What Constitutes Unfair Business Practices in International Contracts Such as Copyright License Contract or Import Distribution Contract under Korean Laws?

“X Company” is a U.S. company that provides and sells Software Products in Korea through the appointment of local distributors.  “X Company” would like to review its standard distribution contracts (the “Reseller Terms”) with Korean distributors and want to know whether there are any clauses in the Reseller Terms that may be deemed illegal under the laws of Republic of Korea.

In view of the nature of the Reseller Terms, under the Monopoly Control and Fair Trade Act of Korea (“MCFTA”), the type of the Reseller Terms may be characterized as both a “copyright license contract” and an “import distribution contract.”  MCFTA has published guidelines on the types and criteria for determining unfair business practices in international contracts (the “Guidelines”), and the Reseller Terms would need to be reviewed against the Guidelines.

For example, paragraph 11 of Article 3 (Transfer of Improvement Technology) of the Guidelines provides that “When a licensor requires a licensee to provide the licensor, without compensation, with the ownership of or the exclusive (non-exclusive) right to use the technology (product) improved by the licensee…,” the practice shall be unfair.

Moreover, because the Reseller Terms is a standardized type of contract applicable to all local distributors, the Reseller Terms may come into the purview of the Regulation of Standardized Contracts Act (“RSCA”).  The purpose of RSCA is to prevent business entities from imposing standardized contracts on their customers containing unfair terms and conditions that constitute abuse of their negotiating position.

For example, paragraph 1 of Article 10 of RSCA provides that “A clause which, without substantial reason, gives an enterprise the power to unilaterally determine or change the content of performance” shall be null and void.

It should be noted that, according to Article 7 of the International Conflicts of Laws Act, both MCFTA and RSCA does operate as mandatory provisions of Korean law governing a particular legal relationship which must be applied (with considerations of legislative intent), in spite of foreign governing law, if the dispute at hand involves such relationship.

With respect to MCFTA provisions, the Korean Fair Trade Commission (“FTC”) has the authority under MCFTA to order the Korean importer/distributor (Reseller) to revise the provisions deemed unfair so that the corresponding contract does not provide for an unfair practice.  If Reseller fails to comply with such order of the FTC, FTC has authority to impose sanction on Reseller (imposition of an administrative fine, etc.).  However, the foreign exporter would not be subject to the sanction of FTC because the extra-territorial application of FTC is not generally approved.  However, because there is some tendency of expanding such an extra-territorial application of MCFTA and also because the possibility of Reseller being subject to sanction could negatively reflect upon the reputation of foreign companies, it would be advisable to make revisions properly.

With respect to RSCA provisions, if any provision of a contract is found to be a violation of RSCA, then such provision would be rendered void under the Korean Civil Code.  Therefore, it would also be advisable to make revisions in order to avoid the foregoing possibility.

If you have any questions regarding this unfair business practice issue under Korea law, please send an E-mail to Mr. Wonil Chung by clicking here.

© 2008 Wonil Chung, a Korean Licensed International Transaction Lawyer/Chung & Partners, a Korean Business Law Firm.

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