending arbitration, the Court would strive to come to a decision that that would assist the arbitral panel in performing their functions, which the author opines that the learned High Court judge had done so in the present case.

Court of Appeal

At the Court Of Appeal, a majority decision (2-1) overturned the High Court decision. Armed with the inherent jurisdiction of the court to administer justice and in light of article 15 in the agreement and s.27 of the Franchise Act which prohibits competitive trade after termination of franchise agreement, the Court of Appeal decided that Loob should be restrained to compete with La Kaffa pending conclusion of the arbitration proceedings vis-à-vis Tealive.

The Court also decided that there was no indication that damages are adequate remedy for La Kaffa and the loss of livelihood is not a justifiable reason to tilt the balance of convenience in favour of Loob. The message was clear: Tealive cannot continue in the circumstances. It seems that the Court of Appeal had set a harsher tone in the present case as compared with the High Court from the excerpts below:

The conduct of Loob on the face of record is not only in breach of legal obligation related to restraint of trade but also breach of franchise law which does not encourage criminal or tortious conduct of business, goodwill, etc. The mandatory injunction clearly supports the breach of obligation as well as the fact that Loob was using La Kaffa’s asset in running “TEALIVE” business.

Unhappy with the decision, Loob filed an application for leave to appeal to the Federal Court. Meanwhile, an application to postpone the enforcement of the Court of Appeal’s order was filed by Loob. Surprisingly, the Court of Appeal were so adamant in upholding its findings on Loob that it had dismissed Loob’s application in an unwavering manner as shown below:

Courts should not lend its hand to persons who on the face of record are seen to be cheats

Whether such comments were warranted remains a point of contention for many legal practitioners to this day.

Ultimately, the entire saga came to an abrupt end in light of the settlement reached by both parties.

 

What does this mean for franchise business owners / franchisees?

Section 27 of the Franchise Act 1988 is applicable to all franchise agreements which governs the operation of franchises in Malaysia. It states:

  • A franchisee shall give a written guarantee to a franchisor that the franchisee, including its directors, the spouses and immediate family of the directors, and his employees shall not carry on any other business similar to the franchised business operated by the franchisee during the franchise term and for two years after the expiration or earlier termination of the franchise agreement.
  • The franchisee, including its directors, the spouses and immediate family of the directors, and his employees shall comply with the terms of the written guarantee given under subsection (1).
  • A person who fails to comply with subsection (1) or (2) commits an offence.

Although the Act does not specify the penalty for the failure of complying with it, at present the judiciary seems to have taken a very stern position in enforcing the said provision.

Thus, franchisees should take utmost care in performing their obligations and under the franchise agreement. Although the Tealive franchise seems to have survived the present ordeal, it had come at the expense of a great amount of time and risk to the business.

In the event of a fallout between franchisors and franchisees, it would be wise to resort to negotiations as a matter of prudent risk management. If such move proves to be challenging, kindly consult a lawyer.

 

Disclaimer

The content of this article is of a general nature. You are advised to seek legal consultation on any matters pertinent to the contents of the article above.

 


By Kenny Lam (view profile)
Associate, Azman Davidson & Co (Dispute Resolution, IP)
+603 2164 0200 (ext no. 188)
lam.kianyip@azmandavidson.com.my

Recent Posts