Q. What is the regulation of the gab-eul relationship?

The regulation of the gab-eul relationship refers to the regulation of unfair trade practices performed by a more powerful party against the other party in a transaction between enterprises.

For example, if a manufacturer commissions the manufacture and supply of parts to a part supplier and pays the price six months after receiving the supply of parts (case one), a seller unilaterally increases the sales price set forth in the contract with a purchaser (case two), or a supplier sets a sales target that a distributor must reach and imposes a penalty such as termination of a contract if the distributor fails to reach such target (case three), they may be subject to the regulation of the gab-eul relationship.

The term “gab-eul relationship” originates from the Korean practice where, when a contract is entered into, the contractual parties are typically referred to as Gab and Eul. The more powerful party is referred to as Gab, while the other party is referred as Eul.

Korea has many laws and regulations concerning unfair trade practices arising from the gab-eul relationship. The most basic and widely applicable law is the Monopoly Regulation and Fair Trade Act. Other laws include the Fair Distributorship Transactions Act, which is applicable to transactions between a supplier and its distributor; the Fair Transactions in Subcontracting Act, which is applicable to subcontracting; the Fair Transactions in Franchise Business Act, which is applicable to franchises; and the Act on Fair Transactions in Large Retail Business, which is applicable to transactions between a large retailer and its supplier or shop tenant.

In the event that the above laws are violated based an unfair trade practice, the company and officers/employees could face administrative sanctions such as corrective orders and fines, criminal punishments and civil lawsuits for compensation of damages, although they usually only have contract issues in other countries. 

Q. Can conduct based on an agreement between the parties be problematic?

Conduct which is based on an agreement between the parties can be problematic, i.e., the regulation of the gab-eul relationship is applicable to a conduct based on an agreement between the parties as well as an unfair conduct performed by one party against the other party without the other party’s consent.

For example, case one mentioned above can constitute a violation even if the parties agree to the payment deadline of six months after the supply because the Fair Transactions in Subcontracting Act prescribes that payment shall be made within 90 days after supply.

Also, in case three, even if the parties agree to the sales target, if the agreed sales target is coerced by a penalty, it can constitute a law violation. As such, under the regulation of the gab-eul relationship, an agreement between the parties does not grant immunity and even conduct based on an agreement between the parties can constitute a violation.

Q. How can we avoid violating the regulation of the gab-eul relationship?

First, a company should be careful to avoid any unfair provisions being included in a contract. From a commercial standpoint, it is natural for a company to seek to make a contract as favorable to itself to the extent possible, but it can be subject to regulation if it constitutes an unfair trade practice.

In particular, many foreign companies have globally used standard terms and conditions, and they want to use such standard terms and conditions without making changes in Korea. But under some circumstances, such an approach may constitute a violation of laws. Also, unfair trade practices may occur in the course of performing a contract even if the contract itself is not problematic. For example, seeking additional benefits not based on the contract or termination not pursuant to the contract.

Therefore, it is necessary to have appropriate guidelines and training in place for employees in order to prevent unfair trade practices from occurring in the course of performing a contract. In sum, since the regulation of the gab-eul relationship in Korea is unique, far-reaching and can cause damages including various sanctions, legal costs and harm to reputation, it is necessary to pay attention to and carefully manage contracts from execution to performance and termination.