International Trade and Distribution : Franchise Litigation: Legal response to illegal termination of franchise agreements

 Franchise Litigation, Termination of Franchise Agreement, Fair Trade Team | Dowoo Hwasan Attorneys & Counselors |

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The Corporate Legal Team of Dowoo Hwasan Attorneys & Counselors resolves cases by deploying a specialized team led by an attorney with Korea and the U.S. franchise experiences, and it is our principle to resolve cases with attorneys who are former judges and public officials, attorneys who passed the judicial examination of Korea with big law experiences overseas, and U.S. attorneys well-versed in the global distribution business. 

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In this posting, we will discuss the limitations of terminating franchise agreements. Many franchisees often get terminated from their franchise agreements unexpectedly by their franchisors. That is why the Fair Transactions in Franchise Business Act (“Franchise Act”) prescribes to allow franchisors to terminate franchise agreements only when they satisfy certain steps, thereby protecting franchisees against franchisors’ unjust exercise of termination rights.

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Article 14 (Limitations on Termination of Franchise Agreement)

① Any franchiser that intends to terminate a franchise agreement shall clearly state the franchisee's breach of the agreement during the grace period of not less than two months and shall give written notice at least twice that it will terminate the agreement unless such breach is corrected during the given period: Provided, That the foregoing shall not apply to cases prescribed by Presidential Decree as it is difficult to continue franchise business transactions. <Amended by Act No. 8630, Aug. 3, 2007> -> Details of the breach shall be clearly specified in the Default Letter, and notification on agreement termination shall be made at least twice and with the grace period of 2 months or longer, notifying the franchisee that the agreement will be terminated unless the breach is corrected.

② The termination of a franchise agreement without complying with the procedure under paragraph (1) shall not have the effect.

          

Notwithstanding the limitations, when the franchisor can immediately terminate the franchise agreement?

Presidential Decree Article 15 No. 1-10 (Cases where Immediate Termination is Allowed)

 

Article 15 (Reasons for Termination of Franchise Agreement)         

"Cases specified by Presidential Decree" in the proviso to Article 14 (1) of the Act means any of the following cases: <Amended by Presidential Decree No. 20594, Jan. 31, 2008; Presidential Decree No. 22446, Oct. 13, 2010; Presidential Decree No. 26176, Mar. 30, 2015>

1.  Where a franchisee files for bankruptcy or compulsory execution procedures or workout procedures on the franchisee begin;

2.  Where bills or checks that are issued by a franchisee are dishonored due to a default of payment, etc.

3. Where a franchisee cannot operate a franchise any longer due to a natural disaster, significant personal reasons, etc.

4.  Where significant difficulties for a franchise are caused by any of the following grounds:

(a) Where the reputation or credit of a franchiser is clearly impaired because a franchisee spreads any false information unnecessarily

(b) Where the reputation or credit of a franchiser is clearly impaired because a franchisee receives any of the following administrative dispositions, in violation of a statute related to operation of a franchised store:

(i) An administrative disposition that the franchisee should correct such violation

(ii) An imposition disposition of a penalty surcharge, administrative fine, etc. of which reason is such violation

(iii) An order of operating suspension of which reason is such violation

(c) Where a franchiser divulges a trade secret or important information

5. Where a franchisee violated a statute related to the operation of a franchised store and was notified of an administrative disposition (including a disposition of imposition of a penalty surcharge, administrative fine, etc.) that it should correct such violation, but fails to correct the violation within a period for correction fixed by an administrative agency (where the administrative agency did not fix the period for correction, ten days from the date it is notified of the administrative disposition);

6. Where a franchisee receives an administrative disposition that does not allow the correction of its violation, such as the revocation of qualification, a license, permission, or an order to suspend business (where the franchisee receives an order to suspend business within 15 days, this shall not apply thereto), because it has violated a statute related to the operation of a franchised store: Provided, That where it receives a disposition for imposition of a penalty surcharge, etc. taking the place of an administrative punishment based on a statute, this shall not apply thereto;

7. Where a franchisee violates the same matter again within one year (in cases of the renewal of a franchise agreement or renewed franchise agreement, the period belonging to the previous period of contract shall be added up) from the date it corrected such matter in compliance with a franchiser's request pursuant to the main sentence of Article 14 (1) of the Act: Provided, That where the franchiser has omitted a fact in a document requesting correction that if the franchisee violates the same matter within one year, a franchise agreement may be terminated without undergoing formalities referred to in Article 14 (1) of the Act, this shall not apply thereto

8. Where a franchisee receives a criminal penalty for an act related to the operation of a franchised store

9. Where a franchisee operates a franchised store by method or in the form that is likely to cause eminent risk to the health or safety of the public

10. Where a franchisee suspends business for at least seven consecutive days without good cause.​

 

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