Material Omissions in Korean Franchise Disclosure Documents in South Korea

In April of 2015, the Supreme Court of Korea ruled that under Article 4; Article (9)(1); and Article 41(1) of the prior version of the Fair Transactions in Franchise Business Act (“Franchise Act”) damages may be obtained, from a franchisor, for all material omissions (Supreme Court 2014 DA 84824,84831, April 9, 2015) within Korean Franchise Disclosure Documents. Thus, we advise all franchises in Korea to review and update their franchise agreements, thoroughly, on a yearly basis.

Damages for Material Omissions in Franchise Agreements in Korea
Monetary damages may be obtained under Article 37(2) of the Franchise Act of Korea and Article 56(1) of the Monopoly Regulation and Fair Trade Act of Korea for “material omissions” within Franchise Disclosure Documents and other document presented to prospective franchisees.

The damages may include the cost of build-out, rental, franchise fees and even, in some cases, lost opportunity costs. Thus, the damages can be substantial. Additional, in some cases fines may be imposed, franchises can be de-registered and criminal charges may be brought against employees and management. The Korean Fair Trade Commission has immense powers and with the assistance of the Korean Prosecution Service can be the death of a foreign franchise in Korea.

Fines by the Korean Fair Trade Commission
The Fair Trade Commission may, additionally, impose a fine, even if no sales/profits, have accrued to the franchisor up to KRW 500,000,000 (c. USD 450,000).

Definition of a Material Omission under Korean Franchise Law
The opinion of the Korean Supreme Court clarifies what the Court will determine as “material.” The Court opined that if a franchisor fails to notify a prospective franchisee of a fact that may lead a franchisee not to invest in a franchise – the franchisor shall be deemed to have violated the Franchise Act of Korea and, thus, may be held liable for damages.

The Court noted it will look to “principles of experience,” thus, allowing the possibility of a court appointed expert to opine if a reasonable franchisee would invest in the franchise if the alleged fact was not omitted from the Korean disclosure document. This standard, obviously, leads a great deal of discretion in the hands of a Korean Court.

Solution
It is best, in Korea, to err on the side of inclusion. The most trivial may come back and bite. Disclosure of prior violations of the Franchise Act and Monopoly Regulation and Fair Trade Act; violations of law by management; prior cancellation of a franchise registration; and the nuts and bolts mandated in the States is required, also, in Korea. Err on the side of caution and reveal all.

Please note that Korea has a disclosure requirement that requires a disclosure akin to what is found in the United States. The Korean government, often, requires the modification of Master Franchise Agreements, Master License Agreements and Franchise Agreements based on interpretations of the Franchise Act by the Fair Trade Commission of Korea. Thus, making it, often, necessary for more time to register a franchise than what is, typical, in the United States.

Plan ahead and, only, hire an attorney with foreign and domestic experience in franchising. Because of Korean-specific realities, have an experienced and still active retired judge as an active part of the team and make sure the team has experience with the Korean Fair Trade Commission.

If you are interested on other articles on Korean Franchise Law, please see: Korean Franchise Law Archives. The Korean Fair Trade Commission’s website may be found at: KFTC. The Korean Supreme Court’s website may be found at: Supreme Court of Korea.

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