In South Korea, the Franchise Act governs the ongoing relationship between franchisors and franchisees, including various provisions related to franchise agreements.
A. Obligation to Register and Provide Disclosure Documents
Before entering into a franchise agreement, the franchisor must register the disclosure document with the relevant administrative authority (Article 6-2 of the Franchise Act) and provide the disclosure document to the prospective franchisee (Article 7 of the Franchise Act).
B. Prohibition of Unfair Trade Practices
The franchisor is prohibited from engaging in the following unfair trade practices that may hinder fair business transactions in the franchise relationship (Article 12 of the Franchise Act):
- Refusal to Trade: Except in cases where it becomes difficult to continue the business relationship due to reasons attributable to the franchisee, such as breach of contract, the franchisor may not unfairly suspend, refuse, or significantly limit the supply of goods, services, or business support to the franchisee. This includes unfair termination, refusal to renew the contract, or suspension of support for essential goods, raw materials, or equipment necessary for the franchise business.
- Conditional Transactions: A franchisor may not unfairly restrict or control a franchisee’s business activities, which includes restricting the price of goods or services that it provides, limiting trading partners, or trading areas.
- Abuse of Superior Bargaining Position: The franchisor may not abuse its superior bargaining position to unfairly impose disadvantages on the franchisee by:
- Compelling the franchisee to purchase or lease unnecessary goods, services, or raw materials beyond what is necessary for operating the franchise business.
- Setting unreasonable sales targets and forcing the franchisee to meet them.
- Imposing or changing contract terms that are difficult for the franchisee to fulfill or are unfavorable to the franchisee.
- Unfairly forcing the franchisee to provide economic benefits or bear costs.
- Unreasonably interfering with the franchisee’s management activities.
- Engaging in acts equivalent to the aforementioned conducts that may impose disadvantages on the franchisee.
- Unfairly Imposing Liability for Damages: A franchisor may not unfairly impose liability for damages on a franchisee, such as by imposing excessive penalties.
- Unfair solicitation of franchisees: The act of improperly inducing franchisees of a competing franchisor to engage in transactions with oneself.
C. Prohibition of Infringement on Business Territory and Restriction on Operating Hours
The franchisor may not, without justifiable cause, operate a directly operated store or a franchise of its own or its affiliate within the franchisee’s business territory in the same kind of business (Article 12-4(3) of the Franchise Act). Additionally, the franchisor may not force the franchisee to operate during late-night hours if such operations incur losses for the franchisee (Article 12-3(2)).
Franchise agreements must include the following (Article 11(2)):
- Matters concerning the grant of a license for Business Symbols;
- Matters concerning the terms and conditions of franchisee’s business activities;
- Matters concerning the training, education, and business guidance for the franchisee;
- Matters concerning the payment of franchise fees and other costs;
- Matters concerning the demarcation of business territory;
- Matters concerning the term of the agreement;
- Matters concerning the transfer of business;
- Matters concerning the grounds for termination of the agreement;
- The fact that a franchise deposit shall be deposited in the depository for two months from the date on which the prospective franchisee or franchisee enters into the franchise agreement (or until the date of commencement of the franchise business, in cases where the franchisee commences the franchise business before the expiration of such two months): Provided, that if a franchiser carries a damage compensation insurance for its franchisees pursuant to Article 15-2, matters concerning the insurance policy shall be included therein;
- The fact that the prospective franchisee has consulted an attorney or a franchise trader;
- Matters concerning compensation for damages incurred by the franchisee due to the franchisor’s unlawful acts or its employees, or acts contrary to social norms that may damage the reputation or credit of the franchise business;
- If the franchisor compels the franchisee to trade with designated parties, the types of real estate, services, facilities, goods, raw materials, or lease terms subject to such compulsion, and the method for calculating supply prices;
- Matters concerning conditions for refund of franchise fees and other payments;
- Matters concerning the installation, maintenance, and cost burden of the franchisee’s operational equipment and fixtures;
- Matters concerning measures related to the termination and cancellation of the franchise agreement;
- Justifiable reasons for the franchisor to refuse the renewal of the franchise agreement;
- Matters concerning the trade secrets of the franchisor;
- Matters concerning compensation for damages due to breach of the franchise agreement;
- Procedures for dispute resolution between the franchisor and franchisee;
- Matters concerning the contract with the previous franchisee in the event the franchisor transfers the franchise business to another business operator; and
- Matters concerning measures to be taken upon the expiration of the intellectual property rights of the franchisor must be included.
Additionally, the franchisor is required to designate the business territory of the franchisee and specify them in the franchise agreement (Article 12-4).