If you’re a franchisor operating or expanding into South Korea, understanding your legal responsibilities is crucial. South Korea enforces strict regulations to ensure fairness in franchise relationships, and franchisors are required to meet clear legal standards. This post breaks down the most important obligations for franchisors under Korea’s Fair Transactions in Franchise Business Act.
1. Avoiding Unfair Trade Practices
Franchisors must not engage in unfair business practices that could harm franchisees or distort fair market competition. Prohibited actions include:
A. Unjustified Refusal to Support or Renew
- Stopping supply of essential goods, services, or support without good reason
- Refusing to renew contracts or unfairly terminating agreements
B. Restricting Franchisee Independence
Franchisors cannot:
- Force specific pricing or restrict price decisions
- Mandate purchasing from specific suppliers without proper disclosure
- Limit product lines or restrict sales by region or customer type
C. Taking Advantage of Franchisees
Franchisors must not:
- Require franchisees to buy unnecessary inventory or equipment
- Impose harsh contract terms or change terms unfairly
- Force co-management or dictate operations without cause
D. Imposing Unfair Penalties or Liability
It’s illegal to:
- Set unreasonable cancellation fees or delay penalties
- Shift responsibility for defective products to the franchisee
- Enforce compensation clauses that go beyond reasonable loss
E. Damaging Competitors
- Unfairly poaching franchisees from competitors
- Using improper tactics to disrupt other franchises
2. Protecting Franchisee Territories
Franchisors must:
- Clearly define each franchisee’s exclusive business territory
- Avoid opening competing stores in the same area
If changes are necessary due to market shifts, the franchisee’s agreement is required.
3. Store Renovations Must Be Justified
Franchisors can only demand renovations when:
- Facilities are outdated or unsafe
- Store conditions harm business consistency or public safety
Franchisors must share renovation costs:
- 20% for upgrades without relocation
- 40% for relocations or major expansions
4. Business Hours Must Be Reasonable
Franchisees must be allowed to reduce hours if:
- Their late-night hours cause consistent losses
- They experience unavoidable personal hardship
5. Advertising & Promotion Require Consent
When franchisees share the cost:
- At least 50% must agree to general advertisements
- At least 70% must agree to sales promotions
Franchisors must provide records of campaign expenses upon request.
6. Other Legal Duties of Korean Franchisors
Franchisors must also:
- Continuously improve product and service quality
- Offer reasonable prices for goods, services, and store setup
- Provide proper training and ongoing support
- Respect franchisee business territories and avoid direct competition
- Handle disputes through dialogue and negotiation
Final Thoughts: Compliance Builds Trust
Respecting Korean franchise law isn’t just about avoiding penalties—it’s about building long-term success. Meeting your obligations as a franchisor builds brand trust, helps attract strong partners, and protects your business from legal trouble.
If you need legal support or guidance on your obligations as a Korean franchisor, contact us at ask@pureumlawoffice.com. We’re here to help you grow with clarity and confidence.
