The Complex Commercial Litigation Law Review: South Korea
South Korea is a civil law country and adopts lex scripta. The law that fundamentally governs the legal relationship between individuals is the Civil Act, and the Commercial Act applies as a special law if one or both transacting parties are merchants. Civil litigation follows the procedures set forth in the Civil Procedure Code. The Ministry of Government Legislation's National Legal Information Centre2 provides official English translations of the Civil Act, the Commercial Act and the Civil Procedure Code.
As Korea is not a federal country, it does not adopt the concept of states; thus, the applicable laws and legal principles do not change between the different regions of Korea. Likewise, the court system is not divided into state courts and federal courts.
In addition to the rules above, there are various special laws based on the need to treat certain legal relationships in a different manner (e.g., the Act on the Regulation of Standardised Contracts, the Product Liability Act and the Act on Consumer Protection in Electronic Commerce).
The Civil Act was enacted in 1958 and took effect on 1 January 1960. Its section on claims deals with contracts, and while other sections of the Act have gone through a number of revisions, the claims section remains unrevised.
The Commercial Act was enacted in 1962 and took effect on 1 January 1963. It has a section on commercial activities, which applies to contracts governed by the Commercial Act, and separate sections for insurance and maritime and air transportation.
The Civil Procedure Code was enacted in 1960 and took effect on 1 July 1960. It has seen several amendments, starting with the complete amendments in 2002, to reflect the litigation practice.
The Korean judicial system is highly systemised and well maintained. Accessing the judicial system online is simple and easy with the courts' well-developed computer network. Through various sites operated by the Supreme Court, users can search key precedents and check the progress in a lawsuit. Court judgments are generally publicly available, and the public can request the court for a copy of a judgment by specifying the case number (provided that in the received copy of the judgment, any personally identifiable information, such as the name of a person or company, is anonymised). The e-litigation system also allows parties to a civil lawsuit to upload court submissions and download submissions made by other parties.
Contract formation requires the parties' meeting of the minds (i.e., offer and acceptance). The first requisite element, the offer, must be a specific and definitive expression of intent containing sufficient details to determine the contract terms so that once the offer is accepted, a contract can immediately be formed. Once accepted, an offer cannot be withdrawn.
The terms of acceptance should be same as those of the offer, and an offer should be accepted within the acceptance period. In case of a modified acceptance containing limitations or modifications to the offer, that reply would be deemed both a rejection of the offer and the provision of a counter-offer, and it would not result in the formation of a contract based on the terms of the original offer.
The meeting of the minds need not encompass all the terms of the contract; however, there should be specific agreements on the essential or important terms of the contract, or on the criteria and methods allowing specific determination in the future. Unless there are agreements on matters indicated by the parties as requiring an agreement, a contract cannot be formed, except in special circumstances.
In general, written contracts are prepared at the time of contract formation, but sometimes the parties may do away with a written form. Contract formation, in principle, requires only the meeting of the minds without any separate requirement on the method; therefore, even without a written instrument, a contract can be validly formed.
However, without a written form, there may be a problem with proof if the parties disagree on the contract formation. A written contract executed by both parties will prevent future dispute in this regard. If a written contract has not been prepared, the court will review records of the parties' communication regarding the contract, purchase orders, etc., to determine whether there was a meeting of the minds on essential or important contract terms, such as price, quantity and timing.
If a written contract contains a provision to the effect that any amendment to the contract can only be made with both parties' written consent, oral amendment to the contract would not be accepted, except in special circumstances.
Where a contract in the name of the contracting parties is executed for the purpose of allowing a third party to acquire rights directly from the contract, the contract is called a third-party beneficiary contract and is valid and enforceable under Korean law. Regarding the issue of whether a contract constitutes a third-party beneficiary contract, the court analyses whether the parties had intended for a third party to directly obtain certain rights through the contract. This entails reasonable interpretation of the parties' intent by reviewing the purpose of the contract, the nature of the parties' actions with regard to the contract, the gains or losses between the parties or in respect of the third-party beneficiary through the contract, transaction practice and the social function that the third-party beneficiary system serves.
For a commercial contract between a Korean company and a foreign company, a potential issue is which law should govern the contract. Parties can avoid the risk of having the contract governed by an undesired law by selecting the governing law. The private international law in Korea explicitly allows parties to select the governing law for the contract. If the parties have agreed on a governing law, they cannot argue that a law other than the selected law applies, and the selected law will apply to the entire agreement, including the governing law provision.
Disputes may arise between contracting parties regarding the interpretation of the contract terms. If a written contract was prepared by the parties and the language of the contract is objectively clear, the courts will acknowledge the existence and content of the parties' expression of intent in accordance with the language of the contract, except in special circumstances.
If the language of the contract is not objectively clear, the contract will be reasonably interpreted based on the court's comprehensive review of the contractual language, the purpose and circumstances of the contract formation, the parties' purpose and true intent behind entering into the contract, common transaction practice and other factors, in accordance with the principles of logic and experience, common sense and conventional wisdom, so that the interpretation will be consistent with the societal concepts of justice and equity. In particular, if the interpretation that departs from the objective meaning of the contractual language will significantly impact the contracting parties' legal relationship, the court will interpret the contractual language in a stricter manner.
As part of the principle of freedom of contract, Korean courts recognise parties' freedom to determine terms of their own contracts. Freedom to determine the contract terms is not recognised without limits: it is limited by the need to maintain a balance with other values, such as sound social ethics and the realisation of fair contracts. Such control of contract terms is carried out not only by legislative actions with regard to civil or administrative affairs but also by judicial actions, such as general provisions of the Civil Act (e.g., principle of good faith, public order and good morals) and nullification of certain standardised contract terms.
The Civil Act invalidates juristic acts that violate the morality and social order. As the standards of morality and social order are abstract, specific details can only be determined through court judgments in individual cases. If a certain juristic act violates the social order or good morals, the act will be deemed null and void; thus, it would be unnecessary to perform any relevant incomplete obligations, and such performance cannot be compelled through a lawsuit.
The principle of good faith, which is recognised under the Civil Act, is that in exercising a right or performing an obligation, a person should not choose a manner of doing so that completely disregards the legitimate interest of the other party, such as violating equity or betraying trust; thus, the exercise of a right or the performance of an obligation in violation of this principle would be deemed null and void.
A standardised contract is a contract prepared in advance by one party in a certain form for the party to enter into the contract with a number of other people, regardless of the contract's name, form or scope. Commercial contracts may take the form of a standardised contract. The Act on Regulation of Standardised Contracts sets out three principles for the interpretation of a standardised contract:
- principle of objective and unified interpretation: a standardised contract should be interpreted in an objective and unified manner in accordance with the contractual language without considering specific circumstances of different contracting parties;
- principle of interpretation against the drafter: where the meaning of a standardised contract is unclear or could be interpreted in different ways, the ambiguity should be resolved against the drafting party and in favour of the customers; and
- principle of restrictive strict interpretation: the immunity clause, which is primarily used for the benefit of the drafter, should be interpreted in a restrictive and strict manner, and the standardised contract should not be construed to apply beyond the scope of the original terms.
i Court litigation
Korean courts are organised into the Supreme Court, which is the highest court in the judicial system, and various other levels of courts. Courts other than the Supreme Court are classified into high courts, district courts, patent courts, family courts, administrative courts and bankruptcy courts.
The high courts or the district courts generally handle commercial disputes; there are no special courts that exclusively handle commercial disputes. Depending on the legal nature of the case, special courts, such as the patent courts or the bankruptcy courts, may have exclusive jurisdiction over the case.
The high courts or the district courts that deal with many corporate disputes and international transactions, such as the Seoul High Court and the Seoul Central District Court, have internally designated some of their divisions to commercial disputes, such as corporate disputes, international transactions and maritime cases, and have assigned judges with relevant expertise and experience to those divisions. Once a lawsuit in one of the specialised fields is filed, the case is randomly assigned within the specialised division.
With the 2018 amendment to the Court Organisation Act, international cases involving intellectual property rights and international transactions fall under the exclusive jurisdiction of the district court in the region where the high court overseeing the competent court is located. In those lawsuits, with the parties' consent, the hearings can be carried out in a foreign language without translation.
There is no lower limit on the value of civil claims that may be commenced in Korean courts, and parties can file a lawsuit no matter how small their claim is.
A lawsuit is effectively commenced when a written complaint is filed, the appropriate fees (stamp duty and delivery fees) are paid with the court, and the complaint has been served on the defendant.
The court directly handles the delivery of litigation documents, including the complaint; private delivery by a party is not permitted. The costs of litigation, including stamp duty, delivery fees and attorneys' fees (up to the legally recognised amount) may be recovered if the plaintiff wins. With the exception of the international cases discussed above, the language used in court is Korean, and all documents written in a foreign language must be submitted with a translation.
Court hearings are, in principle, open to the public. The litigation records can be viewed and copied only by persons with specific interests, such as the litigating parties. In principle, the parties or their representatives should attend the court hearings in person, but when necessary a virtual hearing may take place; for instance, in the case of a preparatory hearing or where it is difficult for a witness located abroad to attend the hearing, the witness examination may take place virtually. In particular, virtual hearings have recently been utilised to prevent the spread of covid-19.
The Civil Procedure Code provides for jurisdiction.
Depending on the value of the claim, the case will be heard by either a single judge or a panel of judges. Cases with a claim value of less than 30 million won are classified as small claims cases, and the courts apply simplified hearing procedures and judgment methods.
A single judge handles the first instance trial of small claims cases and single-judge cases (cases with a claim greater than 30 million won and less than 200 million won). Cases involving a panel of judges (cases with a claim greater than 200 million won) are heard by a three-judge panel starting with the first instance trial.
When the judgment from a first instance trial is appealed, first instance cases involving a single judge will be sent to a panel of judges in the district court, and first instance cases involving a panel of judges will be sent to the high court. The Supreme Court hears all third instance cases.
The territorial jurisdiction of all courts throughout Korea is prescribed by law, and the competent court is determined by a person's residential address in the case of a natural person, or the main office address in the case of an organisation such as a company. Besides such general jurisdiction, the Civil Act recognises special jurisdiction in certain cases, and parties may choose one of the different competent courts at their convenience. If multiple claims are made in a single lawsuit, and if the requirements for a claim merger are met, the lawsuit may be filed in a court with jurisdiction over one of the claims.
Parties may determine the competent first instance court for disputes arising out of a certain legal relationship by agreement in writing. In this case, parties may agree that only a particular court has exclusive jurisdiction, while excluding jurisdiction of other courts, or they may agree to add another court to the list of competent courts.
With the exception of cases falling under the court's exclusive jurisdiction, the court will have jurisdiction unless the defendant pleads against jurisdiction before a certain point in the first trial court.
Korean law does not require litigating parties to be represented by attorney; however, in the case of commercial disputes, particularly international commercial disputes or commercial disputes between large companies, most litigating parties are represented by attorneys.
When issuing its judgment, the court orders the losing party to bear all or part of the litigation costs of the winning party, and the exact amount to be paid is determined by a separate court decision. The amount of the attorneys' fees recognised by the court is limited by the relevant regulations, and it is generally lower than the amount actually spent by the parties. In many civil cases, contingent fee arrangements are made.3
Class action lawsuits are not generally utilised in Korea. The Civil Procedure Code does not provide for a general class action system; however, where multiple litigating parties have a common interest, they can voluntarily select their representative and have the representative carry out the lawsuit (representative action). In those cases, the representative's actions in the lawsuit would directly affect only the parties to the particular lawsuit and not the other interested parties.
The Securities-Related Class Action Act allows for plaintiffs to bring class action lawsuits related to securities. Under this system, a representative party appointed by the court files the lawsuit on behalf of the victims' group claiming damages from illegal activities, such as false or insufficient information in quarterly or annual reports, securities reports or public tender registration; insider trading; market manipulation; and accounting fraud. The court judgment in those lawsuits binds all members of the victims' group (i.e., those who did not seek to be excluded from the class action).
ii Alternative dispute resolution
The Korean legal system provides for various alternative means of dispute resolution, such as mediation, settlement and arbitration. For commercial disputes between companies, arbitration is often used.
Korea is a member of the New York Convention, and it has adopted the Model Arbitration Act and has reflected it in the Arbitration Act. The Korean Commercial Arbitration Board (KCAB) handles many domestic and international disputes.
Korean courts are friendly to arbitration in terms of approving and enforcing arbitration awards rendered in Korea and abroad. The Supreme Court has ruled that as long as the parties have expressly stated their intent to resolve future disputes through arbitration, the parties' arbitration agreement is valid and enforceable, even if the parties did not decide on the arbitration institution, governing law or venue,4 thereby broadly interpreting the arbitration agreement. Major courts, such as the Seoul Central District Court and the Seoul High Court, have specialised divisions dedicated to handling arbitration-related cases, wherein experienced judges handle many different types of cases.
Civil mediation procedures in the courts are also often used as an alternative means of dispute resolution. The Judicial Mediation of Civil Disputes Act provides for those procedures. Parties can apply with the court to have their disputes resolved through mediation rather than through a lawsuit, and if the mediation is not successful, the parties can proceed with the lawsuit after paying the appropriate fees.
Even in cases where a lawsuit is initiated without a mediation application, the judges overseeing the case can send the matter to a mediation centre within the court either ex officio or based on the parties' willingness to mediate. In such case, the mediating judge or the court-appointed mediation committee will directly call the parties or their representatives to attend the mediation sessions in the court to find an amicable solution.
In resorting to mediation, the judges overseeing the lawsuit may decide to preside over the mediation sessions themselves, rather than send the case to a mediation centre, which is very commonly done. As there is no limit on the number of times a case can be sent to mediation, a case can be referred to mediation multiple times by the same court or courts at different levels, which make the decision based on their discretion.
In deciding whether to refer a case to mediation, judges usually consider the parties' willingness to mediate as a factor. During the mediation process, if the parties reach an agreement on their own, the mediation is completed (this is called 'arbitrary mediation').
In contrast, if no agreement is reached, the mediation is declared to have failed, and the case may be sent back to litigation, or the judge may propose a compromise solution that it deems appropriate before returning to litigation. If the parties do not file their objections against the judge's proposed solution within a set amount of time, the proposed solution becomes binding (this is called 'compulsory mediation').
Once the mediation has been completed (regardless of whether through arbitrary or compulsory mediation), the court prepares a document setting forth the terms of the resolution. The stated terms have the same legal effect as a court settlement.
Breach of contract claims
In order for one party to hold the other party liable for breach of contract, it is necessary to establish that (1) the other party has an obligation that it failed to satisfy (2) for grounds attributable to the other party (3) that has caused damage to the party.
The plaintiff in a breach of contract suit must prove points (1) and (3) as requisite elements. The burden of proof for point (2) lies with the defendant; in other words, the defendant must prove that there are no grounds attributable to it to avoid liability. If failure to pay a monetary debt is at issue, the debtor's argument that it was not negligent would not be accepted.
If the contract at issue is a bilateral contract, the defendant may claim defence of simultaneous performance to avoid liability for delayed performance, provided the following requirements are met:
- both parties' obligations arise from the same bilateral contract;
- both parties' performances are due; and
- the plaintiff has not performed its obligation.
In such case, the defendant would not be liable for delayed performance.
Defences to enforcement
A breaching party trying to avoid compulsory enforcement of the contract or payment of damages from the breach can raise various defences under the Civil Act, etc. The defences most frequently used in practice are discussed below.
Certain defences, such as abuse of rights and violation of the principle of good faith, may be considered by the courts ex officio even without a party making the argument; however, in most cases, the defences must be explicitly or implicitly raised by the party.
i Error in formation
Contract formation requires the parties' meeting of the minds. If there is any discrepancy in the parties' expression of intent, an agreement cannot be formed. A breaching party may argue that there was no breach of contract because the contract itself was never formed owing to discrepancies in the parties' expression of intent. Error in formation is distinguishable from mistakes, which is the case where a party's expression of intent does not match its own intent.
ii Unauthorised agent
In case the contract at issue was executed by an agent, the breaching party may try to avoid liability by arguing that the contract was concluded by an unauthorised agent or, alternatively, that other aspects of the agent's action were flawed (e.g., the agent's action was not indicated as performed on behalf of the breaching party, or the agent's expression of intent was based on mistake, fraud or duress), and that, therefore, the agent's action should not bind the breaching party.
iii Statute of limitations
If a rights holder, despite being able to exercise its rights, does not do so for a certain period, the duty bearer can argue that the unexercised rights have been extinguished.
Under the Commercial Act, a five-year statute of limitations applies to claims created by commercial activities. Ordinary claims governed by the Civil Act have a statute of limitations of 10 years, with exceptions for certain claims with shorter periods (e.g., a three-year statute of limitations applies for debt with a repayment period of less than one year (e.g., interest), payment for subcontracted construction, claims for reimbursement of expenses and payment for products sold by merchants). The clock for statutes of limitations starts to run on the day the rights holder obtains the rights and is able to exercise them.
If, before the statute of limitations expires, the rights holder makes a claim (e.g., filing a lawsuit or requesting payment) or the court renders an order for seizure or provisional seizure, or the duty bearer acknowledges its liability, the statute of limitations is renewed and starts again.
Upon the expiration of the statute of limitations, the relevant rights are extinguished; however, based on the principle of the adversarial system under the Civil Procedure Code, extinguished rights are reflected only when the party to benefit from the statute of limitations makes an argument in that regard. When a rights holder does not exercise its rights granted by a finalised court judgment, a new statute of limitations applies, which has a period of 10 years, regardless of the statute of limitations period that applied for the underlying claim.
A breaching party can argue that a contract is invalid when, despite the contract being formed, its terms are not finalised or cannot be finalised through interpretation; contract performance is impossible based on conventional wisdom; or the contract violates regulations, morality or social order.
In case a party's intent does not match its expression (i.e., where a party's true intent is contrary to what was expressed regarding the contract formation) and the other party was aware of, or could have been aware of, this fact, the contract can be voided as invalid.5 In addition, a contract formed based on a fictitious expression of intent made in collusion with the other party can be voided as invalid.6
If a part of a juristic act is null, the entirety of the juristic act is, in principle, null; however, where it is deemed that the juristic act would have been done even if the null part had not existed, the rest of the act will be valid.7
A breaching party may avoid liability by arguing that its expression of intent should be voided because it was made under a mistake with regard to an essential element of the contract8 or the expression of intent was defective (i.e., the expressed intent was not genuine owing to fraud or duress).9
vi Subsequent impossibility
Where a contractual obligation has been established and performance became impossible for reasons unattributable to the obligor – despite performance being possible at the time of contract formation – the obligor cannot be held liable for breach of the contract.
Impossibility is not limited to physical (i.e., natural or factual) impossibility; it is determined by the social convention or the society's idea of transactions. Accordingly, the defence of impossibility can be used not only where the obligor's performance becomes physically impossible but also where the performance, despite being physically possible, cannot be expected based on social convention.
The obligor bears the burden of proving that the performance has become impossible. Where the impossibility was caused by reasons unattributable to the obligor, the obligor is released from the obligation and does not bear any liability.10 In contrast, where the obligor is responsible for the performance becoming impossible, the obligor is not obliged to perform, but it would bear liability for the damages, and the obligee can terminate the contract.
vii Limiting responsibility
In determining the amount of damages to be paid by the breaching party, the breaching party can argue that the amount should be reduced by the plaintiff's comparative negligence or seek to limit its liability based on the principle of fairness.
With regard to the recognition of facts in respect of the grounds to limit liability and the determination of the corresponding proportion of liability, the fact-finding courts (courts of first and second instances) have complete power. The Supreme Court, which only hears questions of law, does not take issue with the fact-finding courts' judgment, as long as the judgment is not substantially unreasonably based on the principle of equity.
viii Abuse of rights and violation of the principle of good faith
Breaching parties often use abuse of rights as a defence. Abuse of rights refers to an exercise of rights that cannot be acknowledged as exercise of legitimate rights owing to deviation from the original social purpose of the rights and violation of the public and social nature of the rights. Article 2 of the Civil Act provides that no abuse of rights is permitted.
Where a party's exercise of rights does not meet the original social purpose (i.e., in cases where the court finds that the exercise of rights violates the principle of good faith, social order or relevant economic or social purpose; lacks legitimate interests; or destroys the balance of social interests), the court rules the exercise of rights as null and void; however, since the above criteria are highly abstract, the courts make their determination based on comprehensive review of various specific factors in each case, and they tend not to easily recognise claims of abuse of rights.
Fraud, misrepresentation and other claims
Where a party is the victim of fraud or has been misrepresented in a contract, the party can not only claim for legal effects from the breach of contract but also cancel the contract. In case the fraud or misrepresentation constitutes tort, the party can claim for those damages as well. The claims listed below can be made simultaneously with the claim for breach of contract, so it does not require a plaintiff to choose one over the other.
i Invalidation of juristic action
Section VI explains that the defendant in a breach of contract case can cancel its expression of intent based on fraud. Conversely, the plaintiff seeking to hold the other party liable for breach of contract can claim against the breach of contract and, optionally, fraud.
Pursuant to Article 110(1) of the Civil Act, which stipulates 'the expression of intent made by fraud or duress may be voidable', a contracting party can invalidate a contract by voiding its expression of intent based on fraud. Once voided, the contract is treated as if it had never been executed, and anything exchanged between the parties should be returned. Further, as fraud can constitute tort, claims can be made for damages based on tort.
Where a third party, rather than the contract counterparty, committed fraud, the expression of intent is voidable only if the counterparty was aware, or should have been aware of, the fact.11
The voidance of expression of intent owing to fraud cannot be set up against an innocent third party.12 To illustrate, A was deceived by B and sold its property to B at a bargain price, and before A voided the sale, B sold the property to C who was unaware of those circumstances. In that case, A may not seek the return of the property from C.
The principle of good faith and prohibition against abuse of rights, discussed in Section VI, apply generally to the entire judicial legal relationship, and pertain to the assessment of validity of contract formation, interpretation of specific contract terms and means of contract performance. As such, it is possible to reject the counterparty's claims as violating the above principles or to deny the contract's binding effect; therefore, it is possible to make claims based on breach of contract as well as violation of the above principles. That said, it is inadvisable to hold a counterparty liable based solely on the violation of the above principles because they are required to be used as a last resort when there are insufficient remedies available.
The Civil Act has a system13 to revoke fraudulent conveyance that is identical to the French Civil Act's action révocatoire system: if an obligor has performed any juristic act that has a property right for its subject, with the knowledge that it would prejudice the obligee, the obligee may apply to the court for its revocation and for restitution of its original status.
To illustrate, if a debtor gifts its only property to a third party and becomes insolvent, the creditor may revoke the gift contract and have the property returned to the debtor.
The right to void fraudulent conveyance can be exercised through a lawsuit, which must be filed within one year of the date the obligee learns of the grounds for revocation and five years of the date of juristic act.
ii Culpa in contrahendo
As grounds to recover damages for misrepresentation, Article 535 of the Civil Code provides the following: 'Where a contract, whose objective is unattainable, is concluded, a contracting party who was aware of, or should have been aware of such unattainability, shall be liable for damages suffered by the other party who relied upon the contract as valid.' This has been adopted from culpa in contrahendo in German law and can be applied not only to situations where the object of the contract is unattainable but also where there has been negligence in contract preparation or contract execution.
Where there is negligence in contract execution, the negligent party should compensate for the damage suffered by the other party because the other party believed in the validity of the contract (i.e., the gain obtained through the other party's trust). For instance, if a buyer, relying on a supply agreement, paid a deposit for storage space and, after the supply agreement was invalidated, lost the deposit, the buyer can seek to recover the amount of the deposit against the seller.
A party is entitled to seek remedies against the breaching party. Below are the major remedies in Korean law.
i Request for performance
Where an obligor has not performed its contractual obligation despite the performance being due and feasible, the obligee may request for the performance to be completed; that is, the obligee may request the obligor to fulfil the obligation set forth in the contract. The performance of the obligation should be what is deemed appropriate in light of regulations, the purpose of the contract, transaction practices and the principle of good faith. Even if the obligor has performed the obligation, if the performance was incomplete owing to non-adherence to the terms of the contract when complete performance is feasible, the obligee may seek complete performance.
When collateral is established for a contractual claim, the obligee may exercise its collateral rights.
In addition to claim for performance, an obligee may also claim for compensation of damage arising from the obligor's non-performance of its obligations (compensation for delayed performance or extended damage).
ii Rescission and termination
If an obligor intentionally or negligently does not perform its obligation even though the performance is due and feasible, the obligee may fix a reasonable period and give peremptory notice demanding its performance, as well as rescind the contract if no performance is effected within such period.14 If the obligor notifies in advance its intention not to effect such performance, the obligee may terminate the contract immediately without providing peremptory notice. Rescission is also possible where the performance has become impossible for any cause for which the obligor is responsible15 or where the obligor has effected incomplete performance and does not effect complete performance, or the complete performance has become impossible for any cause for which the obligor is responsible.
Where a contract is rescinded, all legal effects arising from the contract itself are retroactively extinguished, and the party denying the claim of breach of contract often argues that the contract has been rescinded and that its contractual obligation does not exist.
In a continuous contractual relationship, if an obligor defaults or violates the principle of good faith, it is possible to terminate the contract prospectively, and as the result of the termination, the parties would have to settle the contract. Individual obligations that already arose from continuous contractual relationships before termination (e.g., payment for outstanding receivable or interest) survive even after termination of the basic contract. In many cases, defaulting parties claim that the contract has already been terminated and is no longer valid.
In addition to the cases prescribed by the Civil Act and other relevant laws, the parties may rescind or terminate a contract based on their agreement. Contracting parties may also seek damages, if any, even in cases where the rescission or termination of the contract is validly effected.
In the event of a contractual breach, the non-breaching party may claim damages caused by the breaching party's delayed performance. A classic example is delayed interest on monetary debt. In general, a delayed interest rate of 5 per cent per annum is applied to monetary debt pursuant to the Civil Act; however, in a commercial dispute, 6 per cent per annum is applied pursuant to the Commercial Act. Where a lawsuit has been filed with the court, the non-breaching party, after a certain point, may recover the delayed interest pursuant to the Act on Special Cases Concerning Expedition, etc., of Legal Proceedings. The delayed interest rate is 12 per cent per annum, although it may change in accordance with amendments to the Act.
The non-breaching party may claim damages in lieu of the breaching party's performance;16 that is, the non-breaching party can seek damages if:
- the non-breaching party has rescinded the contract for the breaching party's delayed performance;
- if the contract has not been rescinded, there are special circumstances that make the delayed performance no longer profitable to the non-breaching party; or
- despite the demand for performance for an extended period, no performance was rendered within the period.
The non-breaching party may also claim damages where the performance became impossible for reasons attributable to the breaching party.17
The scope of the damage to be compensated by the breaching party is the non-breaching party's state of interest without the breach and the current state of interest with the breach (i.e., the difference between the benefit the obligee would have received had the obligor performed its obligation and the benefit the oblige received with the obligor's non-performance). Korean law provides for recovery of not only direct damages but also indirect damages (e.g., loss of profit to be earned by the obligee from selling the object of the contract the obligor performed its obligation).
In practice, it is often difficult to prove the amount of damages to the victim, so in cases where damage has occurred but it is difficult to prove the specific amount of damages, Article 202-2 of the Civil Procedure Code lowers the burden of proof for the amount of damages, allowing the court to fix the amount as it deems reasonable, taking into consideration all evidence submitted during trial.
Certain laws, including the Patent Act, stipulate specific methods of calculating the amount of damages. Neither Korean law nor the courts award punitive damages.
iv Claim for vicarious compensation
Where an obligor has obtained profit that is the subject of performance owing to the same cause that made the performance impossible, the obligee may request the obligor for that profit. Examples include where a third party extinguished the object of obligation and made the performance impossible, but the obligor obtains the right to claim insurance proceeds.
Although the Civil Act does not explicitly provide for claims for vicarious compensation, it has been firmly established by the court's interpretation. Such claims are recognised regardless of whether there are reasons attributable to the obligor for the performance becoming impossible.
v Provisional attachment and provisional disposition
It takes a certain amount of time to resolve a breach of contract dispute through the civil litigation process, and while the lawsuit is ongoing, there may be certain factual or legal changes (e.g., changes to the breaching party's asset holding or the object of the dispute being destroyed or disposed), in which case, even with the belated court judgement, the non-breaching party may not be able to obtain a satisfactory result. To prevent such outcome, the judicial system allows for provisional seizure and provisional disposition to preserve the status quo before the judgment is rendered, by freezing the other party's assets, preserving the object of dispute or temporarily forming a provisional legal relationship.
In case what is being sought is a monetary payment (or obligation convertible to a monetary amount), it is possible to apply for provisional seizure to freeze the other party's assets and temporarily take away the right to dispose them. Provisional seizure can be levied on various assets held by the other party, including real estate, ships, automobiles, bonds and tangible properties.
In case what is being sought is an object or right (rather than monetary payment), it is possible to apply for provisional disposition to maintain the status quo with regard to the disputed object or right, specifically prohibiting the obligor's disposition of possession thereof.
If leaving the status quo unattended between the parties until the judgment would make it difficult for the obligee to obtain the objectives for the lawsuit (e.g., the obligee would suffer substantial damage or imminent risk), it is possible to apply for a provisional disposition to obtain a temporary status with regard to the right or legal relationship.
Once the Korean court receives the applications for provisional seizure or disposition, the court handles them expeditiously. The burden of proof with regard to existence of right is not as high as in the lawsuit on the merits, easing the burden for the applicants. Court hearings are not required, and in many cases the court expeditiously rules on the application on the provisional seizure or disposition based solely on the documentary review. Once the court rules on the application, if a party files an objection, a simplified trial will be held to determine the validity of the objection.
When trying to recover from the other party's breach of contract, to ensure the effectiveness of the compulsory execution after the judgment, it is advisable to consider applying for provisional seizure or disposition in advance. Further, careful consideration is required in respect of the type of preservation measure that should be taken.
The Korean judicial system is advanced both in terms of substantive and procedural law and is well organised to allow recovery of damages. Further, efforts are being continuously made to amend the laws and improve the system to be in line with changes and developments in the society.
The same is true for the interpretation of the law. Although the claims section of the Civil Act has not been amended, academic theories and court precedents have evolved to reflect the changes over times. One example is allowing contract termination based on change of circumstances. There have been continuous debates on whether to allow termination on the grounds that the circumstances underlying the contract formation have substantially changed by the time of contract performance, and most previous precedents were hesitant to allow termination based on change of circumstances; however, the Supreme Court recently upheld a plaintiff's claim to terminate a lease agreement and to return the lease deposit, based on a change of circumstances.18 This is recognised as the first publicly published precedent that allows contract termination by applying the principle of changed circumstances.
The Korean judicial system is expected to continue its advancement in line with societal changes and developments.
1 Beomsu Kim is a managing partner, Neung Kyu Lee, Hae Jin Lim and Ki Seong Park are partners and Jessika Kim is a foreign attoney at KL Partners.
3 Meanwhile, contingent fee arrangements are prohibited for criminal cases.
4 Supreme Court Case No. 2005Da74344, rendered on 31 May 2007.
5 Article 107(1) of the Civil Act.
6 Article 108(1) of the Civil Act.
7 Article 137 of the Civil Act.
8 Article 109(1) of the Civil Act.
9 Article 110 of the Civil Act.
10 Article 390 of the Civil Act.
11 Article 110(2) of the Civil Act.
12 Article 110(3) of the Civil Act.
13 Article 406 of the Civil Act.
14 Article 544 of the Civil Act.
15 Article 546 of the Civil Act.
16 Article 548 of the Civil Act.
17 Article 390 of the Civil Act.
18 Supreme Court Case No. 2020Da254846, rendered on 10 December 2020.