I. KEY AMENDMENTS

On June 4, 2024, the Enforcement Decree of the Fair Transactions in Franchise Business Act (the “Franchise Act”) was amended to obligate franchisors to (i) engage in consultations with their franchisees when they intend to modify the transaction terms related to essential items[1] in a manner that is disadvantageous to the franchisees, and (ii) include the related procedures for consultation and specific information on the essential items and their suppliers in the franchise agreement.

This amendment follows the amendment of the Franchise Act on January 2, 2024. The pre-amendment Franchise Act obligated franchisors to include matters relating to essential items only in the franchise disclosure documents (“FDD”). However, with the amendment of the Franchise Act taking effect on July 3, 2024, franchisors will soon be required to include the types of essential items and the calculation methods of their supply prices in the franchise agreements. These obligations apply to franchise agreements that are already in existence at the time the amended Franchise Act becomes effective; existing franchise agreements must be revised to include these details relating to essential items by January 2, 2025, six months from the effective date.

The amended Enforcement Decree, as provided in the table below, will come into effect on December 5, 2024. Once in effect, franchisors will be required to include in their franchise agreements: (i) procedures for consultations between the franchisor and its franchisees, including when modifying the transaction terms to the disadvantage of the franchisees, and (ii) a list of essential items with detailed information and the designated suppliers for each item. For franchise agreements already in existence on the effective date, these requirements must be implemented by June 4, 2025, six months from the effective date.

With this amendment, a franchisor is required to engage in consultations with its franchisees when modifying the transaction terms related to essential items to the disadvantage of the franchisees, such as adding additional items to the list of essential items or increasing their prices. The franchisor may be sanctioned for imposing restrictions on its franchisees in violation of the Franchise Act if it fails to engage in sufficient consultations before modifying such terms to the franchisees’ disadvantage or carries on the transaction without including the relevant information in the franchise agreement.

II. IMPLICATIONS

Business operators currently engaged in or planning to start a franchise business in Korea must pay close attention to the matters that need to be included in the franchise agreement according to the amendments outlined above. Existing franchise agreements should also be revised within the deadline to reflect these amendments. Additionally, franchisors must ensure they do not unilaterally modify the terms agreed upon in the franchise agreement to the disadvantage of the franchisees, such as by expanding the list of essential items or changing the price calculation methods. Doing so without engaging in sufficient consultations with the franchisees may be considered as imposing disadvantages on them in violation of the Franchise Act.