Hello, this is attorney Park Jong-han of Cheongchul Law Firm.

Where a property sales advertisement contains false or exaggerated content, the issue is not only civil liability in damages but also criminal liability for fraud under the Criminal Act and administrative sanctions by the Korea Fair Trade Commission (KFTC) — such as corrective orders and penalty surcharges — under the Act on Fair Labeling and Advertising (the "Labeling and Advertising Act"). In this post we examine the test for criminal liability in connection with property sales advertising and the measures available to the KFTC.

[Question]

What is the test for fraud where a property sales advertisement is false or exaggerated, and what measures can the Korea Fair Trade Commission take?

[Answer]

A. The test for deception in fraud

The Supreme Court has held that "deception as an element of fraud refers broadly to acts, whether active or passive, that betray the duty of good faith and sincerity owed in property transactions, and whether an act constitutes deception causing another to fall into error must be determined generally and objectively, taking into account the specific circumstances at the time of the act, such as the transaction context and the counterparty's knowledge, experience and occupation," thereby establishing the standard for deception as an element of fraud (Supreme Court Decision 91Do2746 of March 10, 1992).

On whether exaggerated or false advertising constitutes fraud, the Supreme Court held that "only where specific facts on matters material to the transaction are falsely represented in a manner blameworthy in light of the duty of good faith does the conduct exceed the bounds of exaggerated or false advertising and amount to deception for the purposes of fraud" (Supreme Court Decision 2004Do45 of January 25, 2007).

Thus, while the Supreme Court holds that some degree of exaggeration or falsity in promotion and advertising lacks the quality of deception so long as it is tolerable in light of ordinary commercial practice and good faith, it also holds that where specific facts material to the transaction are falsely represented in a manner blameworthy in light of the duty of good faith in transactions, the conduct exceeds the bounds of exaggerated or false advertising and constitutes deception for the purposes of fraud.

B. A case where deception was found

Where a speculative land dealer, relying solely on a particular local government feasibility report, provided false or grossly exaggerated information presenting an unconfirmed development plan as though it had been finalized and thereby concluded land sale contracts with purchasers, the court held that "this goes beyond what is tolerable in light of ordinary commercial practice and good faith and amounts to falsely representing specific facts on a matter material to the transaction in a manner blameworthy in light of the duty of good faith in transactions, and therefore constitutes an act of deceiving another for the purposes of fraud," and fraud was established (Supreme Court Decision 2008Do6549 of October 23, 2008).

C. Cases where deception was denied

Conversely, in a case involving advertising that somewhat exaggerated the floor area figures of an apartment in order to facilitate sales, the Supreme Court held that "in light of the method of determining the sale price, the circumstances in which the sales contracts were concluded and the process of negotiating the final price, the defendant's advertising to the general public cannot be said to have served as the basis for calculating the purchase price between the parties, and was no more than an attempt to identify the units offered and to facilitate their sale," and found no deception (Supreme Court Decision 91Do788 of June 11, 1991).

The Supreme Court also found it difficult to treat the conduct as deception for the purposes of fraud where the statements the defendants made in recommending the land purchase corresponded to objective facts or, although not finalized, were contained in a report commissioned by a local government and had been extensively covered in the press, and the defendants showed the purchasers the report and press clippings while making those statements, reasoning that "there was no room for the purchasers to have misunderstood the matter as being more than what was represented" (Supreme Court Decision 2004Do45 of January 25, 2007).

D. KFTC measures — sanctions against unfair labeling and advertising

The Labeling and Advertising Act empowers the KFTC to impose four types of sanctions on unfair labeling and advertising: corrective orders, penalty surcharges, a special rule on liability in damages, and criminal punishment.

First, as a "corrective order" (Article 7(1)), the KFTC may order a business that has engaged in unfair labeling or advertising to cease the violation, to publish the fact that it has received a corrective order, to run corrective advertising, and to take any other measures necessary to correct the violation.

Second, as "penalty surcharges and administrative fines," the KFTC may impose on a business that has engaged in unfair labeling or advertising a penalty surcharge not exceeding an amount calculated by multiplying revenue by 2/100, and where there is no revenue, a penalty surcharge of up to KRW 500 million (Article 9(1)). Where material information is not disclosed in labeling or advertising, an administrative fine of up to KRW 100 million may also be imposed (Articles 20(1)1, 43(3)).

Third, as a "special rule on liability in damages" (Article 10), a business violating the Labeling and Advertising Act is liable in damages to those harmed by the violation, and is distinguished from ordinary tort liability in that the business cannot escape liability by asserting the absence of intent or negligence (Article 10(2)).

Fourth, as "criminal punishment" (Article 17), a business engaging in unfair labeling or advertising is subject to imprisonment of up to two years or a fine of up to KRW 150 million; and where a representative, agent, employee or other worker of a corporation commits the violation in connection with the corporation's business, a joint penalty provision applies so that, in addition to punishing the actor, the corporation is also fined under the relevant article (Article 19).

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