Franchisor Obligations To Provide Information Under The Franchise Business Act ' Focusing On The Obligation To Provide Information About Estimated Profits

• Published date: 11 December 2023
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Franchising
• Law Firm: DR & AJU LLC
• Author: Hyeon Jin Kim

1. Introduction

In Korean law, franchising refers to "a continuous business relationship in which a franchisor allows its franchisees to use its own trademarks, service marks, trade names, signs, or any other trademarks in selling goods or services in compliance with certain quality standards or business methods, and supports, trains, and controls its franchisees in regards to their management, business activities, etc., and in which franchisees pay required payments to their franchisor in return for the use of trademarks and the support and training provided for their management, business activities, etc."

Franchise agreements can mutually benefit both parties involved, as they allow franchisees to start their own business with limited funds and business experience and franchisors to maximize the use of their trademarks. However, due to the asymmetrical structure of the franchisor and franchisee relationship, there is a high chance for conflict to arise between the two parties due to information imbalance. It is common in the franchising industry for franchisors to prearrange the terms of the agreement and offer the same deal to many prospective franchisees. In such instances, the only choice that prospective franchisees have is whether to buy the license or not. Therefore, it is crucial for prospective franchisees to receive accurate information from the franchisor and thoroughly review the terms of the agreement before entering the contract.

For these reasons, Korea's Fair Transactions in Franchise Business Act (hereinafter referred to as the "Franchise Business Act"') requires franchisors to register an information disclosure statement and provide these documents to their franchisees. The act also prohibits franchisors from providing prospective franchisees with false or exaggerated information and specifically requires information with material effect on the maintenance of the agreement, such as the expected future profits, to be provided in writing.

Out of the franchisor's obligations to provide information, there is a special emphasis on the obligation to provide information on expected future profits. This article will explore the specifics and legal consequences of this violation.

2. Franchisor Obligations to Provide Information on Expected Future Profits

2.1 Prohibition on Providing False or Exaggerated Information on Expected Future Profits, Etc.

Article 9(1)1 of Korea's Franchise Business Act prohibits franchisors from providing false or exaggerated information to prospective franchisees or franchisees, supplementing the limitations in the franchisor's obligation to register information disclosure statements and provide information. Thereby, franchisees can hold the franchisor liable for violating this provision if the franchisor registers or provides an information disclosure statement that contains false or exaggerated information.

2.2 Obligation to Provide and Allow Access to Documents about Information on Expected Future Profits, Etc.

According to Article 9(3) of the Franchise Business Act, franchisors must provide franchisees and prospective franchisees with written documents that...