SOUTH KOREA Law and Practice Contributed by: Hongki Kim, Hwijin (HJ) Choi, Kee Won Shin and Jennifer Yein Kwon, Bae, Kim & Lee LLC
• 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 dis - cussions with the franchisee when changing the transaction 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. Statutory Provisions Implied by the Franchise Act The mandatory provisions of the Franchise Act take precedence over the terms of the franchise agree - ment. When entering into a franchise agreement with a Korean franchisee, the following statutory require - Under Article 10 of the Franchise Act, the franchisor is required to refund franchise fees within one month of a written request by the franchisee (or prospective franchisee) in any of the following circumstances: • the franchisor (i) fails to provide the disclosure doc - ument to a prospective franchisee, or (ii) receives franchise fees or enters into a franchise agreement before 14 days have elapsed from the date on which the disclosure document was provided, and the prospective franchisee or franchisee requests a refund either prior to the execution of the franchise agreement or within four months from the date of its execution; • the franchisor (i) provides false information or exag - gerates facts in providing information to a prospec - tive franchisee or franchisee, or (ii) conceals or downplays material facts that may have a signifi - cant impact on the conclusion or maintenance of the franchise agreement, and the prospective fran - ments must be observed. Refund of franchise fees
chisee requests a refund of the franchise fees prior to the execution of the franchise agreement; • the franchisor provides false or exaggerated information (or omits material facts) to a prospec - tive franchisee or franchisee, and such conduct is deemed to have had a material impact on the conclusion of the franchise agreement, and the franchisee requests a refund of the franchise fees within four months from the date of execution of the franchise agreement; or • where the franchisor unilaterally discontinues the franchise business without just cause, and the franchisee requests a refund of the franchise fees within four months from the date of discontinuation of the franchise business. Even if the franchise agreement contains provisions on the return of franchise fees that are inconsistent with the Franchise Act, the franchisor must comply with a franchisee’s request for the return of franchise fees under the Franchise Act. Prohibition on unjustified store renovation requirements and cost sharing Under Article 12-2 of the Franchise Act and Article 13-2 of the Enforcement Decree, the franchisor may not, without justifiable cause, compel franchisees to carry out store renovations. Even where justifiable cause exists, the franchisor is required to bear: • 20% of the costs of sign replacement and interior work (excluding the cost of replacing equipment and utensils); or • 40% of such costs if the renovation involves expansion or relocation. Exceptions apply in the following cases: • where the franchisee undertakes renovations voluntarily, without any recommendation or request from the franchisor; or • where renovations are unavoidable due to hygiene, safety or similar issues arising from reasons attrib - utable to the franchisee. Accordingly, even if the franchise agreement contains provisions on renovation obligations and cost alloca - tion that differ from the Franchise Act, the franchisor
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