SOUTH KOREA Law and Practice Contributed by: Hongki Kim, Hwijin (HJ) Choi, Kee Won Shin and Jennifer Yein Kwon, Bae, Kim & Lee LLC
The Franchise Act does not explicitly require a fran - chisor to demonstrate past profitability before com - mencing franchise operations. However, in practice, a de facto past-performance requirement exists, because the KFTC may refuse registration where the franchisor lacks a directly operated store or where such store has been in operation for less than one year. Specifically, when applying for initial registration, the KFTC may refuse to register the franchise disclo - sure document if: (i) the franchisor does not operate at least one directly operated store under the same trade mark, quality standards, and business methods as those described in the franchise disclosure docu - ment, or (ii) the directly operated store has been in operation for less than one year (Article 6-3 (1)3 of the Franchise Act). An exception applies where the franchisor has engaged in the same line of business for at least one year, either domestically or abroad. In such cases, the existence of a directly operated store is not required, and registration may not be refused on this basis (Arti - cle 5-5 (2)2 of the Enforcement Decree). 5. Duration, Renewal and Termination 5.1 Duration of a Franchise Agreement The Franchise Act grants franchisees a statutory right to request renewal of the franchise agreement, but this right is capped so that the total duration of the franchise relationship, including the initial term, does not exceed ten years (Article 13 (2) of the Franchise Act). The Franchise Act does not prescribe a maxi - mum duration for franchise agreements. 5.2 Franchise Renewal Under Article 13 (1) of the Franchise Act, if a franchisee requests renewal of the franchise agreement between 180 and 90 days before the expiration of the term, the franchisor may not refuse such renewal without justifi - able cause. Exceptions apply in the following cases: • the franchisee fails to make the required payments under the franchise agreement;
• the franchisee objects to terms, conditions or busi - ness policies that apply generally to other fran - chisees; • the franchisee is not compliant with critical busi - ness policies necessary for maintaining the fran - chise, including securing required business premis - es and facilities, obtaining necessary qualifications, licences, or permits, complying with required manufacturing processes or service techniques to maintain quality, protecting intellectual property rights essential to the operation of the franchise, and participating in the franchisor’s regular educa - tion and training programmes; and • where the total duration of the franchise relation - ship, including its initial period, exceeds ten years. Where a franchise agreement is not renewed due to the franchisor’s breach of law or of the franchise agreement, the franchisee may seek damages under tort liability. Damages are generally assessed with ref - erence to the operating profits the franchisee could reasonably have expected to earn had the franchise relationship continued. Goodwill compensation under Article 92-2 of the Korean Commercial Act, which applies to commer - cial agents, does not directly extend to franchisees. 5.3 Termination of the Franchise Agreement The Franchise Act prescribes specific procedures that a franchisor must follow in order to terminate a fran - chise agreement. In general, the franchisor is required to: • clearly notify the franchisee of the breach of the agreement; • provide the franchisee with a two-month period to remedy the breach; and • issue at least two written notices to the franchisee regarding the breach. However, the Franchise Act also sets out certain cir - cumstances in which the franchisor may terminate the franchise agreement immediately, without providing a cure period. Immediate termination is permitted where it is impractical to continue the franchise relationship, including in the following situations:
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