Supreme Court: "Automatic Renewal Clause in Employment Contract Must Be Interpreted According to Its Wording"

Supreme Court, Seocho-dong, Seoul.

[Asia Economy Reporter Choi Seok-jin, Legal Affairs Specialist] The Supreme Court has ruled that if a one-year employment contract includes a clause stating "the contract will be automatically extended unless otherwise agreed," the contract cannot be denied extension on grounds other than mutual agreement between the parties.

The Supreme Court's Third Division (Presiding Justice Kim Jae-hyung) announced on the 2nd that it overturned the lower court's ruling against helicopter pilot A (69) in his appeal lawsuit against the company for invalid dismissal and remanded the case to the Seoul High Court.

The court stated, "The lower court erred in its legal interpretation regarding contract interpretation by concluding that the employment contract was not automatically extended, which affected the judgment," and added, "The grounds for appeal pointing this out are justified."

Additionally, the court pointed out, "Considering the plaintiff's claims and the appeal's purpose, there was also an error in the lower court's judgment on the subject of the trial."

A, who served as a helicopter pilot in the military aviation unit for 20 years before discharge, signed a one-year employment contract in May 2017 with company B, which operates aerial firefighting services using aircraft.

Article 1 (Contract Period) of the contract stated, "The employment contract period shall be from May 1, 2017, to April 30, 2018, and unless otherwise agreed upon before the expiration of the contract period, the contract shall be automatically extended on the expiration date."

However, problems arose. Initially, company B established a helicopter business team in December 2016 and newly hired three pilots including A and three mechanics. But the helicopters introduced by the company failed to obtain the standard airworthiness certificate from the Seoul Regional Aviation Administration, which guarantees safe operation, causing the business to be halted.

Consequently, in early December 2017, the company informed A and others of the situation, collected resignation letters, and on the 21st of the same month notified the entire helicopter business team that "the resignation letters have been accepted, and the employment contracts will terminate on December 31, 2017."

However, A claimed he thought the resignation letters were collected collectively only to dismiss mechanics, not pilots, and filed a relief application with the Labor Relations Commission on January 25, 2018. The commission ruled that the company's notification constituted unfair dismissal.

The company requested a retrial at the Central Labor Relations Commission, which was dismissed, and then filed a lawsuit seeking cancellation of the retrial decision but lost.

Subsequently, on April 2, 2018, the company sent A a certified letter stating, "The employment contract period is scheduled to expire on April 30, 2018, and due to insufficient job competency as a helicopter pilot, contract renewal is not possible."

In response, A filed a lawsuit claiming unpaid wages and interest from January 1, 2018, until the day of his reinstatement, arguing that the employment contract was automatically renewed from May 1, 2018.

The first and second trials, following the Labor Relations Commission and court rulings, judged that the company's dismissal of A before the contract period ended was invalid and ordered payment of wages up to the contract expiration date of April 30.

However, the court ruled that the company had no obligation to pay wages and interest after May 1, 2018, which A claimed based on automatic contract renewal.

The court accepted the company's substantive preliminary defense and dismissed A's claim to confirm the invalidity of dismissal as lacking legal interest.

First, the court pointed out a significant contradiction between the main text of Article 1 of the contract, which states the contract period is one year, and the clause stating automatic extension unless otherwise agreed.

Interpreting the clause literally would result in an unreasonable outcome where A would enjoy the status of an indefinite-term employee unless he agreed to end the contract. Therefore, the court held that the clause should be interpreted as meaning that upon contract expiration, the company may decide whether to renew the contract, and if the company does not express refusal to renew by the expiration date, the contract is deemed renewed.

Although A argued that his extensive helicopter piloting experience demonstrated no job competency issues, the court concluded that the company's refusal to renew was justified, considering negative evaluations from an Australian training instructor, such as "lack of piloting skills and concentration" and concerns about inability to prevent dangerous situations during training.

Ultimately, since the employment contract with A properly ended on April 30, 2018, even if the dismissal was invalid, A could not regain employee status, and thus had no interest in confirming the invalidity of dismissal.

The second trial also upheld the first trial's judgment and dismissed A's appeal. However, the appellate court ordered the company to pay A an additional approximately 3.6 million won due to expanded claims during the appeal.

However, the Supreme Court completely overturned this conclusion.

The Supreme Court first pointed out that the lower courts misinterpreted the employment contract between A and the company.

Relying on previous Supreme Court rulings, the court stated, "When the parties have written the contract terms in a dispositive document, if the wording is clear, the existence and content of the expression of intent must be recognized as written unless special circumstances exist. Especially when interpreting the wording differently from its objective meaning causes significant effects on the legal relationship between the parties, the wording must be interpreted more strictly."

It further explained, "The clause in question clearly means that 'unless the plaintiff and defendant separately agree before the expiration of the contract period on April 30, 2018, the employment contract is automatically extended,'" presenting an interpretation opposite to the lower courts.

The court added, "There is no statement that 'the clause applies only on the premise that the plaintiff maintains qualifications as an aviation worker and can normally perform the work stipulated in the contract during the contract period.' Adding content not written in the employment contract contradicts the objective meaning of the dispositive document."

Moreover, the court noted that although company B's employment rules state, "The contract period for employees shall be within one year except for indefinite-term contracts. However, renewal may be concluded as necessary," since an individual employment contract with more favorable conditions was concluded, the employment rules should not be used to narrow the contract terms.

Furthermore, the court stated, "If during the contract period the plaintiff cannot provide normal work, the defendant may justifiably dismiss the plaintiff if such circumstances are socially recognized as making continuation of employment impossible. Therefore, even if the clause is interpreted as meaning automatic extension unless otherwise agreed, it cannot be concluded that this contradicts the parties' intent at the time of contract conclusion."

This content was produced with the assistance of AI translation services.