Penalty Clause in Franchise Agreement

Pureum Regulation Workplace (PLO) is dedicated to offering sensible and helpful authorized data to our purchasers, so we delve into the intricacies of a penalty clause in franchise agreements and discover the function of penalty clauses in resolving disputes.

Breach of Contract and Damages

In any contractual relationship, breaches can happen, resulting in potential damages. Franchise agreements aren’t any exception. When a franchisee unilaterally terminates the contract or violates operational pointers, the franchisor could undergo monetary losses. Nevertheless, looking for compensation isn’t all the time easy.

Proving Damages

Take into account a situation the place a franchisee leaks proprietary know-how or makes use of it for unauthorized enterprise ventures. The core worth of a franchise lies within the switch of enterprise data, and unauthorized disclosure can considerably affect the franchisor’s income. Proving causation between the know-how leakage and a decline in gross sales is advanced resulting from varied components affecting gross sales figures.

Presumed Damages and Authorized Provisions

To deal with this problem, varied legal guidelines, together with the Unfair Competitors Prevention and Commerce Secret Safety Act (Article 14-2), the Copyright Act (Article 125), and the Patent Act (Article 128), permit for presumed damages. Even when direct proof of losses is missing, aggrieved events can declare damages primarily based on infringers’ income. Nevertheless, these presumptions apply solely to legally acknowledged rights.

The Function of Penalty Clauses

Many contracts embrace penalty clauses to simplify compensation processes. These clauses permit the non-breaching get together to assert a pre-agreed sum with out proving precise damages or causation. Article 398 of the Civil Act deems such clauses lawful.

Civil Act Article 398 (Pre-arranged Compensation)

1. Events could pre-arrange the quantity of compensation for breach of contract.

2. If the pre-arranged quantity is excessively excessive, the court docket could cut back it to an affordable degree.

3. Pre-arranged compensation doesn’t have an effect on claims for efficiency or contract termination.

4. Agreed penalties are presumed to be pre-arranged compensation.

5. Even when compensation is agreed upon in non-monetary phrases, the previous 4 paragraphs apply.

Nevertheless, there are essential issues when together with penalty clauses in franchise agreements.

First, the Franchise Enterprise Act (Article 12, Paragraph 1, Subparagraph 5) prohibits imposing excessively excessive penalties, deeming it an unfair commerce observe. Penalties that exceed widespread expectations or are literally imposed excessively can result in administrative sanctions, together with corrective orders, and doubtlessly prison penalties for non-compliance.

Franchise Enterprise Act Article 12 (Prohibition of Unfair Commerce Practices)

(1) Franchisors shall not have interaction in acts that unfairly hinder truthful transactions in franchise enterprise, together with imposing extreme penalties relative to the contract’s goal, content material, and foreseeable damages.

5. Imposing extreme penalty charges in comparison with the requirements set by the Presidential Decree, contemplating the aim and content material of the contract and the damages that will happen, thereby unfairly burdening the franchisee with compensation obligations.

Second, since franchise agreements are sometimes standardized for a number of transactions, they’re thought-about phrases and situations. The Act on Regulation of Phrases and Circumstances (Article 8) states that clauses imposing “unfairly extreme penalties” are void. Thus, even when penalty clauses are included within the franchise settlement, they might be invalidated if deemed excessively burdensome.

Act on Regulation of Phrases and Circumstances Article 8 (Pre-arranged Compensation)

Clauses imposing unfairly extreme delay damages or different compensations are void.

Third, counting on an invalid penalty clause in litigation can lead to an entire loss. Usually, in circumstances of extreme penalties, courts cut back the quantity to an affordable degree below Article 398, Paragraph 2 of the Civil Act (partial victory). Nevertheless, in franchise circumstances, the court docket could dismiss the whole declare primarily based on the clause’s invalidity, leading to an entire loss.

In the end, to guard their rights and enterprise secrets and techniques in franchise relationships, franchisors should set up legally enforceable penalty clauses. These clauses ought to be meticulously crafted primarily based on thorough evaluation of precedents from the Truthful Commerce Fee and court docket rulings.