SOUTH KOREA Law and Practice Contributed by: Hongki Kim, Hwijin (HJ) Choi, Kee Won Shin and Jennifer Yein Kwon, Bae, Kim & Lee LLC
• abuse of superior bargaining position – placing a franchisee at an unfair disadvantage by abusing the franchisor’s superior bargaining position; • unreasonable imposition of liability for damages – unreasonably requiring a franchisee to compensate for damages, such as by imposing liquidated dam - ages that are excessive in light of the standards prescribed by presidential decree, including in rela - tion to the purpose and content of the agreement and the losses expected to occur; and • other acts likely to undermine fair franchise trans - actions – any other act, not falling under the foregoing, that is likely to impede fair franchise transactions, including improperly inducing fran - chisees of a competing franchisor to transact with the franchisor. Prohibition on Infringement of Business Territory and Restrictions on Operating Hours Pursuant to Article 12-4 (3) of the Franchise Act, a franchisor may not, without justifiable cause, establish a directly operated store or another franchise of the same type of business (ie, one that may reasonably be recognised as the same in light of the regional and demographic scope of the consumer base, the items handled, and the form and method of business) within the designated business territory of an existing fran - chisee. Under Article 12-3 (2) of the Franchise Act, a fran - chisor may not require a franchisee to operate during late-night hours where such operations would result in loss. Mandatory Terms of Franchise Agreements Franchise agreements must cover the following (Arti - cle 11 (2) of the Franchise Act): • licensing and use of the franchisor’s trade marks; • terms and conditions of the franchisee’s business activities; • education, training and operational guidance for the franchisee; • payment of franchise fees and other costs; • designation of business territory; • duration of the agreement; • transfer of business; • grounds for termination of the agreement;
• requirement that a franchise deposit be held in a depository for two months from the date of the franchise agreement (or until business commence - ment, if earlier), or if the franchisor maintains dam - age compensation insurance, details of the insur - ance policy; • confirmation (if consultation was obtained) that a prospective franchisee has consulted an attorney- at-law or certified franchise transaction consultant; • compensation for damages incurred by the fran - chisee due to unlawful acts of the franchisor or its executives, or acts contrary to social norms that may damage the reputation or creditability of the franchise business; • where the franchisor obliges the franchisee to transact with designated suppliers, the scope of the obligation (eg, types of real estate, services, facilities, goods, raw materials or lease arrange - ments) as well as the method of calculating supply prices; • conditions for refund of franchise fees and other payments; • installation, maintenance and cost burden of the franchisee’s operational facilities and equipment; • measures related to the termination and cancella - tion of the franchise agreement; • justifiable reasons for the franchisor to refuse renewal of the franchise agreement; • trade secrets of the franchisor; • compensation for damages due to breach of the franchise agreement; • requirement of the franchisor to engage in discus - sions with the franchisee when changing the trans - action terms and procedures for dispute resolution; • contract with the previous franchisee in the event the franchisor transfers the franchise business to another business operator; and • measures to be taken upon the expiration of the franchisor’s intellectual property rights. Additionally, under Article 12-4 of the Franchise Act, the franchisor is required to designate the business territory of the franchisee and specify it in the fran - chise agreement.
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