Guide to Termination of a Korean Franchise Agreement under Korean Franchise Law

The most critical issues before a franchisor terminates a franchise in Korea are understanding the best practices and risks prior to terminating a franchise in Korea. IPG Legal attorneys, regrettably, see clients lacking proactive Korean legal counsel to advise on pragmatic and best-practice approaches to terminating a franchise, which, sometimes, leads to a franchisee prevailing in court and fines by the Korean Fair Trade Commission. Some noted international brands have run afoul of Korea’s franchise law and have become the scorn of the Korean FTC. A noted case even led to a criminal prosecution. For additional information on Korean Franchise Law please see: IPG Legal’s Korean Franchise Law Archive and our Korean Franchise Law chapter in the leading guide on international franchising in Korea.

Guide to Terminating a Korean Franchise Agreement under Korean Law

Korea’s Law on Terminating a Franchise in Korea

The Fair Transactions in Franchise Business Act (“Franchise Act”) and the Fair Transactions in Large Franchises and Retail Business (“LFBA”) are the major laws governing the relationship between a franchisor and a franchisee. Whereas the general provisions of the Monopoly Regulation and Fair Trade Act (MRFTA), Commercial Act of Korea, and Civil Act of Korea additionally regulate the franchise relationship and other business relationships in Korea. For the leading guide on Korean Franchise Law, see: ICLG Guide to Franchising’s Korean Law Chapter by IPG Legal.

Korea’s Franchise Act limits the power of a franchisor to terminate a franchisee.

“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.”

Thus, in short, to successfully prevail in a challenge to termination, the Franchisor must: (1) Clearly and precisely indicate to the franchisee the respective franchise agreement was breached by the franchisee; (2) Provide the franchisee two months to remedy the breach; and (3) provides at least two written notices of the breach. Some exceptions exist. For more detailed information on the law related to terminating a franchise in Korea, please see: Korean Franchise Termination and the below pragmatic advice.

Guide to Terminating a Korean Franchise Agreement under Korean Law

1. Review Your Franchise Agreement and Related Agreements: The first step for any franchisor doing business in Korea, considering the termination of a Korean-based franchisee, is to carefully review the franchise agreement and see what procedures are mandated under the franchise agreement. Korea errs in favor of the franchisee, and any even minor non-compliance with formalities can lead to the negation by a Korean court of the termination. Thus, pay close attention to the termination clauses, which should outline the specific conditions for termination of the franchise agreement, and also make sure the minimums required by Korean franchise law are met. In most cases, the franchise clauses shall cover mandated notice periods, cure requirements, reasons for termination, and notice formalities.
2. Review the Registered Korean Franchise Disclosure Document: In most cases, a Korean Franchise Disclosure Document is required to be filed and approved by Korea’s Fair Trade Commission. If you are not in compliance with the disclosure law, in many cases, termination shall lead to a lawsuit and the scorn of the Korean FTC. Yearly, the Franchise Disclosure Document must be updated for the franchisee to be compliant with Korean Franchise Law.
3. Document Everything and Form a Pragmatic Document Retention Policy: Evidence is key in substantiating a breach and thus prevailing if a lawsuit is filed. Get sworn statements from employees, get all key documentation, confirm conversations after calls or face-to-face meetings, and have procedures in place for document retention and franchisee relationship-management evidence gathering. All good proactive Korean law firms, including IPG Legal, have processes in place that assist in the production of evidence before even consideration of termination. Regrettably, even many of the well-known international franchisees neglect these pragmatic steps and fall into the trap of needing to substantiate breach with only a few months’ worth of evidence. Start the process right at the beginning, and it is easier, less costly, and risky to terminate a franchise relationship at the end.
4. Consult with a Proactive, Connected, and Street-Smart Korean Legal Counsel: In many cases, the ubiquitous Korean law firms are not adequate for pragmatic solutions because of Korean legal realities and litigation fee motivations. I shall leave it at that.
5. Provide Detailed Written Notice in Compliance with Korean Law, the Disclosure Document, and Franchise Agreement: This should be much more than a one-page document in the simple format utilized in the States or Europe. If you want the matter to be resolved before litigation or having to answer a complaint and information request from the Korean Fair Trade Commission, please substantiate the breach allegations with data, attach the data, and note all major areas of breach. Drafting this termination document should take days, not hours, and should be reviewed by a competent and proactive legal counsel with experience on the ground with franchise matters in Korea. Also, in many cases, a subtle olive branch is advisable to arrive at a settlement. Please see No. 6 below.
6. Engage in Good Faith and Proactive Negotiations: Allow for a settlement. The reality in Korea, with the present administration in power, is that Korea is a franchisee-friendly legal system. A settlement is often better than paying your lawyer to fight this in court, in arbitration, in the court of public opinion, and/or in front of the Korean FTC.
7. Consider Engaging in Mediation if a Settlement is not Reached: IPG Legal has seen great success with less than rational franchisees looking for a pound of flesh when mediation is proposed and actively participated in by the franchisor and franchisee.
8. Litigation & Administrative Action Preparation: Any cases in which a settlement is not reached require a discussion on strategy, posture, and game plan with your Korean-based attorney. Because of Korean realities your litigation team must include a retired and respected judge (a retired judge that must be more than just a show piece and that shall be active in litigation of the matter), experienced attorneys with experience working with international franchisees, and not, merely, local franchisees and in many cases an accountant with experience in calculating franchise damage.

We shall be updating this post periodically and shall be adding a post-termination section in the near future.

IPG Legal is one of the most respected and highly rated law firms in Korea, assisting brands to expand and prosper in the Korean market. IPG Legal works with some of the leading F&B, education, retail, and fitness franchises. IPG Legal, literally wrote the book on Korean franchising.

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 a few non-Korean lawyers as a Top Attorney by AsiaLaw,  IPG Legal is consistently ranked a Top Dispute Resolution Law Firm for our litigation, arbitration, and mediation services, and IPG Legal is consistently rated a top-tier law firm in corporate law, litigation, arbitration, franchise law, distribution law, estate law, family law, employment & labor law, and criminal defense.

To schedule a call with Sean Hayes, please Schedule a Call with a Franchise Attorney in Korea.