The Supreme Court of Korea recently upheld the lower courts’ decisions in a dispute between franchisees and a food franchisor concerning increases in supply prices for designated ingredients and materials. While noting an error in the lower court’s reasoning on procedural non-compliance, the Supreme Court affirmed the judgment, finding that the franchisees’ continued dealings at the increased prices amounted to ex-post, implied consent and effectively cured the procedural defect. The decision provides useful guidance on the legal effect of contractual price adjustment procedures in franchise agreements.
Below we outline the background and procedural history of the case, the courts’ analysis of the principal issues, and the key takeaways.
I. BACKGROUND AND PROCEDURAL HISTORY
1. Background
The franchisor entered into franchise agreements with its franchisees and supplied designated ingredients and materials to them. It implemented two rounds of increases in supply prices for such ingredients and materials, in or around October 2020 and February 2022 (the “First Increase” and the “Second Increase”).
The franchisees challenged the validity of these increases, arguing that they were implemented in violation of the procedural requirements for price adjustments under the relevant franchise agreements, and sought restitution of alleged unjust enrichment and damages.
2. Procedural history
The court of first instance found that, with respect to the First Increase, the franchisor had not fully complied with the procedural requirements to provide written notice and engage in consultation with franchisees. The court nevertheless dismissed all claims, finding that the franchisees had continued to transact at the increased prices for a substantial period without objection and that this amounted to ex-post, implied consent.
The appellate court largely upheld the first-instance judgment. It further elaborated on the interpretation of the relevant contractual clause, including the requirement that a price increase be necessary and the meaning of “consultation,” and dismissed the franchisees’ appeal.
The Supreme Court also dismissed the franchisees’ appeal. While noting an error in the lower court’s reasoning to the extent it suggested that procedural non-compliance alone could not render a price increase ineffective, the Court ultimately affirmed the judgment on the basis that the franchisees’ subsequent conduct constituted ex-post, implied consent that cured the procedural defect.
II. KEY ISSUES AND COURT FINDINGS
1. Interpretation of the price adjustment clause
The franchise agreement provided that supply prices for designated ingredients and materials could be adjusted only where necessary due to changes in economic conditions and required the franchisor to provide a written explanation for the price adjustment and engage in consultation with franchisees before implementing any adjustment.
The lower courts interpreted this clause as permitting price adjustments only where an objective necessity for such adjustment existed. They rejected an interpretation that would allow the franchisor to change supply prices at its discretion, noting that ambiguous standard-form terms are to be construed against the drafter and that such an interpretation could render the clause unfair.
The courts further held that the term “consultation” under the agreement did not require unanimous consent of all franchisees, but rather referred to a process of mutual discussion and exchange of views. Requiring unanimous agreement as interpreted by the franchisees, the courts noted, could unduly hinder the franchisor’s ability to respond to changes in market conditions and maintain consistency across the franchise system.
The Supreme Court did not separately address this aspect of the lower courts’ reasoning, which therefore remains undisturbed.
2. Substantive requirement for price increases
The franchisees argued that the First and Second Increases did not satisfy the contractual requirement that a price increase be necessary. They contended that certain input costs had decreased and that the franchisor’s overall revenue and operating margins had improved, and therefore that the contractual condition for a price increase had not been met.
The lower courts held that such factors alone were insufficient, on their own, to show that a price increase was unnecessary and that the necessity of an adjustment should be assessed in light of the overall circumstances. In assessing whether a price increase was objectively necessary, the courts comprehensively considered factors such as:
(i) the fact that supply prices had not been increased for several years prior to the First Increase;
(ii) increases in fixed costs such as labor and rent; and
(iii) broader changes in economic conditions, including increases in raw material costs, fuel prices, and logistics costs since 2020.
The courts also noted that financial indicators such as operating margins or cost ratios reflect overall business performance and do not, in themselves, determine whether an increase in the supply price of particular ingredients or materials is necessary.
The Supreme Court did not separately address this aspect of the lower courts’ reasoning, which the Supreme Court left undisturbed.
3. Procedural non-compliance and implied consent
A central issue in the case was whether a price increase implemented without complying with contractual procedures would be ineffective, and whether any such procedural defect could be cured by the franchisees’ ex-post, implied consent.
The appellate court found that the franchisor’s First Increase did not strictly comply with the contractual requirements to provide written notice and engage in consultation with franchisees and that it therefore constituted a procedural breach. It nevertheless held that procedural non-compliance alone did not automatically render the price increase null and void. In reaching this conclusion, the court noted that the degree of non-compliance was not substantial, that the franchisees had continued to transact at the increased prices for a considerable period without objection, and that a significant period had elapsed before any dispute was raised.
On that basis, the appellate court concluded that the franchisees had given ex-post, implied consent to the First Increase and that the procedural defect had been cured. The Supreme Court affirmed this conclusion but further clarified the legal effect of procedural non-compliance.
The Supreme Court held that where a franchisor fails to comply with procedural requirements governing price adjustments, a unilateral change in supply prices will in principle not be effective against franchisees. In this respect, it noted that the appellate court had erred to the extent it suggested that procedural non-compliance alone could not affect the validity of the price increase.
At the same time, the Supreme Court confirmed that where franchisees continue to transact at the increased prices and their conduct indicates acceptance of the change, such conduct may constitute ex-post, implied consent capable of curing the procedural defect. In this case, the Court found that the franchisees’ conduct amounted to such consent and therefore upheld the lower courts’ conclusion.
III. KEY TAKEAWAYS
1. Contractual procedures for price adjustments carry legal significance
The decision confirms that contractual provisions requiring written notice and consultation prior to price adjustments are not merely formalities. Even where a price increase may be substantively justified, a unilateral adjustment implemented without complying with the agreed procedures will in principle not be effective against franchisees.
The Supreme Court’s clarification underscores that such procedural provisions function as meaningful contractual safeguards rather than as purely procedural or non-binding requirements.
2. Implied consent may cure procedural defects, but only in limited circumstances
In this case, the franchisor ultimately avoided liability because the franchisees continued to transact at the increased prices for a substantial period without raising objections, and the courts recognized this conduct as implied consent.
However, the decision also suggests that this conclusion was heavily fact-specific. Where franchisees promptly object to a price increase or collectively challenge it at an early stage, the same reasoning may not apply, and a procedural defect may not be regarded as cured.
IV. IMPLICATIONS FOR FRANCHISORS
Franchisors should ensure that contractual procedures governing price adjustments are carefully followed, including providing written explanations and engaging in meaningful consultation with franchisees before implementing any price changes.
At the same time, the decision indicates that the legal effect of procedural non-compliance will depend on the subsequent conduct of the parties and the overall factual context, including whether franchisees continue to transact without objection and the timing of any challenge to the price increase.
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[Korean version]
