CONTENTS
- 1. Fair Transactions in Franchise Business Act | Explanation of the Concept
- - Purpose of Enacting the Fair Transactions in Franchise Business Act
- 2. Fair Transactions in Franchise Business Act | Explanation of Principal Contents and Provisions
- - Levels of Punishment for Violation of the Fair Transactions in Franchise Business Act
- 3. Fair Transactions in Franchise Business Act | Potential Legal Risks
- - A Company's Prevention and Response Strategies
- - Practical Checklist for Compliance with the Fair Transactions in Franchise Business Act
1. Fair Transactions in Franchise Business Act | Explanation of the Concept
The Fair Transactions in Franchise Business Act is a statute enacted to establish a fair trading order in the transactional relationship between the head office and franchisees in the franchise industry and to protect the rights and interests of franchisees.
A franchise business means providing, for consideration, the right to use a particular trade name, trademark, products, business methods, and the like, and a business operator engaging in certain business activities on that basis.
In Korea, the franchise industry has spread across a wide range of sectors—centered on the food service industry but extending to beauty, education, retail, logistics, and others—and as problems such as information asymmetry, forced transactions, and unfair contracts between franchisees and head offices arise frequently, the application of this Act is becoming increasingly important.
The Fair Transactions in Franchise Business Act is continually being amended to alleviate such structural problems and to foster a fair and transparent trading environment; in particular, it has recently evolved in line with the changing structure of the industry, for example by bringing ‘platform-based franchise business’ and ‘non-face-to-face franchise business’ within its scope of application.
The principal contents of the Fair Transactions in Franchise Business Act include matters concerning the registration and provision of the information disclosure document, matters relating to franchise fees, the prohibition of and sanctions against unfair trade practices, and the prohibition on a franchisor coercing or restraining franchisees through unfair conduct.
It also includes provisions relating to franchise agreements, and franchisees are guaranteed the right to form an association under the Fair Transactions in Franchise Business Act.
Recently, there have been cases in which the rights of franchisees who suffered disadvantage after forming such an association were vindicated; both franchisors and franchisees are encouraged to consult with a specialist attorney regarding the Fair Transactions in Franchise Business Act in order to defend their respective rights.
Purpose of Enacting the Fair Transactions in Franchise Business Act
The Fair Transactions in Franchise Business Act is not merely a statute that mediates disputes or regulates unfair conduct; it is a comprehensive legal framework that secures the transparency and stability of the franchise business structure as a whole and takes into account both consumer protection and industrial development.
In particular, one of its principal purposes is to protect prospective entrepreneurs considering opening a franchise from concluding agreements based on exaggerated information or on a revenue structure that differs from reality.
It also prevents the head office's unilateral abuse of authority by requiring that existing franchisees be maintained in a contractual relationship grounded in continuing support and mutual respect.
Furthermore, the Fair Transactions in Franchise Business Act institutionally underpins the soundness and sustainability of the entire industry ecosystem by having the Fair Trade Commission also perform functions such as the receipt of franchise-related reports, examination, dispute mediation, and sanctions.
2. Fair Transactions in Franchise Business Act | Explanation of Principal Contents and Provisions
The core of the Fair Transactions in Franchise Business Act can be summarized in five main points.
These are the information disclosure document system, the rules on mandatory entries in the franchise agreement, the prohibition on unfair cost-shifting, the strengthening of termination requirements, and the operation of a dispute mediation system.
▶Information disclosure document system
: A franchisor must provide a prospective franchisee with an ‘information disclosure document’ registered with the Fair Trade Commission at least 14 days before the agreement is concluded, and this document includes detailed information on the franchisor's financial condition, the contract terms, the increase in and closure of franchise outlets over the most recent three years, litigation history, the revenue structure after the commencement of business, and the like.
If the information disclosure document is absent or is provided falsely, the head office may bear administrative or civil and criminal liability.
▶Mandatory entries in the franchise agreement
: The agreement must include matters such as the nature of the business, the conditions for paying royalties, the contract term, termination conditions, the setting of the operating territory, and the period during which competing business is prohibited; if these are omitted, the franchisee may seek invalidation of the agreement or claim damages.
▶Restrictions on shifting advertising and promotional costs
: Where the head office imposes advertising costs on a franchisee, it must clearly determine the proportion and items in advance and obtain the franchisee's written consent.
Unclear cost charges are regarded as unfair transactions.
▶Prohibition on unfair termination and refusal to renew
: Where the head office terminates the agreement at will during the contract term or refuses to renew it, it must prove justifiable grounds and must notify the franchisee at least 180 days in advance.
▶Dispute mediation system
: Through the dispute mediation procedure operated by the Korea Fair Trade Mediation Agency, disputes can be resolved swiftly and at low cost; although it has no compulsory force, in some cases it may have an effect similar to a judgment.
Levels of Punishment for Violation of the Fair Transactions in Franchise Business Act
A violation of the Fair Transactions in Franchise Business Act may result in an investigation by the Fair Trade Commission, and in serious cases the matter may be referred by complaint to an investigative agency and criminal punishment may be imposed.
The levels of punishment for violation of the Fair Transactions in Franchise Business Act are as follows.
| Violation of the Fair Transactions in Franchise Business Act | Level of Punishment |
| Where a person receives franchise fees without providing the information disclosure document | Imprisonment for not more than 2 years or a fine of not more than KRW 50 million |
| Where a person provides false or exaggerated information | Imprisonment for not more than 5 years or a fine of not more than KRW 300 million |
| Where a person causes disadvantage to a franchisee on the ground that the franchisee applied for dispute mediation or the like | Imprisonment for not more than 3 years or a fine of not more than KRW 100 million |
| Where a person fails to comply with an order of the Fair Trade Commission, such as an order to escrow franchise fees or to provide the information disclosure document | Imprisonment for not more than 3 years or a fine of not more than KRW 100 million |
| Where a person unfairly coerces improvements to the store environment | Cost-bearing within 40% of the construction costs, together with corrective measures and a penalty surcharge |
| Where a person engages in an unfair trade practice | Corrective measures and a penalty surcharge |
| Where a person unfairly restrains operating hours | Corrective measures and a penalty surcharge |
| Where a person unfairly encroaches upon an operating territory | Corrective measures and a penalty surcharge |
3. Fair Transactions in Franchise Business Act | Potential Legal Risks
A violation of the Fair Transactions in Franchise Business Act does not stop at simple civil compensation; it may result in very serious sanctions such as a corrective order from the Fair Trade Commission, the imposition of a penalty surcharge, a criminal complaint, and cancellation of the franchise business registration.
Where a franchisee association is formed and responds collectively, the head office may suffer substantial business harm such as damage to its commercial image, class actions, and brand boycotts, which in turn leads to a decline in corporate trust and a weakening of the franchise's capacity to expand.
In addition, where an agreement is concluded without franchise business registration, the franchise business itself may be invalidated.
A Company's Prevention and Response Strategies
1. Ensuring the accuracy of the information disclosure document and renewing it periodically
A franchisor must renew and register its information disclosure document with the Fair Trade Commission once a year, and the registered information can be viewed by anyone through the Fair Trade Commission's system.
Figure-based items such as profitability analysis, the closure rate, and brand reputation should in particular be kept objective by obtaining advice from an external accounting firm or the like, and as even a minor falsehood may lead to legal risk, an internal review system must be in place.
2. Standardizing the franchise agreement and adapting it to the specific case
Building on the standard agreement provided by the Fair Trade Commission, clauses suited to the characteristics of the particular industry should be supplemented and used in drafting the agreement.
For example, a food service franchise whose principal feature is the supply of ingredients should clearly set out clauses on the basis for settling logistics costs and on the distribution margin structure, and it is also important to prepare additional separate agreements according to the circumstances of each franchisee.
3. Establishing a consultation system with franchisees and preventing disputes
Strengthening the communication structure through regular meetings or a consultative body with franchisees can prevent conflicts arising from unilateral decisions by the head office.
The early-warning function for risk can also be strengthened by operating a complaint-intake system, an anonymous online reporting channel, and the like.
4. Thorough documentation of contractual rights and obligations
All agreements and instructions should be recorded in writing (including electronic documents), and as a variety of related documents besides the franchise agreement—such as goods supply contracts, operating manuals, and reports on compliance with corrective orders—may be used as evidence, it is important to establish a systematic retention system.
5. Legal training for franchise business personnel and establishing a compliance framework
So that practitioners can understand and comply with the Fair Transactions in Franchise Business Act and the Fair Trade Commission's guidelines, regular internal training, a system of collaboration with the legal team, and a risk-management guidebook should be put in place.
In particular, when launching a new brand, franchise business registration and prior review of the information disclosure document must be included as essential steps.
Practical Checklist for Compliance with the Fair Transactions in Franchise Business Act
Item | Review Content | Confirmed |
|---|---|---|
Registration and provision of the information disclosure document | Has the information disclosure document been registered with the Fair Trade Commission and kept up to date? | ☐ |
Inclusion of statutorily mandated entries in the franchise agreement | Are the operating territory, royalties, contract term, termination conditions, and the like entered in the agreement in accordance with the legal requirements? | ☐ |
Clarification of additional costs beyond the franchise fee | Have detailed particulars and a basis been provided for costs beyond the franchise fee, such as training fees, interior costs, and equipment costs? | ☐ |
Provision of a prior explanatory statement | Was a prior explanatory statement provided to the prospective franchisee with sufficient lead time before the agreement? | ☐ |
Setting out the allocation of advertising and promotional costs in writing and obtaining consent | Were the advertising and promotional costs imposed on franchisees specified in a written agreement and consent obtained? | ☐ |
Measures to prevent encroachment on operating territories | Was consideration given and notice provided to ensure that opening a new franchise outlet does not encroach on the business rights of an existing franchisee? | ☐ |
Compliance with procedures for termination and refusal to renew | Has there been no termination or refusal to renew the agreement without justifiable grounds? | ☐ |
Whether the standard agreement is used | Is the standard franchise agreement recommended by the Fair Trade Commission or a relevant association used as the basic form? | ☐ |
Whether a consultative body with franchisees is operated | Is a communication channel—such as regular meetings, the gathering of opinions, or a win-win consultative body—established with franchisees? | ☐ |
Awareness and guidance on use of the dispute mediation system | Are franchisees informed in advance of the dispute mediation procedure, and is there a response framework should a dispute arise? | ☐ |
Establishment of a franchise business support system | Is substantive support necessary for franchise operations, such as training and marketing, provided on a regular basis? | ☐ |
Legal review framework regarding the risk of violations | Is there a process for periodic review of agreements and the information disclosure document? | ☐ |
Legal training for franchise business personnel | Is training on the Fair Transactions in Franchise Business Act and fair trade legislation conducted on a regular basis? | ☐ |
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