Sample – Past Exam Question

To be done in Week 13

S Pte Ltd entered into the restaurant business in 2015 and it has been a huge success. S now
wants to expand into overseas markets, with Malaysia being the first stop. However, to reduce
capital outlay, S decides to grant franchises, instead of directly setting up branches or
subsidiaries overseas. After a year-long search, it finally settles for 2 unrelated companies in
Malaysia: X and Y, to which to grant the franchise.

Question 1

(a) Identify the elements of the contract between S and either X or Y.

1. Offer by franchisor, S
a. Contains specific terms of contract
b. Electronic transaction act for e-contracts
2. Acceptance by X, franchiser
a. Unconditional + acceptance
b. If franchisee tries to change any of the term, offer is invalidated → have to start
process of offer again
c. Can have aural discussion / in writing/ e format (whatsapp chat) for offer
3. Consideration
a. Something in exchange for something
i. S(Franchisor) give _ in exchange for _
ii. X(F’ee) give royalty fee/ % of revenue in exchange for _
b. Sufficient of some value
c. Consideration is likely to be executory (future profits)
4. Intention to create legal relations
a. Commercial agreements
i. Law presumes that ICLR exists
ii. Unless there’s evidence to the contrary

(b) Which of the parties would want to insist on a no-subcontracting clause and why? (2m = 2
reasons)

S would want a no-subcontracting clause

1) S would have done due diligence on X prior to engaging in contract → assured of track
record of X, part of screening process → choose X to run franchise → do not wish to
allow X to subcontract to some unknown strangers
2) Confidentiality: Franchisor shares trade secrets/ SOP/ operating manuals that are
confidential which they want to protect through a confidentiality clause in the franchise
 agreement between S and X. If subcontract to third party, no contract with third party,
confidentiality is not protected

Assignment and sub-contreacting

● Assignment and Subcontracting clause

○ Distributor shall not without consent of principal assign this agreement
○ Distributor should not without the consent of the principal enter into a
sub-distributorship in respect of this agreement
■ Applies to products and services (gym, advertising etc)
● The franchisee may not subcontract its obligations in this Agreement, without the prior
written consent of the Franchisor
● Regardless of any such approval by the franchisor, the franchisee remains solely liable for
the performance of its obligations under this Agreement
○ = if subcontractor messes up, franchisor holds franchisee liable

Question 2

Identify at least 2 matters or clauses relating to payment of royalties / franchising fees that S will
want to specify in its contract with X or Y.

(1m each)
Price variation clause
● Principal reserves the right to make modifications to any of products in any way he deems
fits
● The principal reserves the right to make variations to the price of the products in any way
he deems fit for orders
Payment clause on currency and timing
● All payments in Indonesian rupiah nd credited to __ account by __(method)
● … made within 30 days of the date of invoice
Liquidated damages clause
● If payment in price of product ordered not received within a period of 30 days, …
Termination clause
● May terminate the contract if giving 3 months notice
● May terminate agreement if delay in paying price by >30 days
Time of essence clause - relating to payment by franchisee (PROTECTING THE
FRANCHISOR!!!!!)

b) Identify 1 anti-competitive restraints which S may wish to include in the Franchise Agreement
Valid ROT - in malaysia, cannot sell competing products
Scope clause: where the franchise is set up → link to ROT
Two possible valid ROT: 1. After franchisee agreement end, cannot sell competing products/
work for competitors 2. During the franchise agreement period

Restrictive Covenants
● Distributor shallot without consent of principal sell products similar or competitive under
this agreement
Franchisee, for a period of one year after agreement’s termination, shall not own, engage in, or
be employed by, any businesses whcih is in the same as franchisor’s business and which is
located within a radius of ten miles of any business

b) Identify 1 anti-competitive restraints which X or Y may wish to include in the Franchise

Agreement
Valid ROT - in malaysia, cannot sell competing products

Assuming franchisee has the bargaining power to impose a ROT clause.

ROT clause on geographic area → cannot grant a franchise to any third party within a location of
5km of the franchisee’s franchise outlets.

Question 3

(a) Assuming there is a food poisoning incident at X due to the use of expired food by a cook
(who is an employee of X), what are the liabilities of X? As cooked food may not be a
sale of goods, do not discuss the Sale of Goods Act.

1. Cook committed a legal wrong (using expired food is a criminal offense) in the course of
business → Employer-employee ⇒ vicarious liability
2. Negligence of franchisee (not training the employee, never monitor expiry of food/ quality
of food)
3. And: breach of contract (implied term is safe food)

(b) Will S be liable for the above incident?

● Is there a principal - agent relationship? Depends on the extent of the control that principal
has over A Must A follow instructions of P? (make an assumption in answer)
● Independent contractor clause? (also means no control) ⇒ no ambiguity & no liability

Question 4

List at least 4 things to reduce S’ risks associated with wrongful actions by franchisees (such as
food poisoning)?
 ● LD clause
● Due diligence
● sample/ surprise audits and checks
● Training by franchisor
● Insurance

Clauses:

● LD: save time + deterrent from doing wrong

● Indemnity: indemnify distributor for any losses, damage, liabilities, costs, charges or
expenses resulting from breach of intellectual property rights concerning products
● Independent contractor:
● Exclusion of Liabilities (but UCTA does not permit exclusion for bodily harm)

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