Franchise Agreement Termination in Korea can become a serious financial issue when a franchisee needs to close a store before the contract expires. A franchise agreement may contain a substantial termination penalty, but the amount written in the contract is not necessarily the end of the legal analysis.

Franchise Agreement Termination in Korea and Early Termination Fees

In one consultation, a franchisee entered into an agreement with a ramen franchise and began operating the store. After several months, sales declined while labor costs and rent became increasingly difficult to manage. The franchisee eventually asked to terminate the agreement.

The franchisor demanded a contractual penalty and also argued that the franchisee could not recover the performance deposit.

Korea’s Fair Transactions in Franchise Business Act regulates the relationship between franchisors and franchisees, including certain unfair practices associated with franchise agreements.

For a broader introduction to the regulatory framework, see Pureum Law Office’s Korean Franchise Law guide.

Can a Franchise Termination Penalty Be Reduced?

A large termination penalty should not automatically be accepted simply because it appears in the agreement.

The remaining contract period, circumstances surrounding termination, actual or anticipated loss, and proportionality of the penalty may all become relevant.

Article 398 of the Korean Civil Act also provides that a court may reduce an agreed amount of liquidated damages when it is unreasonably excessive.

Franchise Agreement Termination in Korea May Involve Disclosure Issues

Termination disputes can involve more than the penalty clause.

In this matter, the franchisee had taken over a directly operated store from the franchisor. Information concerning expected sales was therefore particularly important when deciding whether to enter the franchise relationship.

Franchisees should review what information was provided before signing the agreement and whether legally required disclosures were properly made.

For more information, see our guide to the Korean Franchise Disclosure Document.

Failure to provide important information may create separate legal issues that should be considered together with the termination dispute.

What Should a Franchisee Review Before Terminating?

Before terminating a franchise agreement, review the termination clause, penalty calculation, remaining contract period, deposit provisions, disclosure documents, and representations made before signing.

The circumstances of each franchise relationship are different. A contractual penalty should therefore be evaluated together with the applicable law and the franchisor’s conduct.

Pureum Law Office advises both franchisees and franchisors on Franchise Agreement Termination in Korea, including termination penalties, deposits, disclosure issues, and related disputes. You can also review our Franchise Law resources for additional guidance.

If you are considering terminating a franchise agreement or have received a demand for a substantial penalty, contact Pureum Law Office or email ask@pureumlawoffice.com.

Let us help.