The franchise industry in South Korea is a major driver of the national economy, valued at approximately USD83 billion and employing over 1 million people. The sector includes more than 8,000 franchisors, 12,000 franchise brands and 365,000 franchisees nationwide.

The franchise market is heavily concentrated in convenience stores and food and beverages, though retail and service-oriented franchising also hold substantial market shares. Growth has been steady in recent years, with record numbers of new franchise registrations and continued expansion despite economic headwinds.

Convenience Store Franchises

South Korea has one of the world’s most saturated convenience store markets, with most major players operating under franchise models that allow participation by a wide range of franchisees. Examples of such franchises include CU, GS25, 7-Eleven and emart24.

Food and Beverage Franchises

Franchising is the dominant model for quick-service restaurants, coffee chains and casual dining in South Korea. Examples of such franchises include the following.

• South Korean franchise brands:
1. coffee – Mega Coffee, A Twosome Place and Ediya;
2. burgers and sandwiches – Lotteria, Mom’s Touch and Eggdrop;
3. chicken – BBQ Chicken, BHC and Kyochon; and
4. bakery – Paris Baguette and Tous les Jours.
• International franchise brands:
1. coffee – Coffee Bean and Illy Caffé; and
2. burgers and sandwiches – McDonald’s, Burger King, KFC and Subway.

Obligation to Register and Provide Disclosure Documents

Before entering into a franchise agreement, a franchisor must register its disclosure document with the competent administrative authority (Article 6-2 of the Fair Transactions in Franchise Business Act – the “Franchise Act”) and deliver the registered disclosure document to the prospective franchisee (Article 7 of the Franchise Act).

Prohibition of Unfair Trade Practices

Under Article 12(1) of the Franchise Act, a franchisor shall not engage in, or cause another business entity to engage in, any of the following acts likely to impede fair franchise transactions:

• unreasonable suspension or refusal to trade – unreasonably suspending or refusing to supply goods, services or business assistance to a franchisee, or imposing significant restrictions on such supply;
• imposing unfair restrictions – imposing unfair restraints on the prices of goods or services handled by a franchisee, or on the franchisee’s customers, business territory or business activities;
• 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 damages that are excessive in light of the standards prescribed by presidential decree, including in relation to the purpose and content of the agreement and the losses expected to occur; and
• other acts likely to undermine fair franchise transactions – any other act, not falling under the foregoing, that is likely to impede fair franchise transactions, including improperly inducing franchisees 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 franchisee.

Under Article 12-3(2) of the Franchise Act, a franchisor 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 (Article 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 commencement, if earlier), or if the franchisor maintains damage compensation insurance, details of the insurance 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 franchisee 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 arrangements) 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 cancellation 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 discussions 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.

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 franchise agreement.

Under Korean law, a “franchise business” is legally defined as a business relationship that includes all of the following elements:

• the franchisee is granted the right to use the franchisor’s trade marks (including trade marks, service marks, trade names, signs or any other marks);
• the franchisor allows the franchisee to sell products or services (including raw and auxiliary materials) in accordance with prescribed quality standards or business methods, while also providing training and operational support;
• the franchisee provides consideration to the franchisor in the form of a franchise fee, covering both the right to use the trade marks and the training/support received in connection with business operations; and
• the parties enter into a continuous business relationship.

In practice, whether a business relationship qualifies as a “franchise” is determined primarily by the existence of a franchise fee. The concept of a franchise fee is interpreted broadly and may include virtually any payment made by the franchisee to the franchisor, such as:

• membership fees, initial joining fees, training fees or contract fees paid in consideration for the right to use trade marks or for operational support and training;
• payments serving as security for the franchisee’s obligations, including the cost of goods supplied by the franchisor or compensation for damages;
• upfront payments required as a condition for the grant of franchise rights, such as the cost of fixtures, equipment or goods provided by the franchisor, or rent for premises payable to the franchisor;
• periodic or irregular payments to the franchisor for the use of trade marks, training, support or other benefits conferred under the franchise agreement; and
• any other payments made by a prospective or existing franchisee to acquire or maintain the right to operate the franchise business.

General Principles

Under Article 7 of the Franchise Act, a franchisor is required to provide a franchise disclosure document to a prospective franchisee. A disclosure document that has been duly registered (or amended and re-registered, where applicable) with the Korea Fair Trade Commission (KFTC) or the competent metropolitan/provincial government authority (eg, the mayor of a special metropolitan city, the mayor of a metropolitan city or the provincial governor) should be provided.

The Franchise Act requires disclosure to be made in accordance with methods prescribed by the Enforcement Decree of the Franchise Act, such as certified mail or other objectively verifiable means, to confirm the timing of disclosure. Although the Franchise Act does not explicitly mandate translation, in practice the KFTC requires that the franchise disclosure document be submitted in Korean in the registration process.

Information Required in the Franchise Disclosure Document

Under Article 2 of the Franchise Act and its Enforcement Decree, the franchise disclosure document must include, among other things:

• general information on the franchisor (corporate details, history and financial statements);
• current state of the franchise business, including the number of stores, closures and average sales;
• record of legal violations by the franchisor or its executives;
• obligations imposed on the franchisee;
• conditions or restrictions on business activities (eg, mandatory purchases, business territory);
• procedures and timelines for commencing business operations;
• details of support, education and training to be provided by the franchisor; and
• the status of stores directly operated by the franchisor.

Under Article 9(1) of the Franchise Act, a franchisor is prohibited from engaging in the following conduct in relation to the franchise disclosure document:

• providing false or exaggerated information (ie, offering information that is inconsistent with the facts or presented in an overstated manner); and
• providing deceptive information (ie, withholding or downplaying material facts that would significantly affect the conclusion or continuation of a franchise agreement).

Cooling-Off/Waiting Period

The franchisor may not (i) enter into a franchise agreement with the prospective franchisee or (ii) receive any franchise fees until 14 days have elapsed from the date on which the franchise disclosure document is provided. This waiting period may be shortened to seven days where the prospective franchisee has obtained legal advice from an attorney-at-law or certified franchise transaction consultant with respect to the franchise disclosure document.

Amendments to Disclosure Documents and Reporting Requirements

If there are changes to the key matters listed in Annex 1-2 of the Enforcement Decree of the Franchise Act, the franchisor is required to file a “registration” of the amended franchise disclosure document within the prescribed period. For minor changes identified in the same annex, the franchisor is required instead to submit a “report” of such changes.

Non-compliance with disclosure obligations under the Franchise Act may give rise to administrative fines, statutory rights of termination and refund for franchisees, and criminal sanctions.

• Administrative fines: Failure to register amendments to the disclosure document or to provide disclosure may result in a negligence fine of up to KRW10 million (Article 43(6)1, 2). Failure to report minor changes may result in a negligence fine of up to KRW3 million (Article 43(7)1).
• Franchise remedies: If a franchise agreement is executed without the franchisor having provided a duly registered franchise disclosure document, the franchisee may terminate the franchise agreement and demand a refund of all franchise fees within four months from the date of execution of the franchise agreement (Article 10(1)1).
• Criminal sanctions: A franchisor that fails to comply with an obligation to provide disclosure documents may be subject to criminal sanctions, including imprisonment of up to two years or a fine of up to KRW50 million (Article 41(3)2).

Unlike certain jurisdictions that provide exemptions from disclosure obligations, no such exemptions are available under Korean franchise law.

Although the Franchise Act does not explicitly mandate translation, in practice the franchise disclosure document must be prepared and provided in Korean, as the KFTC requires the document to be registered in Korean.

Franchisors are required to register the franchise disclosure document with the KFTC (with the registration process delegated to the Korea Fair Trade Mediation Agency; KOFAIR), or with the competent metropolitan or provincial government authority.

Concerning the franchise registration process, see 2.1 Mandatory Disclosure.

Regarding the consequences of failing to obtain the registration, see 2.2 Consequences of a Failure to Disclose.

A franchisor may not execute a franchise agreement without first registering its disclosure document with the KFTC or the competent metropolitan/provincial government authority, and providing the registered disclosure document to the prospective franchisee.

The Franchise Act does not explicitly require a franchisor to demonstrate past profitability before commencing 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 disclosure 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 document, 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 (Article 5-5(2)2 of the Enforcement Decree).

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 maximum duration for franchise agreements.

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 justifiable 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 business policies that apply generally to other franchisees;
• the franchisee is not compliant with critical business policies necessary for maintaining the franchise, including securing required business premises 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 education and training programmes; and
• where the total duration of the franchise relationship, 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 reference 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 commercial agents, does not directly extend to franchisees.

The Franchise Act prescribes specific procedures that a franchisor must follow in order to terminate a franchise 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 circumstances 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:

• an application for the franchisee’s bankruptcy is filed or compulsory workout procedures are initiated against the franchisee;
• bills or checks issued by the franchisee are dishonoured for reasons such as payment default;
• the franchisee is no longer able to operate the franchise due to a natural disaster, significant personal reasons or other circumstances;
• the franchisee receives administrative sanctions or court judgments for violations of laws or regulations related to franchise operations, which causes significant harm to the franchisor’s reputation or credibility and creates a serious obstacle to the franchise business (including corrective orders, penalty surcharges, administrative fines or business suspension orders);
• the franchisee receives an administrative sanction that prevents correction of a violation (eg, revocation of qualifications, licences or permits, or a business suspension order exceeding 15 days) due to a violation of laws or regulations related to franchise operations – provided that this does not apply where a penalty surcharge or administrative fine is imposed instead of such sanction;
• the franchisee repeats the same violation within one year (including the previous contract period in the case of renewal) after correcting the issue at the franchisor’s request, despite having been notified by the franchisor that such repetition will result in termination without the opportunity to cure;
• the franchisee receives a criminal penalty for an act related to franchise operations;
• the franchisee operates the franchise in a manner that poses an imminent threat to public health, making it impractical to wait for corrective action by authorities; and
• the franchisee suspends business for seven consecutive days or more without justifiable cause.

The Franchise Act regulates a broad range of matters concerning franchise transactions (see 2. Franchise Disclosure, 5. Duration, Renewal and Termination, 6. Restrictions on Competition in Franchise Agreements and 7. Choice of Governing Law). Its stated purpose is to ensure the mutually complementary and balanced development of franchisers and franchisees on an equal footing, rather than to safeguard competition in the relevant market (Article 1 of the Franchise Act).

Accordingly, the restrictions commonly found in franchise agreements, such as exclusive territories, non-competes and mandatory purchase obligations, are regulated under the Franchise Act primarily to protect the interests of franchisees (see 6.2 Exclusive Territories and Competing Businesses and 6.3 Requiring Franchisees to Purchase Specific Goods and Services).

For matters falling within the scope of the Franchise Act, the following provisions of the Monopoly Regulation and Fair Trade Act (South Korea’s principal competition law) do not apply: Article 45(1) subparagraphs 1 (unreasonable refusal to deal), 4 (unfair inducement of customers), 6 (abuse of superior bargaining position) and 7 (exclusive dealing and territorial or customer restrictions), and Article 46 (resale price maintenance).

Exclusive Territory

Under Article 12-4(3) of the Franchise Act, the franchisor may not, without justifiable cause, operate a directly operated store or establish a franchise of its own or its affiliate within the franchisee’s designated business territory in the same line of business. A business will be considered the same where it is reasonably recognised as such in light of the consumer base’s regional and demographic scope, the items handled, and the form and method of business. Accordingly, exclusive territories are permitted in franchise agreements, and the franchisor is expected to guarantee the franchisee’s territorial rights as stipulated in the agreement.

Non-Compete Clause During the Term of the Franchise Agreement

Under Article 6(10) of the Franchise Act, franchisees are prohibited from engaging in the same line of business as the franchisor during the term of the franchise agreement. Therefore, non-compete clauses that restrict the franchisee from operating a competing business during the contract period are permitted under Korean law and are commonly included in franchise agreements.

Non-Compete Clause After Termination

The Franchise Act does not explicitly regulate non-compete clauses that apply after the termination of the franchise agreement. However, the KFTC reviews such clauses to determine whether they constitute an “unfair contract term” under Article 12(1)3 of the Franchise Act.

In assessing whether a post-termination non-compete clause is unfair, the KFTC considers the harm to the franchisee and prevailing industry practices. For example, in a recent decision, the KFTC found that imposing a two-year post-termination non-compete obligation was an unfair contract term as it exceeded what is typically observed in comparable franchise relationships (KFTC Decision No 2025-024, dated 18 February 2025). The KFTC reasoned as follows.

• Non-compete obligations may be justified to the extent necessary to protect the franchisor’s proprietary know-how or trade secrets. However, if the restriction is excessive, it could unduly limit the franchisee’s ability to conduct business and serve as a means to exclude competitors. As such, these clauses must be interpreted and applied strictly.
• The Franchise Act itself limits non-compete obligations to the duration of the franchise agreement.
• The KFTC also took into account industry practices, noting that a two-year post-termination restriction deviated from what is typically observed in comparable franchise relationships.

Accordingly, the permissibility of a one-year post-termination non-compete clause should be assessed in light of prevailing industry practices in the market in which the franchisor operates. In Korea, many industries (such as restaurant franchises) commonly use one-year post-termination non-compete clauses. The KFTC has not taken specific action against such clauses to date, and Korean courts have upheld their validity. Therefore, a one-year post-termination non-compete clause is generally unlikely to be considered a violation of the Franchise Act.

Overview: Regulations on Mandatory Items

A franchisor may require a franchisee to purchase certain products or services exclusively from the franchisor or from designated suppliers (“mandatory items”). However, such requirements are subject to specific regulations under the Franchise Act.

The relevant regulations include:

• the requirement to disclose details of the mandatory items in both the franchise agreement and the disclosure document; and
• prohibition on unfairly restricting the franchisee’s choice of suppliers, which constitutes an unfair trade practice.

Disclosure Requirement in the Franchise Agreement and Disclosure Document

The franchisor must specify in the franchise agreement the types of mandatory items and the methodologies used to determine the supply price of each item (Article 11(2) of the Franchise Act). In addition, the franchisor must include the following in the franchise disclosure document (Franchise Act Article 2(10); Enforcement Decree, Annex 1):

• a list of mandatory items;
• the upper and lower limits of the supply price for key mandatory items during the preceding business year;
• information on any difference between the supply price of the mandatory items and a reasonable wholesale price; and
• information on any economic benefits (such as sales incentives and rebates) the franchisor or its affiliates obtain in connection with the supply of mandatory items.

Prohibition on Unfairly Restricting the Franchisee’s Choice of Suppliers

The franchisor must ensure that the requirement to purchase mandatory items does not constitute an unfair restriction on the franchisee’s choice of suppliers. The Franchise Act sets out the following conditions under which a requirement to purchase mandatory items will not be considered an unfair restriction (Article 12(1)(2)):

• the mandatory item must be objectively essential for the operation of the franchise business;
• it must be objectively recognised that, without dealing with the specific suppliers designated by the franchisor, it would be difficult to protect the franchisor’s trade mark rights and maintain the uniformity of goods or services;
• the franchisor must disclose details of the mandatory items in advance in the disclosure document and incorporate them into the franchise agreement; and
• where the franchisor changes the details of the mandatory items (eg, specifications, price, quantity, quality or suppliers) in a manner disadvantageous to the franchisee, the franchisor must first consult with the franchisee.

Restrictions on the Franchisee’s Use of Sales Channels

Restricting a franchisee’s use of sales channels may be considered “unreasonable restriction on the franchisee’s business activities” and prohibited as an unfair trade practice. However, the Franchise Act provides that such restrictions will not be regarded as unlawful if both of the following conditions are satisfied (Franchise Act Article 12(1)2; Enforcement Decree, Annex 2):

• it is objectively necessary to protect the franchisor’s trade mark rights or to maintain uniformity in goods or services, and this cannot reasonably be achieved without restricting the franchisee’s business activities; and
• the franchisor discloses the restriction in the franchise disclosure document and enters into the agreement with the franchisee on that basis.

Franchisor’s Ability to Operate in the Same Sales Channels as Franchisees

The Franchise Act permits franchisors to operate directly, but such activity is subject to certain limitations.

Protection of the franchisee’s business territory

As discussed in 6.2 Exclusive Territories and Competing Businesses, during the term of a franchise agreement, the franchisor may not, without justifiable cause, operate a directly operated store or establish another franchise of the same line of business within the franchisee’s designated business territory (Franchise Act Article 12-4(3)). Accordingly, the franchisor’s offline sales channels are restricted to protect the franchisee’s territory.

Disclosure of the franchisor’s online and offline sales activities

If the franchisor operates through specific sales channels such as online platforms, this must be disclosed in the franchise disclosure document. Specifically, the franchisor must disclose (i) the proportion of annual domestic sales accounted for by online versus offline sales; (ii) the proportion of products sold exclusively online or offline; and (iii) whether the franchisor sells goods or services identical or similar to those of franchisees through online, home shopping or telemarketing channels (Franchise Act Article 2(10); Enforcement Decree, Annex 1).

Consultation with franchisees and franchisee associations

Franchisees may request consultation with the franchisor, and the franchisor is obligated to participate under the principle of good faith (Franchise Act Article 4). Franchisees may also form franchisee associations, which may request consultation with the franchisor concerning transaction terms, including changes to the franchise agreement. In such cases, the franchisor must respond in good faith to such requests (Franchise Act Article 14-2), though it is not legally required to reach agreement.

Franchisees or franchisee associations may request consultations with the franchisor regarding matters related to the franchisor’s use of specific sales channels. In this regard, the “Standard Franchise Agreement (for Retail and Other Sales Businesses)” published by the KFTC provides that franchisees, either individually or through their associations, may request consultations with the franchisor on issues such as whether and to what extent the franchisor engages in online sales, including the types of products sold, the share of sales and the pricing. The franchisor, in turn, is prohibited from unreasonably refusing or neglecting to engage in such consultations.

Accordingly, where the franchisor utilises specific sales channels such as online platforms, franchisees or franchisee associations may request consultations. In such cases, the franchisor must participate in the consultations in good faith, but is not legally required to reach agreement on the matters under discussion.

Under the Franchise Act, a franchisor may not, without justifiable cause, fix the resale prices of goods or services sold by franchisees or unfairly restrict the franchisees’ ability to determine such prices (Article 12(1)2 of the Franchise Act; Enforcement Decree, Annex 2). However, the following practices are excluded from this prohibition:

• recommending resale prices to franchisees; and
• requiring that franchisees consult with the franchisor in advance when determining or changing resale prices, provided that the franchisor does not coerce compliance through such consultations.

Within the scope of these exceptions, vertical agreements between franchisors and franchisees are permitted under Korean law. Separately, in assessing the competitive effects of vertical restraints in franchise relationships, pro-competitive effects may also be considered in theory. In practice, however, pro-competitive justifications rarely play a decisive role in enforcement outcomes.

The Franchise Act does not expressly regulate the governing law of franchise agreements. Accordingly, the franchisor may stipulate the laws of its own jurisdiction as the governing law of the agreement.

Korean law does not formally require that franchise agreements be governed by Korean law. Nevertheless, the generally accepted view, also reflected in the KFTC’s position, is that the Franchise Act constitutes overriding mandatory provisions. Therefore, even where the parties designate foreign law as the governing law, the Franchise Act will continue to apply to agreements with franchisees in Korea.

The Franchise Act applies equally to both the intellectual property elements and the service elements of a franchise agreement.

Mandatory Terms of Franchise Agreements

Franchise agreements must include matters concerning the following (Article 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 commencement, if earlier), or if the franchisor maintains damage compensation insurance, details of the insurance 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 franchisee 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 arrangements) 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 cancellation 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 discussions 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 agreement. When entering into a franchise agreement with a Korean franchisee, the following statutory requirements must be observed.

Refund of franchise fees

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 document 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 exaggerates facts in providing information to a prospective franchisee or franchisee, or (ii) conceals or downplays material facts that may have a significant impact on the conclusion or maintenance of the franchise agreement, and the prospective franchisee 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 prospective 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 attributable to the franchisee.

Accordingly, even if the franchise agreement contains provisions on renovation obligations and cost allocation that differ from the Franchise Act, the franchisor may only require store renovations in the circumstances prescribed by the Franchise Act and must share costs in accordance with the statutory standards.

Prohibition on unfair restrictions on operating hours

Under Article 12-3 of the Franchise Act and Article 13-3 of the Enforcement Decree, the franchisor may not impose unfair restrictions on franchisees’ operating hours contrary to normal business practices. The followings are considered unfair restrictions:

• where, despite the franchisee’s request, the franchisor refuses to allow shortened operating hours even though late-night operations (between midnight and 6am or between 1am and 6am) have resulted in operating losses for three consecutive months due to the store’s location or other factors; and
• where the franchisor refuses to allow a franchisee to shorten operating hours to the minimum extent necessary for unavoidable circumstances such as illness or medical treatment.

Accordingly, even if the franchise agreement contains different provisions on operating hours, the franchisee may request a reduction in operating hours pursuant to the Franchise Act.

Prohibition on infringement of business territory

As discussed in 6.2 Exclusive Territories and Competing Businesses, the franchisor (i) must designate a business territory for the franchisee at the time of entering into the franchise agreement and specify it in the contract, and (ii) may not infringe on the franchisee’s territory during the term of the agreement without justifiable cause (Article 12-4 of the Franchise Act). Accordingly, even if the agreement provides otherwise, the franchisor must comply with the prohibition on unjustified territorial infringement under the Franchise Act.

Advertising and sales promotions

Where the franchisor conducts advertising or promotional activities for which franchisees bear all or part of the costs, the franchisor must obtain the consent of at least 50% of the franchisees concerned (70% in the case of promotions). However, this consent requirement does not apply where the parties enter into a separate agreement, apart from the franchise agreement, governing the advertising or promotional activity and the activity is carried out pursuant to that agreement. In addition, the franchisor must notify franchisees of the details of such activities and, upon request, allow them to review the records of execution (Article 12-6 of the Franchise Act; Articles 13-5 and 13-6 of the Enforcement Decree).

Accordingly, even if the franchise agreement contains different provisions on advertising or promotions involving cost-sharing by franchisees, the franchisor must comply with the Franchise Act’s requirements concerning consent and disclosure.

Renewal of franchise agreements

As discussed in 5.2 Franchise Renewal, the Franchise Act prohibits a franchisor from refusing a franchisee’s request to renew the franchise agreement without justifiable cause and enumerates the exceptional circumstances under which renewal may be denied (Article 13). Therefore, even if the agreement provides otherwise, the franchisor must renew the franchise agreement in accordance with the Franchise Act.

Termination of franchise agreements

As discussed in 5.3 Termination of the Franchise Agreement, the Franchise Act generally requires that the franchisor allow a cure period of at least two months before terminating a franchise agreement and strictly limits immediate termination to the exceptional cases specified in the Franchise Act (Article 14). Therefore, even if the agreement provides different procedures or grounds for termination, the franchisor must comply with the Franchise Act and may immediately terminate only on the statutory grounds.

The Franchise Act does not contain a statutory blacklist of clauses that may not be included in franchise agreements. However, if a franchisor incorporates into a franchise agreement provisions that amount to conduct prohibited under the Franchise Act, this may be considered a violation (ie, imposition or amendment of unfair contract terms). Care should therefore be taken when drafting agreements. For relevant statutory restrictions, see 6.2 Exclusive Territories and Competing Businesses, 6.3 Requiring Franchisees to Purchase Specific Goods and Services and 7.3 Mandatory Content.

Enforcement of Foreign Judgments

Under Article 217 of the Civil Procedure Act and Article 26 of the Civil Execution Act, a foreign judgment may be enforced in Korea once it has been recognised by a Korean court. Recognition is granted where the following requirements are met:

• the foreign court had proper international jurisdiction under Korean law or applicable treaties;
• the defendant who lost the case was duly served with the complaint (or equivalent documents) and notice of hearing or orders in a manner that afforded sufficient time to prepare a defence – excluding service by publication or similar methods – or, if not duly served, nevertheless appeared and defended the case;
• the content of the final judgment and the proceedings leading to it are not contrary to sound morals or other aspects of social order in Korea; and
• reciprocity exists where the foreign country also recognises Korean judgments under substantially similar conditions.

Enforcement of Foreign Arbitration Awards

South Korea is a party to the New York Convention (having acceded in 1973). Accordingly, foreign arbitration awards are recognised and enforceable in Korea in accordance with the Convention.

Regulation on Payment Amount of Franchise Fees

The Franchise Act does not impose any statutory limits on the amount of franchise fee, royalties or service fees. There is also no annual maximum payment cap in foreign currency.

Other Regulations on Franchise Fees

A franchisor is required to set out franchise fees and other costs to be borne by the franchisee in the franchise disclosure document (Article 2(10) of the Franchise Act) and to include the terms of payment of such franchise fees and costs in the franchise agreement (Article 11(2) of the Franchise Act).

General Rule

For franchisors who are non-residents for tax purposes and do not maintain a permanent establishment in South Korea, franchise royalties are generally subject to withholding tax.

Exception: Compensation for Exclusive Distribution Rights

In a recent case, the Seoul High Court (Case No 2023Nu57526, currently pending before the Supreme Court of Korea) classified compensation for exclusive distribution rights as business income rather than royalty income under Korean tax law. Business income paid to a foreign entity without a permanent establishment in South Korea is not subject to taxation in South Korea. Accordingly, under this reasoning, consideration paid by a franchisee to a franchisor for exclusive distribution rights would not be subject to withholding tax.

General Rule: No Reporting Requirement

Under the Foreign Exchange Transactions Act, only capital transactions are generally subject to reporting requirements; remittances made in connection with the trade of goods or services are not. Accordingly, franchise fees payable to a franchisor are, in principle, not subject to foreign exchange reporting.

Exceptions Where Reporting May Be Required

Depending on the method of payment, certain cases may exceptionally trigger a reporting obligation under Foreign Exchange Transactions Regulation Article 5. These include:

• where frequent transactions with the counterparty are settled on a net basis through a running account;
• where payment for imports is made more than one year before the goods are received;
• where payment is made to a third party; and
• where payment is made without going through an authorised foreign exchange bank.

In these cases, reporting may be required depending on the amount and nature of the payment. Franchisors and franchisees should therefore confirm in advance whether reporting is necessary under these exceptions.

There are no formalities required when signing the franchise agreement. In particular, there is no requirement to authenticate or notarise signatures, to have witnesses or to complete any form of registration.

Electronic signatures are permitted and valid in South Korea. They have full legal effect under the Digital Signature Act.

There are no document taxes or stamp duties applicable to franchise agreements in South Korea. The Franchise Act does not require franchise agreements to be notarised or registered. In addition, no fee is charged for registering the franchise disclosure document with the KFTC or another competent authority.