[비즈한국] Companies sometimes make decisions that are difficult to explain based on money alone. Understanding the laws or systems hidden behind these decisions can help clarify the deeper context. 'Useful Business Law (Use-Bi-Beop)' introduces clues that help in understanding the flow of business.
Franchise transactions are governed by the 'Fair Transactions in Franchise Business Act (Franchise Business Act).' They are under the strong supervision of the Fair Trade Commission, and the intensity of regulation is growing day by day. For example, in the early stages of the enforcement of the Franchise Business Act, franchisors could: △carry out promotional events according to their own sales policies and charge the costs to franchisees without prior consent; △provide expected sales figures without guaranteeing their accuracy; and △require franchisees to purchase most items used in operations exclusively through the franchisor.
The situation is different now. In the case of promotional events, consent must be obtained from a certain percentage or more of franchisees. If expected sales figures are presented as higher than the actual revenue generated, the franchisor must bear liability for damages to the franchisees. Furthermore, to ensure a unified image of the franchise and maintain consistent product quality, franchisors can only require purchases for products that are directly related to the business.
Generally, contracts under the Civil Act are considered consensual contracts (contracts formed solely by the manifestation of intent) or non-formal contracts (requiring no specific method for the manifestation of intent), meaning they do not require special procedures or formats. Drafting a contract or getting it notarized is done to secure evidence for the fact or content of the contract for the future; the act itself is not invalidated just because such procedures were not followed. In other words, a verbal contract is still a contract.
However, the Franchise Business Act stipulates that if a franchisor does not go through predefined procedures or formalities, their actions may be ineffective or the franchisor may be held liable for legal violations. For instance, suppose a franchisor charged franchisees for promotional costs after conducting an event. Even if the profit gained through the promotion is greater than the cost borne by the franchisee, the franchisor may still face administrative sanctions for violating the Franchise Business Act if they failed to obtain prior consent from the franchisees. Arguments like "They made a lot of money and the results were good, so what's the problem?" do not hold up.
Why is there such strict regulation on franchise transactions? First, it is fundamentally predicated on the idea that franchisors hold a superior position in the transaction over franchisees and can therefore force unfavorable trade conditions against the franchisees' will.
Second, the fact that franchising is often the first choice for those starting a business without special assets or know-how is also a factor. Franchise businesses are closely related to our daily lives, and as a result, many people are interested in them. If you go outside and look at commercial districts, you will find that it is difficult to find a store that is not a franchise, except for 'long-established shops' that have been passed down through generations.
Third, which may be an uncomfortable truth for franchisors, is that while franchising is a means for franchisors to expand their influence, it also shifts a certain level of risk onto franchisees, which provides the justification for regulation. If a franchisor were truly confident that opening a new store and expanding the business would guarantee 100% profitability, they would likely operate it as a direct-managed store rather than recruiting franchisees.
In reality, opening a store such as a restaurant, cafe, convenience store, or academy does not always guarantee profit, and operating one involves immense effort and hardship. Almost all store owners often complain, saying things like "I'm grinding myself to the bone," "My whole family is tied to this," "I haven't taken a single day off since I opened this convenience store," or "I'm actually jealous of the part-timers." Given these circumstances, it is considered natural that franchisees receive special protection under the law.
I have represented both sides in various disputes between franchisors and franchisees (store owners). Consequently, I am well aware of the positions and arguments of franchisors. The concerns I frequently encounter while advising franchisors are as follows: First, franchisors feel that current regulations are too heavy. Especially for small and medium-sized franchisors without a fully equipped legal team, they believe it is impossible to perfectly comply with the Franchise Business Act.
Second, they feel there are no defensive measures against "betrayal" by franchisees, such as leaking trade secrets or immediately terminating a contract after receiving know-how from the franchisor to secretly engage in the same business elsewhere.
Third, they believe regulations are being enforced without a proper understanding of the franchise business. The essence of a franchise business is that multiple franchisees adhere to the quality and service standards designated by the franchisor. Furthermore, since most franchise businesses generate revenue through domestic demand, and the domestic market is shrinking daily, repeatedly implementing creative promotional activities is essential for the survival of the business.
However, many franchisees fail to understand this essence or, aiming only to maintain the status quo, are uncooperative with the franchisor's requests and instructions. Some even leave store operations entirely to part-timers while they stay uninvolved, a practice they call "running on auto." From the franchisor's perspective, they may feel that the Franchise Business Act lacks provisions to deal with such cases.
In such a situation, how should franchisors and franchisees treat each other, and how should relevant legal provisions be interpreted? First, franchisors must understand the legislative intent to protect franchisees and preemptively refrain from taking measures unfavorable to them.
The Suwon District Court ruling (2020Gahap12175, August 12, 2022) addressed provisions in the Franchise Business Act that allow a franchisor to terminate a contract immediately without going through procedures like a notice of correction, stating: "If such exception clauses are recognized too broadly, there is a concern that the intent of the mandatory regulations regarding termination procedures could be circumvented (slyly evading regulations); therefore, the applicability of exception clauses must be judged strictly and cautiously." It ruled that the immediate termination of a franchise contract without going through proper procedures is practically only possible in extremely exceptional cases.
The Supreme Court ruling (2009Da32560, September 24, 2009) held that if a franchisor unilaterally notifies a contract termination without following the procedures set by the Franchise Business Act, they are liable for damages for illegal contract termination and refusal of performance, even if there were grounds for termination.
As such, franchisors must keep in mind that courts are strictly reviewing the legitimacy of their actions. For this reason, they should not attempt to bind franchisees with penalty clauses, and instead of notifying them of contract termination, they should communicate continuously with the franchisee and suggest ways to find an exit, such as transferring business rights or succession of the store, to assist the franchisee.
On the other hand, franchisees also need to cooperate with the franchisor's policies. Even if they are protected by the Franchise Business Act, a dispute with a franchisor can be a significant burden for an individual franchisee. Moreover, they should keep in mind that such disputes are often "a game where you only break even if you win."
In my experience, most franchisees who faced such disputes eventually gave up the franchise business (closed down) and pursued other work, and in many cases, the profits from their new business were worse than the previous franchise business. Therefore, franchisees should keep in mind that the essence of a franchise business lies in maintaining consistency in quality and service, and that ongoing investment and effort are necessary for the maintenance and survival of the business, and they should not avoid dialogue and negotiation with the franchisor.