CONTENTS
- 1. Act on the Regulation of Terms and Conditions | Scope and Principal Obligations
- - Scope of Application
- - Obligations of the Business
- 2. Act on the Regulation of Terms and Conditions | Clauses That Constitute Unfair Terms
- - Principal Types of Clauses Deemed Void
- - Effect of Partial Invalidity
- 3. Act on the Regulation of Terms and Conditions | Sanctions for Violations
- - Corrective Measures by the Fair Trade Commission
- - Criminal Punishment and Joint Penalty Provision
- 4. Act on the Regulation of Terms and Conditions | Points Frequently Overlooked in Practice
- - Reusing Existing Terms and Conditions As They Are
- - Neglecting Whether the Obligation to Explain Has Been Performed
- - Using a Clause Without Knowing That It Is Unfair
- - Becoming Aware of a Fair Trade Commission Review Request or the Commencement of an Investigation Too Late
- 5. Act on the Regulation of Terms and Conditions | Reasons to Obtain Assistance
1. Act on the Regulation of Terms and Conditions | Scope and Principal Obligations
The Act on the Regulation of Terms and Conditions (the "Act on the Regulation of Terms and Conditions") is a statute enacted to keep a business from abusing its transactional position to draft and use terms with unfair content, and to maintain a sound transactional order.
Terms and conditions refer to the content of a contract that one party prepares in advance, in a set form, in order to enter into contracts with a number of counterparties, regardless of their title or form.
They appear in many forms, including terms of use, service agreements, transaction contracts, and standard form contracts, and every business that uses them falls within this Act.
Scope of Application
The Act on the Regulation of Terms and Conditions is not confined to particular industries.
It can apply to businesses in any industry that uses terms and conditions, including online platforms, finance and insurance, telecommunications, real estate, distribution and manufacturing, and services.
Regardless of the size of the business or the form of the contract, a document prepared in advance to enter into contracts of identical content with multiple customers may qualify as terms and conditions.
Obligations of the Business
The Act on the Regulation of Terms and Conditions places the following obligations on a business.
First, the obligation to draft.
Terms and conditions must be drafted in Korean using standardized terminology, and the key content must be set off clearly, for example in bold and large type.
Second, the obligation to explain.
When the contract is formed, the business must clearly inform the customer of the content of the terms and conditions and must provide a copy on the customer's request.
A business that breaches this obligation may not assert the relevant clause as part of the contract.
Third, the prohibition on using unfair clauses.
The business must not adopt, as part of the contract, the unfair clauses listed in the Act.
2. Act on the Regulation of Terms and Conditions | Clauses That Constitute Unfair Terms
The Act on the Regulation of Terms and Conditions provides that clauses which violate the principle of good faith and lack fairness are void.
Clauses that fall within the following types are presumed unfair or are expressly void.
Principal Types of Clauses Deemed Void
Type | Principal Content |
Exemption Clause | A clause that excludes liability arising from the intent or gross negligence of the business or its performance assistant, or that unfairly limits the scope of damages |
Predetermined Damages | A clause that imposes on the customer an unfairly excessive obligation to pay damages, such as liquidated damages for delay |
Rescission and Termination of Contract | A clause that excludes the customer's right of rescission or termination, or that grants the business a right of rescission not provided for by law |
Performance of Obligations | A clause that lets the business unilaterally set or change the content of performance, or suspend performance at its discretion |
Infringement of Customer Rights | A clause that excludes the customer's right of defense or right of set-off without substantial reason, or that unfairly restricts contracts with third parties |
Deemed Declaration of Intent | A clause that places unfairly strict restrictions on the form of the customer's declaration of intent, or that deems the business's declaration of intent to have been received |
Restriction on Filing Suit | A clause on agreed jurisdiction that is unfairly disadvantageous to the customer, or a clause that unfairly shifts the burden of proof onto the customer |
Effect of Partial Invalidity
Where some clauses of the terms and conditions are void, the contract remains valid on the strength of the remaining clauses alone.
If the purpose of the contract cannot be achieved with the valid portion alone, however, or if that valid portion is unfairly disadvantageous to one party, the entire contract may become void.
3. Act on the Regulation of Terms and Conditions | Sanctions for Violations
A breach of the obligations under the Act on the Regulation of Terms and Conditions can lead to corrective measures by the Fair Trade Commission and to criminal punishment.
Corrective Measures by the Fair Trade Commission
The Fair Trade Commission may recommend that a business using an unfair clause take the measures needed to correct it, such as deleting or amending the clause.
In the following cases, it may go beyond a recommendation and issue a corrective order.
∙ Where the business enters into the contract by unfairly using its transactional position
∙ Where the urgency or speed of forming the contract makes it hard for the customer to change the content of the terms and conditions
∙ Where the business holds a markedly superior position, or the customer's range of choice among other businesses is limited
∙ Where the business ignores a corrective recommendation without justifiable grounds, causing or threatening to cause harm to many customers
The receipt of a corrective order may itself be made public, which bears directly on the business's credibility and brand image.
Criminal Punishment and Joint Penalty Provision
A person who fails to comply with a corrective order of the Fair Trade Commission is subject to imprisonment for not more than two years or a fine not exceeding 100 million won.
Where a representative, agent, or employee of a corporation commits a violation, the same fine may fall not only on the actor but also on the corporation itself, so management at the corporate level is necessary.
4. Act on the Regulation of Terms and Conditions | Points Frequently Overlooked in Practice
The situations below are typical of how the Act on the Regulation of Terms and Conditions becomes a problem in actual practice.
Reusing Existing Terms and Conditions As They Are
When a business borrows another company's terms and conditions or keeps using old ones unchanged, the content may include provisions that have already become unfair clauses because of statutory amendments or shifts in case law.
Periodic review of the terms and conditions is necessary.
Neglecting Whether the Obligation to Explain Has Been Performed
A business that fails to explain the content of the terms and conditions properly to the customer, or that does not provide a copy, becomes unable to assert the relevant clause as part of the contract.
Whether the obligation to explain was performed becomes a central issue once a dispute arises.
Using a Clause Without Knowing That It Is Unfair
Exemption clauses that favor the business alone, clauses imposing excessive penalties, and clauses allowing unilateral changes to the contract are used by custom in practice, yet they may be void under the Act on the Regulation of Terms and Conditions.
Becoming Aware of a Fair Trade Commission Review Request or the Commencement of an Investigation Too Late
The Fair Trade Commission may open a review of terms and conditions on its own authority or in response to a review request from an interested party.
A business that prepares its response only after an investigation has begun will find it hard to avoid a corrective order and a public announcement.
5. Act on the Regulation of Terms and Conditions | Reasons to Obtain Assistance
A case under the Act on the Regulation of Terms and Conditions may start with an administrative sanction by the Fair Trade Commission and grow into criminal punishment and a civil claim for damages.
A corrective order or public announcement, in particular, bears directly on a business's external credibility, so it is important to manage risk from the stage of drafting and reviewing the terms and conditions.
Preventive Measures
∙ Diagnosing legal risks and advising on revisions when terms and conditions are drafted or amended
∙ Advising on a system for performing the obligations to explain and to provide
∙ Monitoring whether standard terms and conditions apply and tracking regulatory trends by industry
Subsequent Response
∙ Responding to administrative adjudication and litigation challenging a corrective recommendation or corrective order
∙ Responding to contract disputes and claims for damages arising from unfair terms and conditions
∙ Responding to criminal investigations related to failure to comply with a corrective order
Disputes over terms and conditions often surface only after a contract has been formed.
Because the available response options narrow quickly once a Fair Trade Commission investigation has begun, securing a review from the stage of drafting and amending the terms and conditions is necessary.
Daeryun has attorneys experienced in matters under the Act on the Regulation of Terms and Conditions and in the field of fair trade.
If you require legal advisory on a related matter, you may proceed with a fair trade attorney consultation.
