Korea Amends Franchise Act to Require Disclosure, Registration, Cause for Nonrenewal

This posting was written by John W. Arden.

Recent amendments to Korea’s Fair Franchise Transactions Act of 2002 require franchisors to register disclosure statements with the Korea Fair Trade Commission, to deliver written disclosure states to all prospective franchisees, and to have just cause to refuse renewal of a franchise, according to a presentation by Brendon Carr at the International Bar Association meeting this week in Singapore.

Disclosure Statement

The “most profound change” of the August 3 amendments is the article mandating that franchisors prepare and register a detailed disclosure statement containing information similar to that prescribed by the U.S. Uniform Franchise Offering Circular, Mr. Carr observed. Previously, Korea did not require registration of a disclosure statement.

Such disclosure statements may be subject to review and approval by the Korean Fair Trade Association. Prior to these amendments, the KFTA had promulgated a suggested Model Disclosure Statement, which was not mandatory but was widely adopted by Korean domestic franchisors.

Delivery to All Prospective Franchisees

In addition to making the disclosure statement mandatory, the amendments affirmatively obligate franchisors to deliver disclosure statements to all prospective franchisees not just to prospective franchisees who make written requests for disclosure statements, as previously required.

A prospective franchisee is defined as any party who conducts discussions or negotiations with a franchisor concerning the execution of a franchise agreement. The law now authorizes franchisees to rescind franchise agreements and demand refunds of franchise fees where disclosure statements contain false or exaggerated information.

Just Cause

The amendments completely overhaul the law’s previous renewal section, allowing franchisors to decline renewal only when there is “just cause,” defined as default in payments, failure to adhere to standards and practices applied to the rest of the franchise system, or default in adherence to “material standards” of the franchise system.

Franchisors intending to refuse renewal must send two default notices over 60 days and provide an opportunity to cure the cited default.

Other Provisions

Besides the disclosure, registration, and nonrenewal requirements, the amendments (1) impose a cooling off period of at least 14 days after the delivery of a disclosure statement; (2) expand the definition of “franchise fees” to include the cost of required fixtures, trade dress elements, and rent paid to the franchisor; and (3) prohibit franchisor competition with the franchisee.

The amendments will become effective on February 4, 2008, with an Enforcement Decree expected to be issued before that date, according to Mr. Carr. Like the original law, the amended version does not address cross-border franchise agreements.

Further details and text of the law in English translation will appear in the CCH Business Franchise Guide.

The paper, “Recent Amendment of the Korean Franchise Act,” was written by Brandon Carr, Foreign Legal Consultant with Hwang Mok Park, P.C. of Seoul, Korea. He is the editor of the Korea Law Blog.