The purpose of this Act is to establish sound order in business transactions and protect consumers by preventing business owners from drafting and enforcing adhesion contracts containing unfair terms and conditions through the abuse of their position in trade and by regulating adhesion contracts containing unfair terms and conditions.
Reasons for regulating unfair terms and conditions
- Adhesion contracts have become commonly used for the purpose of expediting and simplifying transactions and supplementing existing laws and regulations to catch up with the increasingly complicated and diversified socio-economic structure.
- In reality, however, the party who offers an adhesion contract almost always prepares the terms and conditions contained therein in its own favor, or most of the customers are unaware of the terms and conditions and therefore do not have the freedom to willingly make decisions regarding any terms in the contract.
- In order to protect the bona fide intent of consumers, customers, etc. who are the weaker party in the economy and to establish fairness in transactions conducted according to adhesion contracts, it is necessary to regulate adhesion contracts containing unfair terms and conditions.
Characteristics of the Act on the Regulation of Terms and Conditions
- A general Act that is applied to a general circumstance, irrespective of transacting parties entering into an adhesion contract
- A mandatory Act that invalidates any agreement between the relevant parties which excludes application of the Act on the Regulation of Terms and Conditions
- An administrative Act under which administrative agencies impose corrective orders (recommendations) and penalties
Difference between examination of adhesion contracts by KFTC and that by courts
The examination of an adhesion contract by KFTC does not require a specific contractual relationship as a prerequisite, but focuses only on the fairness of the terms and conditions of the adhesion contract and determines their validity. If necessary, KFTC takes necessary measures including elimination and/or correction of specific clauses. In comparison, the court examines the validity of the terms and conditions of an adhesion contract as a matter for a prior decision to confirm the rights and obligations of the relevant parties, in an actual contractual relationship, and the effect of such confirmation has ex post facto effect only on the persons who bring the individual case to the court.
Criteria for determining unfairness under the Act on the Regulation of Terms and Conditions
- The Act on the Regulation of Terms and Conditions (hereinafter referred to as the “Act”) has two criteria (General Provision and Individual Prohibitive Provisions) for screening unfair terms and conditions in an adhesion contract:
- The General Provision stipulates the principle of trust and good faith. (Article 6 of the Act)
- Individual Prohibitive Provisions are divided into eight categories: ① prohibition of exemption clauses; ② predetermination of the amount of indemnification; ③ restriction on a business owner’s right to unfairly cancel or terminate a contract; ④ performance of obligations; ⑤ protecting rights and interests of customers; ⑥ deemed expression of intent; ⑦ additional obligations of agents; and, ⑧ limitations on right to file lawsuits. (Articles 7 to 14 of the Act).
Categories of Unfair Terms and Conditions
There are two categories of unfair terms and conditions: ① violation of the principle of trust and good faith; and, ② violation of individual prohibitive provisions.
Violation of the principle of trust and good faith The principle of trust and good faith is a principle of conduct stipulating that the party who writes the terms and conditions should make them fair and balanced so that they are not contrary to the interests and rational expectations of the counterparty. Any clause which loses unfairness, in contrary to the principle of trust and good faith (Article 6 (1) of the Act)
- Example: A clause which defines a service of blocking harmful information on the Internet as an additional service and charges consumers additionally for the service, even though such service is a standard obligation of Internet communications companies Any clause which is unreasonably unfavorable to customers (Article 6 (2) 1 of the Act)
- Example: A clause which determines items that are supposed to belong to customers as belonging to the business owner Any clause which customers would have difficulty anticipating (Article 6 (2) 2 of the Act)
- Example: A clause which excludes the business owner’s obligations in a bilateral contract Any clause which restricts fundamental rights of a contract (Article 6 (2) 3 of the Act)
- Example: A clause which makes it difficult to satisfy the requirements to file a claim for insurance benefits concerning a life insurer’s payment of insurance benefits
Violation of Individual Prohibitive Provisions
Prohibition of Exemption Clause (Article 7 of the Act)
Any clause which exempts a business owner from liability for intentional wrongdoing or gross negligence will always be null and void. (Article 7 (1) of the Act)
- Example: A waiver of liability for parking lot which relieves the parking lot of any and all responsibilities with regard to any accident that may occur in the parking lot Any clause which limits, without a substantial reasons, the extent of indemnification payable by a business owner, or which passes a risk to be borne by a business owner to a customer (Article 7 (2) of the Act) Example: An adhesion contract for real estate sales which provides that the purchaser takes responsibility for destruction, loss or damage of an object caused by force majeure including natural disasters after the date on which the contract is concluded Any clause which excludes or limits, without a significant reason, a business owner’s liability for security, or adds prerequisites for customers to exercise their rights; and any clause which reduces or exempts liability for goods that differ from a sample or other indications
- Example: A lot-sale contract for a commercial building which prohibits demand for price adjustment according to increase or decrease in the supplied space area
Predetermination of Amount of Indemnification
Any clause which obligates customers to pay unreasonably heavy damages (Article 8 of the Act) Example: A clause which provides that 30% of the deposit should be paid as compensation for damages when a real estate lease agreement is terminated before expiry
Restriction on a Business Owner’s Right to Unfairly Cancel or Terminate a Contract
- This provision regulates terms and conditions infringing customers’ rights in disregard of the Civil Law such as those which make it difficult for customers to exercise their right to cancel a contract, forcibly maintaining the contract to the advantage of the business owner; or which make it easy for the business owner to exercise its right to cancel a contract; or which excessively expand the effect of cancellation. (Article 9 of the Act)
- Example: A clause which prohibits cancellation of a contract even when a business owner fails to perform its obligations, a clause which stipulates automatic cancellation of a contract if payment falls in arrears even once, and a clause which sets forth that the initiation fee paid upon membership registration will not be refunded regardless of the reason
Performance of Obligations
- Any clause which, without a significant reason, gives a business owner power to unilaterally determine or change the details of performance, and any clause which allows a business owner to unilaterally suspend performance of its obligations or performance of its obligations to be performed by a third party. (Article 10 of the Act)
- Example: A clause which does not acknowledge the right of a tenant to reduce the rent but allows the landlord to raise the rent, and a clause which allows discontinuation of driving education when a student obtains a driver’s license during the period of education
Protecting Rights and Interests of Customers
- ① Any clause which, without a significant reason, excludes or limits a customer’s rights, which are provided for by Acts; ② any acceleration clause which, without a significant reason, deprives customers of their right to perform obligations in given time; ③ any clause which unreasonably limits a customer’s right to enter into contracts with a third party; and, ④ any clause which allows a business owner to divulge confidential information of customers without just ground (Article 11 of the Act)
- Example: ① A clause which provides that the lease deposit will be refunded after a certain period from the date when the tenant turns over an object; ② an acceleration clause which is applicable even upon partial violation of the terms and conditions for transactions with a bank; ③ a contract which prohibits a person, who is transferring a business from conducting business activities in the same industry for a certain period without setting a specific scope; and, ④ a clause which prohibits individuals from obtaining a credit card membership unless they agree on the use of their personal credit information
Deemed Expression of Intent
- Any clause which provides that once a certain act or omission has occurred, customers shall be deemed to have expressed or to not have expressed a certain intent; any clause which imposes unreasonably strict restrictions on customers’ expression of their intent; any clause which provides, without a significant reason, that the intent of a business owner is deemed communicated to customers; and any clause which provides for an unreasonably long or indefinite term during which a business owner may express its intent (Article 12 of the Act)
- Example: ① A clause which provides that when a gas user is changed due to sale of a gas supply facility or other reasons, if there is no request for change of the user’s name, all the rights and obligations of the previous user shall be succeeded to the new user; ② a clause which provides that at the time of cancellation or change of a hospital reservation, patients should visit the relevant clinic by four o’clock in the afternoon one day before the reserved date to go through cancellation or change process; and, ③ a clause which provides that just a unilateral expression of intent shall be sufficient to become effective
Additional Obligations of Agents
Any clause which imposes no-fault liability for indemnification on the agent where a contract entered into by the agent of a customer becomes null and void. (Article 13 of the Act)
Limitations on Right to File Lawsuits
- Any clause which prohibits customers from filing a lawsuit, requires customers to agree to jurisdiction, or passes the burden of proof on to customers (Article 14 of the Act)
- Example: A clause which relieves a business owner of any civil or criminal liability regardless of the reason; a clause which sets forth the court located at a business owner’s place of business as the competent court; and a clause which exempts a business owner from liability for damage caused by a reason that the business owner is not able to recognize
Categories of Unfair Terms and Conditions
- Unfair terms and conditions are obviously null and void.
- Where some clauses are invalid, the remaining clauses remain valid.
- However, if the remaining clauses alone cannot help achieve the objectives of the contract or are unfavorable to any party, the entire contract becomes null and void.
Standard Adhesion Contracts
System of Standard Adhesion Contracts
- Standard Adhesion Contracts refer to the adhesion contracts, the terms and conditions of which contained therein are used as the standards in certain trading sectors. They are devised in consideration of the positions of business owners and customers and define the rights and obligations of the parties to the contract concerned in order to establish sound order in business transactions and prevent the use of adhesion contracts containing unfair terms and conditions.
- Because regulating individual adhesion contracts containing unfair terms and conditions has little impact and the same consumer damages occur repeatedly, for certain trading sectors that are closely related to the people’s lives and give rise to a lot of disputes and civil petitions, standard terms and conditions for adhesion contracts are distributed as a means to examine unfair terms and conditions of any adhesion contract.
Requests for Examination of Standard Terms and Conditions
- Business owners or business entities that intend to use an adhesion contract may draft standard terms and conditions for the adhesion contract and file a request with the KFTC for examination as to whether the standard terms and conditions violate the Act. (Article 19-2 (1) of the Act)
- The Korea Consumer Agency or any consumer organizations registered under the Framework Act on Consumers (hereinafter referred to as “consumer organizations, etc.”) may request the KFTC to prepare standard terms and conditions. (Article 19-2 (2) of the Act)
- When consumer organizations, etc. make a request, when damage is caused to a large number of customers, or when damage due to unfair terms and conditions repeatedly occurs, the KFTC may recommend business owners or business entities to formulate standard terms and conditions and when business owners or business entities fail to take necessary measures within four months, the KFTC may directly formulate standard terms and conditions after holding consultations with ministries and agencies concerned. (Article 19-2 (3) and (4) of the Act) As of August 2008, a total of 59 standard adhesion contracts in 24 trading areas have been distributed. (Refer to the Standard Adhesion Contracts.)
Use of Standard Adhesion Contracts
- The KFTC may publish standard adhesion contracts and recommend business owners and business entities to use them. Those business owners and business entities recommended to use standard adhesion contracts shall, if they use an adhesion contract containing terms and conditions different from the standard adhesion contract, indicate the major differences in a manner that customers can readily understand. (Article 19-2 (5) and (6) of the Act)
- The KFTC may prescribe an indication of standard adhesion contracts in order to promote their use, and when such indication is used, no terms and conditions different from standard terms and conditions should be used in the contract. Where an indication of standard adhesion contract is used in violation of the regulation, terms and conditions of the contract that are more disadvantageous to customers than the standard terms and conditions shall be deemed invalid. (Article 19-2 (7), (8) and (9) of the Act)
- As business owners can freely prepare or select terms and conditions to use for their trading, they tend to use standard adhesion contracts in trading only when they wish to do so.
Indication (Marking) of Standard Adhesion Contracts
The KFTC introduced “indication (marking) of standard adhesion contracts” in February 2000, and has been encouraging business owners to use standard adhesion contracts and providing information that can be used as the criteria for consumers’ choices.