Privity of Contract in Franchise Agreements in Korea: Korean Franchise Law Updates

Normally, in Korea, a contract/agreement cannot confer rights nor impose obligations upon a person who is no a party to the contract/agreement. One interesting case, in franchise law, applied this principle to the benefit of the franchisor and the detriment to a supplier. A Supplier delivered food through a Distributor to a Franchisee based on a franchisee requirement iterated in a franchise agreement with a franchisor. The case brings to light, also, the potential liability of franchisors for acts of Korean franchisees.

The dispute occurred, of course, since the Supplier was not paid for an outstanding order, since the Franchisee was insolvent. The Franchisor (deep pocket) was not insolvent and, thus, the only available option for collection was via the Franchisor. One caveat is that the Franchisor was paid a commission by the Supplier/Distributor for sales to the Franchisee and as noted above, the Franchisee was mandated to use this specific Supplier. Thus, the Franchisor had a business relationship with the Supplier.

The Supreme Court of Korea held, in part, that:

The Franchisor was not liable for the non-payment of the debt by the franchisee, since the Franchisor did not have privity of contract with the Supplier even though the Fair Transactions in Franchise Business Act allows the franchisor to mandate that franchisees use a specific supplier (The Fair Transactions in Franchise Business Act Article 12 (1)-2, Article 12 (2), Enforcement Decree of the Fair Transactions in Franchise Business Act Paragraph 13 (1) attached Table 2, Paragraph 13 (2)), the franchisor is not a a party to the supply contract and, thus, does not assume any responsibility for the supply transaction itself (Supreme Court Decision 2016Da238212 Decided Jan 25, 2018).

Korea, in most cases, has a strict interpretation of this privity rule in favor of the non-party to the agreement. However, exceptions do exist and structuring formalities are essential.

Other articles on Korean Franchise Law may be found via a search in the search box to the right or clicking on: Franchise Law.

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