[Sejong=Asia Economy Reporter Joo Sang-don] One out of four disputes between franchisees or prospective franchisees and franchisors was found to be related to the reduction or concealment of franchisees' burden costs or the provision of exaggerated sales or net profit figures.
On the 2nd, the Korea Fair Trade Mediation Agency announced that among 1,379 franchise-related dispute mediations received from 2019 to June this year, about 27% (374 cases) involved franchisors providing false or exaggerated information. The related damages amounted to 23.7 billion KRW, which accounts for about 34% of the total claimed damages (approximately 70 billion KRW) by applicants.
Examples of damages by application reasons include cases where franchisees signed franchise contracts based on oral promises or written estimated sales (or net profit) data provided by franchisors, but actual sales or net profits fell significantly short of those estimates.
According to the Mediation Agency, Mr. C, who was considering starting a business, inquired about the average monthly profit of a convenience store franchise from an employee of Company D, a convenience store franchisor. In response, Sales Manager Mr. E of Company D verbally encouraged Mr. C to quickly sign the franchise contract, stating that the daily sales of the franchise store Mr. C would operate would definitely exceed 2 million KRW. Considering Mr. E’s proactive attitude and trust in the large-scale Company D, Mr. C signed the franchise contract. However, after starting operations post-contract, daily sales were far below what Mr. E had described. As this situation persisted, Mr. C was unable to bear the accumulating losses and terminated the franchise contract with Company D after about two years, bearing closure costs including termination penalties.
There were also many cases where franchisors designated essential items that franchisees must purchase from the franchisor or its designated suppliers, supplying these items at prices higher than the appropriate wholesale price without informing franchisees of the price difference, causing damages to franchisees. Additionally, some franchisees signed contracts based on initial interior construction costs posted on the franchisor’s website but ended up paying nearly double the construction costs after the work was completed.
An official from the Mediation Agency stated, "There are many cases where franchisees trust the information provided by franchisors during the contract process or overlook its importance, only realizing after signing the contract or after significant damages have occurred that the information was false." The official added, "If disputes arise due to franchisors providing false, exaggerated, or reduced information, franchisees can directly use the Mediation Agency’s online dispute mediation system to apply for dispute mediation or seek consultation and assistance."
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