Franchise Non-Compete Clauses in South Korea: Checking Restrictions on Other Businesses and Starting Again After Closure

When choosing a franchise brand in South Korea, check not only the conditions for opening a shop, but also how much freedom you will have to pursue other business activities. This is particularly important if you intend to keep an existing business, prepare a separate venture with family members or launch your own brand after the agreement ends. Even a provision designed to protect the shared interests of a franchise network should not place excessive restrictions on a franchisee’s future livelihood. When reading a non-compete clause, look beyond phrases such as ‘no competing business’ and establish whose activities it restricts, what those activities are and how long the restriction lasts.

1. Read restrictions during and after the agreement separately

A non-compete clause restricts activities that compete with the franchise business. Agreements may use different expressions, such as ‘competing commercial activities’, ‘businesses in the same sector’ or ‘involvement in similar brands’. Even without a dedicated heading, these provisions may appear under franchisee obligations, post-termination duties or contractual penalties, so search the whole document for relevant wording.

First, separate restrictions that apply during the agreement from those that apply after it ends. A requirement to focus on running the franchise has a different impact from a condition preventing you from opening a new business after closure. Check the wording to establish whether activities permitted during the agreement remain permitted afterwards, and whether any restrictions automatically lapse when the agreement ends.

Franchising in South Korea is governed by the Fair Transactions in Franchise Business Act. This legislation sets out pre-contract procedures, including the registration and provision of franchise disclosure documents, as well as obligations for franchisors and franchisees. However, it does not guarantee the enforceability of every non-compete provision drafted by a franchisor. Post-termination restrictions, in particular, require a separate assessment of the specific terms and the circumstances in which they apply.

Equally, do not assume that restrictions on trading after the agreement ends are always invalid. Their purpose, the interests they seek to protect, the activities covered, their duration and their geographical scope all need to be considered together. During discussions, rather than accepting an explanation that ‘it is in the law, so you can sign as it stands’, ask which wording in the proposed agreement restricts which actions.

2. Use specific examples to check existing businesses and family activities

The phrase ‘in the same sector’ alone does not tell you what is permitted. For example, ask whether every outlet selling drinks counts as a competitor, whether its main menu must overlap with yours, and whether online sales without physical premises are included. Even where businesses fall under different sector labels, you and the franchisor may interpret the clause differently if the products and customer groups overlap in practice.

Do not limit your checks to businesses you run directly. Look for wording that also prohibits holding shares in another outlet, acting as a joint representative, providing operational advice or working in a family member’s shop. If the clause does not distinguish passive investment from active involvement in running a business, request written examples of what is and is not allowed.

Read provisions referring to family members or separate companies carefully too. Do not assume there is no issue simply because a family member is not a party to the agreement: the franchisor may argue that you are operating indirectly to circumvent the restriction or breaching the agreement. However, being related to you does not, by itself, automatically impose contractual obligations on that person.

Before discussions, prepare a one-page summary covering:

• The nature of any businesses you currently operate or hold shares in, and the products they actually sell
• Shops independently run by your spouse or other family members, and the extent of your involvement
• Any side businesses, online sales or advisory work you intend to continue after opening
• The products, operating model and likely location of any business you plan to start after the agreement ends

If the franchisor permits an existing business, specify the permitted activities rather than merely naming the business. Wording such as ‘the existing business is exempt’ may leave room for further disputes if you add menu items or change how it operates. Agree the conditions under which the exception remains valid and the consultation procedure for any changes.

3. Assess duration, location and activities together for post-closure restrictions

Start by checking when any post-termination non-compete period begins. Its end date will differ depending on whether it runs from the agreement’s expiry date, the effective date of termination, the last day of trading or the date the signage is removed. Set a clear reference date so that delays in settling accounts or returning goods do not leave the restriction open to an uncertain extension.

Be equally precise about geographical scope. Your ability to start again will depend on whether the restriction covers only the area around your former premises, areas around other franchise outlets or the whole country. For online sales, ask whether the relevant location is where the business operates or where it delivers. Do not assume there is a universally safe distance or duration that applies to every brand.

Also examine the connection between the prohibited activities and the interests the franchisor seeks to protect. Using the franchisor’s confidential recipes should be distinguished from drawing on general experience to open an outlet with a different concept. If the clause also prevents you from starting an independent business that does not use the franchisor’s trade marks or trade secrets, ask why that scope is necessary and propose a narrower alternative.

If the franchisor cites the shared interests of multiple outlets, link that explanation to the specific contractual wording. Ask which customer relationships or operational information it aims to protect, and why the stated area and duration are needed to achieve that purpose. Do not surrender all future business opportunities on the strength of an abstract explanation alone.

Calculate the cost of the restriction as well. Delaying a planned new venture may mean additional living expenses, storage charges or costs of preparing an alternative business. This does not mean the franchisor must necessarily compensate you. It does, however, represent a burden that should inform your decision just as franchise fees do. Assess whether your financial plan can withstand accepting the clause.

4. Put exceptions and liability for breaches in writing before signing

If the franchisor has prepared the provision in advance for use with multiple prospective franchisees, it should also be assessed under South Korea’s Act on the Regulation of Terms and Conditions. Article 6 renders void standard terms that are unfair in breach of the principle of good faith. It also presumes certain terms to be unfair, including those that unreasonably disadvantage the customer or are difficult for the customer to anticipate. Calling a provision a ‘non-compete clause’ does not, by itself, determine its validity.

Check liability for a breach separately from the scope of the restriction. Look at whether the agreement provides for additional damages or demands to cease trading, as well as a fixed contractual penalty. Article 8 of the Act on the Regulation of Terms and Conditions renders void standard terms that impose an unreasonably excessive obligation to pay damages. However, the enforceability of a particular amount depends on the nature of the clause and the circumstances, so do not expect it to be easily reduced after you sign.

When negotiating, proposing revised wording can clarify the issues more effectively than simply asking for deletion. You might expressly exclude an existing business, narrow the prohibited activities to genuinely competing operations, and specify the duration and area of any post-termination restriction. If some activities are allowed with prior approval, also agree what information an application requires, how the franchisor will respond and how long approval remains valid.

An assurance that ‘we will approve it later’ may be difficult to verify if the person handling your account changes. Record agreed exceptions in supplementary contractual terms, confirming the contracting parties and the signatories’ authority. State which wording takes precedence if those terms conflict with the main agreement. Keep the final agreement, supplementary terms and written responses from discussions together, and consider having any ambiguous provisions reviewed by a qualified franchise transaction adviser or lawyer in South Korea.

The practical takeaway is straightforward: before signing, write down your current business activities and future plans, then check each against the contract to establish whether it is permitted. If the scope, duration, geographical reach or exceptions remain unclear, it is safer not to proceed on verbal assurances alone.