Hello, I am Attorney Sang-yoon Eom of Chungchul Law Firm.

Recently, the Supreme Court issued a ruling that clearly stated the effect of a franchisor’s unilateral increase in the supply price of raw and subsidiary materials (hereinafter “material cost”) without complying with the procedure prescribed in the franchise agreement, as well as whether there was subsequent ratification. Today, I will introduce that decision and examine its implications.

[Overview of the Case]

The defendant is the franchisor (Company A Co., Ltd.) that operates a franchise business under the trade name “C,” and the plaintiffs are franchisees who entered into franchise agreements with the defendant.

The proviso to Article 28, Paragraph 1 of the franchise agreement in this case provided that “if changes in the supply details or prices of raw and subsidiary materials are necessary due to rising prices or other changes in economic conditions, the franchisor shall present in writing to the franchisee the details of the change, the reasons for the change, and the basis for calculating the changed price, and the parties shall consult and determine the matter.” However, on September 11, 2020, the defendant posted a notice on the internal integrated franchise business management system bulletin board stating that the supply price of a specific item (B) would be increased by 150 won, and then raised the unit price as of October 1, 2020 (first material-cost increase).

The plaintiffs argued that, because the defendant omitted the contractually required specific procedures of “written presentation” and “consultation,” the first material-cost increase was invalid, and sought restitution of the unjust enrichment arising from that increase.

Meanwhile, for the second increase, the defendant exchanged official documents with the franchisee council and others, held several meetings, and ultimately reached an agreement by adjusting costs so that headquarters and franchisees could share profits at a 40:60 ratio based on franchisee sales (second material-cost increase).

[The Court’s Decision]

1. Decisions of the first instance and the appellate court

With respect to the plaintiffs’ claims, the first instance court (Seoul Central District Court 2022Gahap548786) held that simply posting a notice with abstract content on the internal bulletin board did not amount to having gone through the specific “written presentation” and “consultation between the parties” required under the franchise agreement, and therefore found a procedural violation. However, taking into account that the procedural violation was relatively minor and that the franchisees had received the goods at the increased price for a long period without objection, the court held that the procedural violation under Article 28, Paragraph 1 of the franchise agreement did not immediately render the first or second material-cost increase invalid, and concluded that the procedural violation had been cured by subsequent and implied ratification, thereby dismissing the plaintiffs’ claims.

The appellate court (Seoul High Court 2024Na2048856) likewise concluded that the increase could not be deemed invalid based on the procedural violation alone and that implied consent was established, reaching the same conclusion as the first instance court.

2. The Supreme Court’s Decision

By contrast, the Supreme Court found that the appellate court erred with respect to the validity of the first material-cost increase.

The Supreme Court held that, under the franchise agreement in this case, in order for the franchisor to change the prices of raw and subsidiary materials pursuant to this clause, it must satisfy ① the necessity of the price change, ② written presentation (details of the change, reasons, and basis for calculation), and ③ consultation with the franchisee; and that if the franchisor unilaterally changed the price without satisfying these requirements, the effect would, in principle, not extend to the franchisee. On that basis, the Court found that the appellate court erred in law by concluding that the first material-cost increase was not invalid.

However, the Supreme Court held that the appellate court’s ultimate conclusion—that the first material-cost increase was not ultimately invalid because the franchisees had given subsequent and implied consent—was proper, and therefore dismissed all of the plaintiffs’ appeals.

(Meanwhile, as to the second material-cost increase, the Court held that it was valid because the procedures under the franchise agreement had not been violated.)

[Implications of This Case]

The Supreme Court made clear that the price increase procedures specified in the franchise agreement (written notice, presentation of the basis for calculation, consultation, etc.) are not merely illustrative provisions. A unilateral unit-price increase by a franchisor that fails to comply with those procedures is, in principle, invalid and may be subject to restitution of unjust enrichment. Accordingly, franchisors must strictly comply with the procedures under the franchise agreement when increasing unit prices.

In this case, subsequent implied ratification was recognized; however, depending on the circumstances, where a business operator objected and continuously expressed opposition to the increase, implied ratification may not be recognized. Therefore, from a franchisee’s perspective, if they do not agree with the franchisor’s unilateral measure, they should immediately and expressly reserve their objection through a content-certified letter or the like right after the price increase in order to protect their legal rights.

Based on the expertise and experience accumulated through major domestic law firms such as Kim & Chang, Bae, Kim & Lee, Lee & Ko, Shin & Kim, and Yulchon, Chungchul Law Firm provides comprehensive advisory services related to the Subcontracting Act to numerous companies.

If you work with Chungchul, we will accurately identify the essence of the matter and become a reliable partner who conveys the client’s position effectively.