The Enforceability of Penalty Clauses in Korean Franchise Agreements

Korean Franchise Law and Korean Franchise Jurisprudence provides protections to franchisees that may not be available in the United States, Europe, Australia, New Zealand and in South America, thus, IPG Legal drafted this blog post to inform the reader on the enforceability of Penalty Clauses in franchise agreements in Korea.

IPG Legal is rated one of the leading law firms in Korea assisting franchisors entering and growing in the Korean Market. If you are interested in contacting a franchise lawyers in Korea, please: Schedule a Call with a Lawyer in Korea. IPG Legal wrote, over the years, chapters in leading publications on Korean Franchise Law. A recent chapter in a franchise journal may be found at: Korean Franchise Law.

Proving Damages in Korea

In all disputes in South Korea, the plaintiff is required to prove damages. To help alleviate this burden, contracts, including franchise agreements, provide penalty damages (or liquidated damages) for certain breaches.

For example, if a franchisee closes a store without notification and/or a valid reason, the franchisor may claim a minimum monthly “penalty” fee to be paid until the expiration of the franchise agreement. Or if the franchisor violates confidentiality obligations, the franchise agreement may mandate that the franchisee must pay a damage sum for each violation of the confidentiality obligation. In many cases, the actual damages are impossible or near impossible to prove, thus, a penalty clause allows damages to accrue to the franchisor without the need to prove the actual damages.

Enforcement of Penalty Clauses in Franchise Agreements in Korea

(1) Franchisors shall not engage in acts that unfairly hinder fair transactions in franchise business, including imposing excessive penalties relative to the contract’s purpose, content, and foreseeable damages.

Franchise Business Act Article 12 (Prohibition of Unfair Trade Practices)

A Korean court may either invalidate the penalty clause under Article 8 of the Korean Act on Regulation of Terms & Conditions or “reduce it to a reasonable level” under Article 398 of the Korean Civil Act if the court in Korea deems the penalty “excessive.” In many cases, Korean courts defer to the opinion of the Korean Fair Trade Commission, thus, prior to drafting franchise agreement penalty clauses it is essential to understand Korean court jurisprudence and the viewpoint and opinions of the Korean Fair Trade Commission.

If you would like a consultation with a Korean franchise lawyer, please: Schedule a Call with a Lawyer in Korea.