Jun 30, 2016

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

The Fair Franchising Transactions Act of Korea ("Franchise Act") and its Enforcement/Presidential Decree, the Commercial Law of Korea and the Korea Franchise Promotion Act are the main bodies of law regulating the relationship between franchisors and franchisees in Korea.  The law is enforced by the Korea Fair Trade Commission and the Korean courts.
terminating a franchise in korea
Franchise Termination in Korea

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."
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.  Few attorneys, in Korea, are adept at Korea's franchising law and even fewer lawyers understand the business-side of franchising.  Franchising is a true specialty in Korea that few attorneys know much about.   Get a Korean franchise lawyer that is business savvy prior to even consider terminating a franchise in Korea.  This lawyer, because of Korean realities, should be working with an experienced retired senior judge, since many of these cases end up in court.  The ubiquitous firms are not always the answer and not, always, the best at resolving matters in a proactive and non-conflicted manner.
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Sean Hayes may be contacted at: SeanHayes@ipglegal.com.

Sean Hayes is co-chair of the Korea Practice Team at IPG Legal. He is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty. Sean is ranked, for Korea, as one of only two non-Korean lawyers as a Top Attorney by AsiaLaw.

Sean's profile may be found at: Sean C. Hayes