Termination of Franchise Agreement by Franchisees
Termination of franchise agreement
- Where grounds for termination of a franchise agreement occur to a franchisee, he/she may notify the franchiser of the termination of the franchise agreement and terminate the franchise agreement (Article 11(2) of the 「Fair Transactions in Franchise Business Act」 and Article 543(1) of the 「Civil Act」).
- If a franchise agreement between a franchiser and a franchisee is terminated, all rights and obligations related to a franchise business, such as trademarks license, etc. are also terminated. However, the same shall not apply to claims and debts, such as the payment, etc. of goods and services already purchased from the franchiser on credit.
Limitations on Termination of Franchise Agreement by Franchiser
Limitations on termination of franchise agreement
- A franchiser that intends to terminate a franchise agreement shall clearly inform franchisee of the manner in which franchisee has breached the agreement during the grace period of not less than two months, and shall give franchisee written notice at least twice that it will terminate the agreement unless such breach is corrected during the given period (Main body of Article 14(1) of the 「Fair Transactions in Franchise Business Act」).
- However, where it is difficult to continue franchise business transactions, such as in the circumstances described below, a franchiser may terminate a franchise agreement without notification (Proviso to Article 14(1) of the 「Fair Transactions in Franchise Business Act」 and Article 15 of the 「Enforcement Decree of the Fair Transactions in Franchise Business Act」).
· A franchisee files for bankruptcy, or compulsory execution procedures or workout procedures on the franchisee begin
· Bills or checks that are issued by a franchisee are dishonored due to a default of payment, etc.
· A franchisee cannot operate a franchise any longer due to a natural disaster, significant personal reasons, etc.
· Where a franchisee violates any laws related to franchisee operation and receives any of the following administrative dispositions or court decisions, clearly impairing the reputation or credit of the franchiser and thus causing significant difficulties for the franchiser
① An administrative notice that the franchisee should correct a violation
② A notice of the imposition of a penalty surcharge, administrative fine, etc. for the reason of such violation
③ An order of suspension of operations for the reason of such violation
· Franchisee receives an administrative notice that does not allow the correction of its violation, such as the revocation of a qualification, license or permission or an order to suspend business (where the franchisee receives an order to suspend business within 15 days, this shall not apply thereto) because it has violated a statute related to the operation of a franchised store (however, where it receives a notice of the imposition of a penalty surcharge, etc. in lieu of an administrative punishment based on a statute, this shall not apply thereto)
· Franchisee repeats the same violation within one year (in cases of the renewal of a franchise agreement or renewed franchise agreement, the period belonging to the previous period of contract shall be included) from the date it corrected such matter in compliance with a franchiser's request (however, if the franchiser has omitted a fact in a document requesting correction stating that if the franchisee makes the same violation within one year, the franchise agreement may be terminated immediately, this shall not apply thereto)
· Franchisee is subject to a criminal penalty for an act related to the operation of a franchised store
· Where a franchisee operates a franchised store in a manner that is clearly likely to cause eminent risk to the health or safety of the public but it is difficult to wait for an administrative agency's corrective measures
· Franchisee suspends business for seven consecutive days without good cause
Effect of termination of franchise agreement without notification
- The termination of a franchise agreement by a franchiser without notifying franchisee shall have no effect (Article 14(2) of the 「Fair Transactions in Franchise Business Act」).
Return of Franchise Fees
Return of franchise fees
- In the following circumstances, a franchisee or prospective franchisee may request the franchiser to return the franchise fees (Article 10(1) of the 「Fair Transactions in Franchise Business Act」).
· It is found that the inclusion of false or exaggerated information or the omission of any important matter had a material effect on the execution of the agreement, and the franchisee requests the return of the franchise fee within four months of the date of execution of the franchise agreement
· Franchiser unilaterally ceases the franchise business without just cause and franchisee requests the return of the franchise fee within four months of the date of cessation of the franchise business