Korean Franchise Law Basics: Korea's Act on Fairness in Franchise Transactions

Korea has seen its share of unscrupulous local franchisors. Issues with local franchisors have led to Korea adopting one of the most franchisee-friendly franchise laws in Asia. The first comprehensive franchise act in Korea was passed in 2002. This act was substantially amended in 2007 and some revisions were made in 2010. For a recent post on Amendments to Korean Franchise Law please see: Amendments of Korean Franchise Law for 2021.

The Act on Fairness in Franchise Transactions may be found on the website of the Korean Legislative Research Institute. The translation is far from perfect and without a reading of the Presidential Decree to the Act, the reading of the Act may be a fruitless endeavor.

The major requirements regarding franchise disclosure statements, fees, termination, and non-renewal are noted in the Presidential Decree to the Act on Fairness in Franchise Transactions. The Decree, to my knowledge, has not been, officially, translated.

Major Changes to the Korean Franchise Act of 2002 (2008 & 2010):

A comprehensive Franchise Disclosure Statement is required to be filed with the Korean Fair Trade Commission (KFCC). The KFCC, normally, takes two months to review the filing. Don’t market your franchise in Korea before going through this procedure. The specific details required to be noted in the disclosure statement have been detailed in a Model Franchise Disclosure Statement that was drafted by the Korea Fair Trade Commission. Your international franchise disclosure statement will not be adequate for Korea.
Implementation of a 14-day “cooling-off” period. No money can be taken or agreements signed with a franchisee until 14-days of receipt of the Franchise Disclosure Statement. This means the Franchise Disclosure Statement that has been approved by the KFCC, not, your international disclosure statement.
Prohibition of operating in competition with a franchisee by a franchisor.
Set aside of a portion of the franchise fee in trust.
Non-renewal, only, based on “just-cause.” Termination, only, based on “just cause,” with an opportunity to remedy.

The Korean Franchise Law and the Definition of a Franchise is criticized for being too protective of franchisees (difficulty to terminate non-complying franchisees), thus, leading major international franchisors to only enter the market through a joint venture with a local conglomerate.

We have found that many of our clients have also had issues, also, with local conglomerates and some have had few issues with SME franchisees. Big doesn’t mean better. The key is a detailed localized Franchise Disclosure Statement, due diligence, a good localized franchise package, and on-the-ground experts assisting.

Please be aware that the KFCC has aggressively audited local and foreign franchisees and has not been shy in fining and filing lawsuits against franchisors that are not in compliance with Korea’s franchise law.

_________

IPG is engaged in franchise projects for franchisors and franchisees throughout Asia and North America. IPG has worked with Asian franchisors expanding into the West and Western franchisors expanding into Asia. Sean Hayes 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, and IPG Legal is consistently ranked Top Dispute Resolution Law for our litigation services.

If you would like a consultation with an English-speaking lawyer in Korea, please schedule a call at: Schedule a Call with an Attorney.