April 19, 2024

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[THE INVESTOR] The Fair Trade Commission has received a complaint that Korea’s Kyochon Chicken signed an unfair master franchise contract with a Chinese firm in Shanghai, according to news reports on July 18.

A master franchise contract gives rights to franchisees to run businesses in a specific region in return for royalties. Under this specific contract, the Chinese firm bought the operation rights in Shanghai.

However, the contract included heavy penalties for delayed payments, according to the report. For instance, if the franchisee fails to pay any fees, it has to pay 1 percent interest per day. That means if Kyochon China gets behind for a year, it would have to pay interest of 3,778 percent. The firm also asked its franchisee to bear US$40,000 advertising expenses in 2015, which was used to extend its contract with a celebrity.

“The penalties on payments in arrears was decided after much discussion. Furthermore, we never actually applied this rate,” a Kyochon spokesperson was quoted as saying in the report. “As for the ad fee, we asked the franchisee to cover it because it wanted to continue using this particular celebrity to promote Kyochon Chicken.”

So far, Kyochon China is over US$290,000 behind in delayed payments, the spokesperson added.

Meanwhile, due to the lack of local laws concerning unfair master franchise contracts, the government has its hands tied. The FTC has recently initiated a probe into major Chicken franchisee restaurants such as Goobne and BHC.

Kyochon Chicken established it first overseas store in the US in 2007, and currently runs 27 stores worldwide, including the franchise in Shanghai.

By Song Seung-hyun (ssh@heraldcorp.com)