CONTENTS
- 1. Litigation Under the Financial Investment Services and Capital Markets Act, Who Were the Parties and How Did It Arise?
- - How the Litigation Arose
- 2. Litigation Under the Financial Investment Services and Capital Markets Act, What Did the First and Second Instances Hold?
- - Litigation Under the Financial Investment Services and Capital Markets Act, What Are the Relevant Statutes and Precedents?
- 3. Litigation Under the Financial Investment Services and Capital Markets Act, What Did the Supreme Court Hold?
- 4. Litigation Under the Financial Investment Services and Capital Markets Act, Daeryun's Strategy
1. Litigation Under the Financial Investment Services and Capital Markets Act, Who Were the Parties and How Did It Arise?
The plaintiff that brought the lawsuit was Company A, a provider of securities information. It filed suit claiming that it was entitled to receive a refunded amount and a penalty for breach from B, the defendant in this case and an individual investor.
How the Litigation Arose
Company A, which was established for purposes including the provision of securities information, concluded a securities information service contract with B in 2021, with a subscription fee of 15 million won and a subscription period of six months.
That contract also included a special provision stating that, if the cumulative rate of return fell below 200 percent, the entire service fee would be refunded.
B, who had been receiving information for stock trading from Company A, abruptly requested termination of the contract three months later.
In response, Company A returned approximately 5.3 million won to B, calculated under the refund formula, and prepared a settlement agreement under which B would raise no objection whatsoever to this refund amount in the future.
B, however, requested the credit card company to cancel the card payment for the remaining approximately 9.6 million won, excluding the refund B had already received, and obtained a full refund.
Company A, claiming that B had breached the settlement, filed an action for an agreed sum, demanding payment of approximately 20 million won, consisting of the money refunded by the card company plus a penalty for breach.
2. Litigation Under the Financial Investment Services and Capital Markets Act, What Did the First and Second Instances Hold?
Both the first-instance and second-instance courts ruled in favor of B.
The reasoning was that, although Company A was not an investment adviser as defined under the Financial Investment Services and Capital Markets Act, it engaged in investment advisory conduct directed at a specific person, and because that conduct itself violated the applicable law, the contract was likewise unlawful and therefore void.
The courts also held that the settlement agreement prepared by Company A and B during the refund process was premised on the validity of the underlying contract, and therefore could not be given effect.
Litigation Under the Financial Investment Services and Capital Markets Act, What Are the Relevant Statutes and Precedents?
Article 17 of the Financial Investment Services and Capital Markets Act (Prohibition of Unregistered Business Activities)
No person shall conduct investment advisory business or discretionary investment business without registering as a financial investment business under this Act (including registration of changes).
Article 55 of the Financial Investment Services and Capital Markets Act (Prohibition of Loss Compensation, etc.)
In connection with the trading of or other transactions in financial investment instruments, a financial investment business entity shall not engage in any of the conduct falling under any of the following subparagraphs, except where it compensates for losses or guarantees profits under Article 103 (3) or where there is a justifiable ground because there is no risk of harming a sound trading order. The same shall apply where an officer or employee of a financial investment business entity acts for the officer's or employee's own account.
1. Promising in advance to compensate for all or part of a loss to be incurred by an investor
2. Compensating, after the fact, for all or part of a loss incurred by an investor
3. Promising in advance to guarantee a certain profit to an investor
4. Providing a certain profit to an investor after the fact
3. Litigation Under the Financial Investment Services and Capital Markets Act, What Did the Supreme Court Hold?
The Supreme Court reached a different conclusion.
It found that Article 17 of the Financial Investment Services and Capital Markets Act, on which the lower court relied in holding the contract void, was a regulatory provision rather than a validity provision.
Here, a regulatory provision means one under which an unlawful act is punished while the validity of the related contract is still recognized.
In other words, even if Company A's investment advisory conduct was unlawful, the contract concluded between Company A and B cannot, for that reason, be regarded as void.
“A discretionary investment contract or investment advisory contract concluded in violation of the provision cannot be said to possess such a marked degree of antisocial or immoral character that even its validity under private law must be denied, nor can it be said that the legislative purpose can be achieved only by denying the validity of the act under private law; accordingly, the said provision is not a validity provision but a regulatory provision. (See Supreme Court, Decision of June 13, 2019, 2018 Da 258562; Supreme Court, Decision of May 9, 2024, 2023 Da 311665.)
The Supreme Court also held that Article 55 of the Financial Investment Services and Capital Markets Act could not be applied by analogy to the contract that Company A, which was no more than a quasi-investment advisory operator, had concluded with B.
It then reversed the lower court's judgment and remanded the case to that court, finding that the case needed to be heard and decided anew.
4. Litigation Under the Financial Investment Services and Capital Markets Act, Daeryun's Strategy
Civil suits disputing responsibility for the termination of contracts continue to be filed.
Through this decision, the Supreme Court held that, even where a contract that an unregistered investment advisory firm concluded with investors is unlawful, the validity of the contract itself is maintained.
This decision of the Supreme Court appears likely to have a significant effect on related civil cases currently pending in the lower courts.
Daeryun Law Firm LLP provides legal services that help companies comply with the Financial Investment Services and Capital Markets Act and identify and manage related risks.
If you have any related inquiries, you are welcome to contact Daeryun at any time.
