The Korea Fair Trade Commission (“KFTC”) announced on December 30, 2024, that it has amended its standard franchise agreements across 13 business sectors1 to address unfair trade practices in franchise businesses and reflect recent regulatory developments. In addition, the KFTC recently stated that, starting from February 3, 2025, it will conduct compliance reviews of 75 major franchisors to check whether the requirements regarding mandatory purchase items have been properly reflected in their franchise agreements.
The KFTC provides standard franchise agreements tailored to various business sectors, incorporating Korea’s franchise regulations and the specific characteristics of each sector. These standard agreements are designed to help businesses minimize legal violations and streamline the drafting process while also serving as practical guidelines when the KFTC conducts compliance reviews under the Fair Transactions in Franchise Business Act (the “Franchise Act”). The KFTC actively promotes the adoption of these standard franchise agreements by offering incentives to franchisors which use the standard franchise agreements, such as awarding higher scores in evaluations of their fair trade and mutual growth agreements with franchisees. Franchisors with high evaluation scores may be exempt from ex officio investigations by the KFTC for certain period (one to two years).
The key amendments made by the KFTC are summarized below:
I. Provisions on the Designation of Mandatory Purchase Items
The recently amended the Franchise Act, effective July 2024, requires franchise agreements to include the types of products that franchisees must purchase from franchisors or parties designated by the franchisor (i.e., mandatory purchase items) and the criteria for calculating their supply prices. The KFTC has revised its standard franchise agreements to reflect this new obligation.
Below is an example clause from the standard franchise agreement for the general services sector:2
II. Provisions on Negotiating Changes to Transaction Terms
The recently-amended Enforcement Decree of the Franchise Act, effective December 2024, requires franchisors to (i) engage in negotiations with franchisees when changing transaction terms for mandatory purchase items to the disadvantage of franchisees, and (ii) include negotiation procedures for changing transaction terms, including those for mandatory purchase items. The KFTC has updated its standard franchise agreements accordingly. Additionally, the KFTC has ensured that the negotiation process for changing general transaction terms (other than those for mandatory purchase items) similarly incorporates some aspects of the procedures used for negotiating changes to the transaction terms for mandatory purchase items.
Below is an example clause from the standard franchise agreement for the general services sector:
III. Provisions on Credit Card Payment Restrictions
The KFTC clarified in its standard franchise agreements for 11 business sectors that franchisors must not force or encourage cash payments by restricting credit card payments to specific locations. However, the standard franchise agreements for two sectors—laundry and convenience stores—do not include these provisions, as credit card payments are considered unnecessary due to the nature of their businesses.
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[Korean version]
- Four from restaurant business sector (chicken, pizza, coffee, and general dining); five from service sector (education, beauty and haircare, auto repair, laundry, and general services); four from retail sector (convenience stores, cosmetics, health supplements, and general retail).
- We have underlined the key parts.
- Article 30 appears to be a typo, so it has been corrected to Article 29.
