A Year and a Half After Mandatory Disclosure Law: Two Out of Three Franchisors Still Using 'Blind Contracts'

KFTC Inspects 100 Major Wholesale and Service Franchisors
Voluntary Corrections Encouraged for 51 Out of 77 Companies with Mandatory Item Issues

It has been a year and six months since the law was revised to require franchise headquarters to explicitly state in franchise agreements both the types of "mandatory items"—those raw and subsidiary materials that franchisees are obliged to purchase—and the method for determining supply prices. However, it has been found that so-called "blind contracts" that disregard the purpose of the law are still commonplace on the ground in the franchise industry.

On August 12, the Korea Fair Trade Commission (KFTC) announced the results of its "Inspection on Compliance with the Requirement to Specify Mandatory Items in Franchise Agreements," which targeted 100 major franchisors in the wholesale, retail, and service sectors. According to the findings, 77 of these franchisors had mandatory items in place. Among them, only 26 companies (33.8%) fully complied with the law by reflecting all mandatory disclosures in franchise contracts and applying them without exception to all franchisees.

Two out of three franchisors (51 companies, 66.2%) operating mandatory items failed to include, or only partially included, the types of mandatory items and the method for determining supply prices in the franchise agreement. Ten companies either misunderstood the existence of mandatory items or were entirely unaware of the legal amendment, and thus failed to reflect any information in their contracts. Out of 67 companies that had revised their franchise agreements, 12 omitted some of the legally required mandatory disclosures regarding the types of mandatory items or the supply price calculation method. Some cases were also found where companies changed only the agreement format and applied the new requirements solely to new contracts, postponing updates for existing franchisees to evade the law.

The level of specificity in disclosures was also lacking. Among the 64 companies that documented price calculation methods, only 55 (85.9%) specified clear criteria or the range of increases as per KFTC guidelines, while the remainder used ambiguous language that can be interpreted arbitrarily.

The KFTC plans to provide a one-month voluntary correction period, after which it will review contract update status. Companies found to be insufficiently compliant will face further investigation and strict enforcement of the law.

This content was produced with the assistance of AI translation services.