Termination of a Franchise Agreement in Korea: Korean Franchise Law Basics

The Fair Transactions in Franchise Business Act (“Franchise Act”) and the Fair Transactions in Large Franchises and Retail Business (“LFBA”) are the major laws governing the relationship between a franchisor and a franchisee. Whereas the general provisions of the Monopoly Regulation and Fair Trade Act (MRFTA), Commercial Act and Civil Act, additionally, regulate the franchise relationship and other business relationships in Korea.

See: Definition of a Franchise in Korea for the Definition and an explanation of Korean Disclosure Requirements.

Korea’s Franchise Act, facially, limits the power of the franchisor to terminate a franchise. The Franchise Act notes that:

“Article 14 of the Franchise Act of Korea
(1) Any franchisor that intends to terminate a franchise agreement shall clearly note the franchisee’s breach of the agreement during a grace period of not less than two months and shall give written notice at least twice that it will terminate the agreement unless such breach is corrected during the given period: Provided, that the foregoing shall not apply to cases specified by Presidential Decree…
(2) The termination of a franchise agreement without complying with the procedure under paragraph (1) shall have no effect.”

If a franchisee requests to renew a franchise during the 90 to 180 days period prior to expiration of the franchise agreement, the franchisor must renew unless the franchisee is behind on payments, materially breached the franchise agreement or the franchise is more than ten years old. Thus, the “guaranteed term” of a franchise for a franchisee in Korea is 10 years. (Article 13(1) Franchise Act). The following Article 14 is, thus, limited to the first ten years of the relationship – with some exceptions.

Additionally, to successfully prevail in a challenge to termination, the Franchisor must : (1) Clearly indicate to the franchisee the franchise agreement was breached; (2) Provide the franchisee two months to remedy the breach; and (3) provides at least two written notices of the breach.

The major published disputes, with regard to Article 14 of the Franchise Act of Korea, relates to the seriousness of the alleged breach alleged by the franchisor, whether the breach was corrected and the intent of the franchisor in terminating. Because of many perceived abuses by franchisors, the Fair Trade Commission of Korea has been active in fining franchisors for these perceived abuses and the courts have deemed some terminations as ineffective under Article 14(2) of the Franchise Act.

Article 15 of the Presidential Decree/Enforcement Decree to the Franchise Act stipulates certain exceptions to the “grace period/cure period” noted in Article 14 of the Franchise Act of Korea.

The exceptions include:

1. Franchisee Bankruptcy, insolvency, or corporate reorganization;
2. Franchisee bounced promissory note;
3. Franchisee’s Force Majeure;
4. Franchisor business is damaged because of dissemination of malicious lies or the leak of trade secrets by the franchisee;
5. Franchisee’s violation of law in relation to operation of the franchised business that is not rectified;
6. Franchisee’s violation of law in relation to operation of the franchised business that is impossible to rectify;
7. Repeated violation of legal franchisor demands by the franchisee;
8. Franchisee operates the franchise in a manner that gives rise to an imminent fear to public health or safety;
9. Franchisee abandons the franchise business; and
10. Franchisee is convicted of a crime related to operation of the franchise business.

Terminating a Franchise is not easy in Korea. Get a great Korean franchise lawyer that is business savvy prior to even consider terminating a franchise in Korea.

Sean’s profile may be found at: Sean C. Hayes. To schedule a call with Sean Hayes, please click: Schedule a Call with Sean Hayes.

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