On December 3, 2015, the National Assembly of Korea passed the Act on Fair Transactions with Dealers (the “Act”). To take effect on December 23, 2016, the Act will be applicable to the contracts between a supplier and a dealer that are newly entered into or renewed on or after the effective date of the Act.
Recent scandals involving suppliers’ abusive treatment of dealers rapidly gave rise to awareness on the need for a separate law dedicated to improving the relationship between suppliers and dealers. This led lawmakers to introduce a number of bills at the National Assembly, which were then consolidated and adjusted into a single version by the National Policy Committee and approved by the full committee vote into law.
The key provisions of the Act include the following: (i) The scope of applicability is narrowly construed by providing exceptions to the definition of the term “dealer transaction”; (ii) the Act introduces ex-ante regulations (such as a duty to provide and keep a contract) to supplement the Monopoly Regulation and Fair Trade Act (the “MRFTA”) that primarily provides ex-post regulations; and (iii) the provisions on the types of violation closely adopt the language of the provisions on abuse of superior bargaining positions under the MRFTA.
A. Definition of “dealer transaction” (Article 2) and exceptions (Article 3)
The Act defines a dealer transaction as a transaction that is implemented by a contract entered into between a supplier and a dealer for a certain period in connection with resale or consignment of sale of the supplier’s goods or services to be routinely made during that contract period (Article 2).
Such resale or consignment of sale shall not constitute a dealer transaction if (i) the supplier is a small or medium business proprietor, (ii) the dealer is a large enterprise, or (iii) the supplier is otherwise deemed to lack a superior bargaining position against the dealer (Article 3).
B. Supplier’s duty to prepare, provide to dealer, and keep a dealer transaction contract in writing (Article 5)
The Act imposes on the supplier a duty to prepare, distribute to a dealer, and keep a dealer transaction contract in writing, a violation of which may be punished by an administrative surcharge not exceeding KRW 50 million for failure to prepare and KRW 10 million for failure to keep (Article 21, Paragraph 1, Items 4 and 5, respectively).
The Act authorizes the Korea Fair Trade Commission (“KFTC”) to recommend suppliers to use standard dealer transaction contracts to be provided by the KFTC (Article 5).
C. Types of violations based on abuse of superior bargaining positions (Articles 6 to 12)
① Coerced purchase: A supplier’s act of coercing a dealer into purchasing goods or services that the dealer has no intention to purchase (Article 6).
② Coerced provision of economic benefits: A supplier’s act of coercing a dealer into providing economic benefits such as money, goods, services, among others (Article 7).
③ Designation of sales target: A supplier’s act of designating, and mandating the dealer to meet, a sales target for the supplier’s goods or services (Article 8).
④ Unfavorable treatment: A supplier’s act of setting forth or modifying transaction terms and conditions unfavorable to the dealer, or otherwise imposing a disadvantage on dealers in implementing transaction terms in any other manner than set forth in Articles 6 to 8 (Article 9).
⑤ Interference with dealer’s business operations: A supplier’s act of interfering with a dealer’s business operations (Article 10).
⑥ Refusal or evasion to accommodate a request to confirm a dealer’s order details: A supplier’s act of refusing or evading to accommodate a dealer’s legitimate request to confirm the details of an order such as the name or quantity of a product or service which the dealer has offered or otherwise expressed its intention to purchase (Article 11).
⑦ Retaliatory action: A supplier’s act of refusing to deal, reducing supplies, or otherwise disadvantaging a dealer for the reason that the dealer has filed a complaint for dispute resolution, reported the supplier to an authority, or took a similar action to such effect (Article 12).
The details and types of actions subject to Articles 6 to 10 shall be prescribed by a presidential order (Paragraph 2 of each Article).
D. Dispute resolution by the dealer dispute mediation committee (Articles 13 to 22)
For timely resolution of disputes arising from dealer transactions, the dealer dispute mediation committee shall be established under the Korea Fair Trade Mediation Agency (Article 13). The resolution reached between parties to the dispute shall have the same effect of a binding settlement before the court (Article 21).
E. Fines to be based on “Amount of Violation” (Article 25)
A number of KFTC-administered acts (for example, the Act on Fair Transactions in Large Franchise and Retails Business) have been criticized for authorizing, in the course of their statutory interpretation, fines that are disproportionate to the level of actual benefits to a respondent that had resulted from its illegal conduct. To address this issue, the Act authorizes the KFTC to calculate and impose a fine “not exceeding the Amount or Violation, which shall be prescribed by a presidential order.” As such, the definition or exact meaning of this provision is to be clarified by a presidential order (Article 25).
F. Damages (Article 34)
The Act requires the supplier to pay compensatory damages to the dealer for the loss or injury to the dealer resulting from the supplier’s violation of the Act. Additionally, the Act introduced the concept of punitive damages by authorizing the KFTC to impose punitive damages not exceeding three times of the loss or injury to the dealer resulting from coerced purchase or coerced provision of economic benefits (Article 34).
The Act is expected to contribute to addressing unfair trade practices frequently found in supplier-dealer relationships by providing protections to dealers at a level similar to those provided to subcontractors under the subcontracting transactions.
As the Act has adopted similar provisions to those regulating abuse of superior bargaining positions as unfair trade practices under the MRFTA, the introduction of the Act will have a de facto effect of making the MRFTA applicable in addition to the Korean civil code if the dispute is related to the termination or expiration of a contract between a supplier and a dealer. In addition, the Act might end up undermining the supplier-dealer relationship in the long run, as the Act may incentivize suppliers previously relying on their dealership to switch to other distribution channels such as their own direct selling units or franchisees in order to avoid the higher level of protections the Act makes available to dealers, particularly the availability of punitive damages. Indeed, a number of large-scale manufacturers/suppliers have already started to explore ways to directly sell to retail customers or supermarket chains and thereby bypass or exclude dealers from their distribution chains.