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  • voluntary payment largely governed by trade practice
  • around 10% of the contract price
  • contract binding even without a deposit unless the trade practice suggests otherwise

1. Interpretation

  • evidence of the contract
  • reservation of the right to terminate at will: exercisable until a party begins to perform. Art. 565
  • the right to terminate at will becomes available only upon 'full' and actual payment of the agreed deposit amount (But the Supreme Court's jurisprudence is undergoing a change).
  • (Only when the parties expressly agree to treat it as liquidated damage) liquidated damage; cf. Art. 398
  • (Only when the parties explicitly agree to treat it as penalty) penalty: in such a case, proven damage may be recoverable separately

2. Cases

  • 92Da23209: In the absence of an explicit intent to treat the deposit as liquidated damage, the deposit may not be so treated: P paid 41 million KRW to D as contract deposit. D gave a blank check to P in case the deposit needs to be returned. A dispute arose and P alleged D's breach and attempted to cash the check to recover the deposit. D terminated the contract. P demanded return of the deposit. The court ruled that D may not keep the deposit. But D can claim damage to the extent the amount of D's loss can be proven.
  • Contract deposit shall 'normally' be interpreted as reserving the right to terminate at will before a party begins to perform. Art 565, 80Da2499
  • 72Da2243: the seller must actually tender double the amount of deposit if the contract is to be terminated. Verbal offer to tender the amount is not enough. Brewery was sold with 5 million KRW contract deposit. Seller purported to terminate the contract tendering 5.5 million KRW. It was held that the contract was not terminated.
  • 2004Da11599: A party may 'begin' the performance even before the agreed time. The due date is presumed to be for the benefit of the obligor, who may give it up. (Art. 153) If that happens, the deposit can no longer entitle a party to terminate the contract at will. After the sale contract for a plot of land was concluded, the height restriction affecting the area was lifted. Land price soared. Seller demanded the contract price to be increased. In response, buyer tendered the contract price earlier than the agreed date. The seller refused to accept the buyer's performance and purported to terminate the contract offering double the amount of deposit. Early performance held to be valid and that the contract may no longer be terminated at will.
  • However, once a party notifies the termination (even without the required full amount), the other party may not 'begin' to perform. In such a case, the 'early' performance is harmful to the obligee (Art. 153(2) proviso). The contract is terminated if and when the required amount of forfeiture (full amount of the agreed and paid deposit) is actually tendered.
    • 97Da9369 Land located in an area requiring permission for sale is sold with 220 million KRW contract deposit and a separate clause for 60.5 million liquidated damage payable by the seller in the event of failure to obtain permission to sell the land. Seller purported to terminate the contract, offering KRW280.5 million (220+60.5). Buyer disputed the validity of termination and purported to perform early (pay the balance). Seller refused to accept the payment. Buyer sued seller with a view to enforcing the sale contract. Seller subsequently terminated the contract tendering KRW440 million. Termination held to be valid when the correct amount was tendered. Buyer's lawsuit against seller shall not be viewed as 'beginning' of the performance. [Buyer unable to 'begin' performance while the permission to sell has not been granted? Contract becomes valid only upon the Minister's permission.]
  • 94Da17659: 'to begin' the performance ought to be distinguished from the tender of performance. (이행에 착수한다는 것은 객관적으로 외부에서 인식할 수 있는 정도로 채무의 이행행위의 일부를 행하거나 또는 이행을 하는데 필요한 전제행위를 하는 것을 말하는 것으로서 단순히 이행의 준비만으로는 부족하나, 반드시 계약내용에 들어 맞는 이행의 제공의 정도에 까지 이르러야 하는 것은 아니라 할 것) A house was sold with 0.3 million KRW deposit. Subsequently 2 million KRW was paid as a partial payment of purchase price and the seller delivered the possession. The parties agreed to treat 2.3 million as a 'new' contract deposit. The seller purported to terminate offering 4.6 million KRW. Termination invalid as both parties have already 'begun' to perform.
  • 2007Da73611: An 'agreement' to pay the deposit is not enough to entitle a party to terminate the contract at will. The right to terminate at will accrues only upon 'actual' payment of the 'full' amount of the deposit. Apartment was sold with 60 million KRW agreed as the deposit, of which 3 million was paid and 57 million KRW to be paid the following day. The following day, before the buyer pays the balance of the deposit, the seller purported to terminate the contract. Termination invalid. The seller may demand the payment of the balance of the deposit but may not terminate at will while the full amount of the deposit is not yet paid. If the balance of the deposit is not paid, the seller may terminate the deposit agreement and, if the sale contract would not have been concluded without full payment of the deposit, the sale contract itself may be terminated on the ground of the buyer's material breach of the contract.
  • 대법원 2015. 4. 23. 선고 2014다231378 판결: Agreed contract deposit was 110 million KRW, of which 10 million KRW was paid promptly and the balance was to be paid the following day. On the following day, however, seller purported to terminate the contract and closed the bank account so that buyer could not pay the balance of the agreed deposit.  Seller's termination was invalid. The court ruled, "Even if the contract can be terminated as asserted by the [seller], the amount which entitles the termination must be 'the agreed deposit amount', rather than 'the actually paid deposit amount'."
  • 지원림, 계약금 분할지급 약정의 효력 : 대상판결 : 대법원 2015. 4. 23. 선고 2014다231378 판결, 민사법학 2015-09 :85-113
  • 99Da48160: Apartment sale. Buyer did not have money available on the day of contract. An IOU was issued, instead of actual payment of contract deposit. It was agreed that in the event of a breach, double the amount of IOU shall be paid. Court held that this is a valid agreement for liquidated damage in the event of a party's breach. Buyer was held to be in 'breach' because buyer was trying to re-negotiate the terms and refused to honour the contract.

3. Contract provisionally void

  • 97Da9369: While the contract is provisionally void (due to the lack of approval for the sale of land which requires an approval), deposit may still be valid. See this.

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  • A separate contract
  • One or both parties may have the option to conclude the main contract.
  • Notice of the exercise of the option is sufficient to conclude the main contract. No separate acceptance is required. The discussion regarding the 'obligation to accept' is meaningless.

1. Duration of the option (absolute time limit)

  • Determined by the option contract. May not exceed 10 years from the date when the option arises if the parties did not stipulate the duration. The parties may freely agree upon a duration which is longer than 10 years.
    • 91Da44766 (28 July 1992): 10 years begins to run from the date the option contract was concluded. An option to purchase the land expires upon lapse of 10 years even if the land is delivered and has been in possession of the option holder. Absolute time limit absolutely expires. Unlike the statute of limitations, there cannot be any suspension, tolling or resetting the absolute time limit.
    • 94Da22682 (10 Nov. 1995) Parties agreed on 1 May 1980 that Plaintiff may have the option to purchase which is exercisable from 26 March 1985. Plaintiff excercised the option on 6 August 1992. Ruled: The option must be exercised before the end of 1 May 1990. Even if the parties agreed that the option may only be exercisable after a period, the option expires upon lapse of 10 years from the date the option came into existence (권리가 발생한 때) regardless of when the option became exercisable.
    • 97Da12488 (27 June 1997) ruled that the option to complete the accord and satisfaction in the event of the borrower's default would arise when the due date for the repayment has passed.
    • 99Da18725 (13 Oct 2010) Shops in a 'department store' were leased for 10 years. Parties agreed that lessees shall have an option to purchase the shops after 10 years or more of lease. Is this option valid? Lower court accepted that the lessees validly exercised the option to purchase. Supreme Court overturned the decision pointing out that the lower court should have examined whether the option was exercised within 10 years since it was created. The court must examine this question suo motu.
    • 2016다42077 (25 Jan 2017): parties explicitly agreed that the option shall be exercisable for 30 years. Supreme Court ruled that such an agreement is valid.
  • However, 2019Da271661 (14 July 2022) ruled that a put option in a contract arising from an investment (which was done as a commercial activity) shall expire in 5 years from the date the option was excercisable.
  • If the duration is not specified, the counterpart may propose a reasonable period within which the option must be exercised. Upon lapse of the period, the option expires. Art. 564(2)
  • If an option contract is used as a security, the security disappears in 10 years. If, however, the loan repayment date is more than 10 years in the future, how to interpret the parties' intent? Option does not 'arise' until the due date arrives. (97Da12488)

2. Multiple parties

  • Where several parties jointly hold an option, whether a party may separately exercise the option (in respect of his/her portion) must be determined by looking at the details of the option contract. 2010Da82530 overturning 83Daka2282 (which had ruled that the option must be jointly exercised without exception). Several buyers were to be co-owners upon exercise of the option. In the case, one buyer was allowed to exercise the option and acquire his portion of ownership. Each was treated as 'solely' holding the option for his/her portion of the ownership (thus, not a 'jointly held' option.)
  • But the principle is that jointly held option can only be exercised jointly because a person who does not want to exercise the option should not be forced to become bound by the main contract. The main contract as agreed by the option contract cannot be completed if the option is not jointly exercised. Whether to conclude the main contract with the 'willing' option holders is a matter of negotiating a new contract.
  • Where a jointly held option (to purchase real estate) is registered, the party seeking cancellation of the registration may bring a lawsuit against some (not all) of the joint holders of the option. 2000Da26425

3. Option contract to secure a debt

  • Art. 607 Option contract to convey title of an asset in the event a loan is not repaid. If the asset's value (at the time of the option contract) exceeds the principal and interest (until due date), the option contract is invalid (Art. 608). However, the contract may instead be interpreted as creating a 'security right' for the creditor (80Da998). See also 91Da11223 below.
  • Art. 607 inapplicable to option contract to secure a debt other than an obligation to repay a loan. 65Da1302, 68Da1468
  • Court is willing to interpret the main contract to convey the title as creating a 'security right' for the creditor. The creditor is thus required to return the surplus (in excess of the principal and interest) to the debtor.
  • 91Da11223. It was agreed that A shall convey the property worth 55 million KRW in satisfaction of an existing debt amounting to 42 million. It was also agreed that A shall have a buyback option within 3 years at a price equivalent to the principal and interest at the time of A's exercise of the buyback option. After the lapse of 3 years, A offered to repay the debt with interest and demanded the property back. Court interpreted the parties' agreement either i) as an agreement to provide a security for the repayment of debt (rather than an accord and satisfaction); or ii) as an "option contract to carry out accord and satisfaction" in the future when the debtor can no longer reclaim the property upon lapse of three years (rather than an accord and satisfaction with immediate effect). The court held that A can recover the property either because the agreement was merely a security agreement or because the option to complete the accord and satisfaction is invalid because the property at the time of the option contract is worth more than the amount of debt (principal plus aggregate interest at the time three years have completed). B shall be required to return the property to A when A offers the principal and interest (even after the expriry of 3 year buyback option).

4. Registration of an option

  • Applicable to an option to effect conveyance of real estate (as accord and satisfaction of an existing debt)
  • Act Regarding Registration of Option to Secure Debts 1983
  • Creditor must give a "two month" notice of settlement to the debtor after the repayment date. The notice must set out (Art. 3 of the 1983 Act):
    • the credit amount (including the amount of secured credit owed to other creditors who have priority)
    • the valuation amount of the property
    • the balance (if any)
  • Secured creditors having an inferior claim must also be notified. They may demand auction of the property before the balance (if any) is paid out to the debtor or before the expiry of the 2 month-settlement period (when there is no balance to be paid to the debtor). Art. 12(2) of the 1983 Act
  • Debtor or the guarantor/owner of the property may repay the debt before receiving the "correct amount" of the balance (i.e., the creditor's calculation of the balance may be challenged). Until the settlement amount which is calculated in a justifiable manner is paid to the debtor/collateral provider, the debtor/collateral provider may resist the conveyancing and resist the transfer of possession" and that "the debtor/collateral provider is entitled to receive the justifiably assessed settlement amount".  See 96Da6974 (30 July 1996) and 2005Da36618 (11 April 2008), for example. The debtor may tender the full repayment of the debt and the interest and demand cancellation of the registered option(94Da3087) or the title transfer (if the title transfer had already taken place at the time of loan) shall be cancelled. In the latter case, the right of recovery must be excercised before the lapse of 10 years from the repayment date and before the property is conveyed to a third party in good faith. Art. 11 of 1983 Act.
  • Special rules for a forfeited pledge agreement: as long as the method of disposal was compliant with the contract, unjustness of the price is not a ground to invalidate the disposal. 2018Da304007

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Transfer of 'proprietary right' (Art. 563)

  • title and possession need to be transferred (warranty against eviction)
  • compare Art. 563 and Art. 568. Transfer of title alone will not be sufficient.
  • 2000Da8533: If the property is subject to attachment, the seller must have it cancelled so that the buyer is not in danger of being evicted from the property.
  • 87Daka1029: The buyer may withhold the payment of the amount secured by hypothec until the hypothec is cancelled.

Seller's obligation to maintain and preserve the thing sold until delivery (Art 374)

  • Buyer's mora creditoris and seller's reduced duty of care (Art 401)
  • Fruit from the thing sold, interest on purchase price (Art 587): Unless the parties agreed otherwise, as long as the purchaser has not paid the price seller may keep the fruit even when he is in delay of performance (just as the purchaser need not pay delay interest even while it is in delay of performance - as long as the seller has not delivered the thing sold).
  • As long as the purchaser has not fully paid, the seller need not pay damage for delayed delivery (because the seller is entitled to keep the fruit/benefit of using the thing until is it delivered or until the purchaser fully pays the purchase price. 대법원 2004. 4. 23. 선고 2004다8210 판결
  • Once purchaser fully pays the price, the seller may not keep the fruits (they must be handed over to the purchaser), and the seller must pay damage for delayed delivery. 2004다8210

(Art 587 of KCC; 96Da14190): “even where the purchaser is in delay for the payment of the purchase price (because the seller 'tendered' the delivery), the purchaser need not pay interest on the purchase price until the thing sold is delivered."

  • Increased costs for the safekeep of the thing sold due to the buyer's mora creditoris: Does Art 403 apply to sale contract?

80Da211 (Even when the Purchaser is in breach of its own obligation, Seller still has the duty to maintain and preserve the thing sold until delivery anyway. Art 374.)

  • Whether the seller may claim payment of purchase price even where the thing sold can no longer be delivered? (Art 538 stipulates, yes, if the seller's impossibility was caused by the buyer)
  • 2010Da11323 (where the obligor sold off the property to a third party and therefore is no longer in a position to transfer the property to the obligee)
  • A group of companies were sold to an investor. But the investor asserted that the seller committed a breach of warranty and refused to close. Past the agreed closing date, the seller sold one of the company to a third party (in order to reduce the financing costs for holding those companies).
  • A company was sold to an investor. A portion of the seller's shares were pledged to a lender. On the day of closing the purchaser agreed to repay the debt and the seller agreed to deliver the unburdened shares. The company was subsequently sued by a third party for patent infringement. The buyer asserted that the seller committed a breach of warranty and refused to close. The seller could not repay the debt and the lender exercised the pledge and sold the seller's pledged shares to a third party. The buyer terminates the contract on the ground of the seller's impossibility of performance.

Buyer's obligation to take delivery?

Seller's obligation to transfer title of a 'specific' property

Seller's liability in respect of defect of a 'specific' property

Sale by Description

Breach of warranty v. Breach of contract

Exclusion of warranty

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문제는 여기

박명리의 채무 상환을 연대 보증한 이시중은 두나은행과의 관계에서 채무자라는 점은 의문이 없다. 그러나, 두나은행은 박명리에게 대출한 5억원 중 3억5천만원에 대하여는 박명리의 4억원 상당의 부동산에 설정받은 제1번 근저당권으로 담보되어 있으므로, 그 한도에서는 채권자 취소권을 두나은행에게 인정할 필요는 없다(박명리와의 관계에서건 이시중과의 관계에서건). 따라서 나머지 1억5천만원에 대한 채권자 취소권을 두나은행이 이시중의 재산처분 행위에 대하여 행사할 수 있는지 여부가 문제된다.

채무자(이시중)가 자신의 유일한 부동산을 대물변제로 어느 채권자에게 제공하는 행위는 나머지 채권자들을 해하는 행위(채권자 평등을 깨므로)라는 것이 대법원의 입장이다. 따라서 이시중의 대물변제는 저글(주)와의 관계에서 유리/불리 했는지를 따질 필요 없이 나머지 채권자에 대한 사해행위로 평가될 여지가 있다. 두나은행은 저글(주)를 상대로 사해행위 취소 소송을 제기하여 문제의 거래를 1억5천만원 한도에서 취소하고, 가액의 반환을 저글(주)로부터 구하는 동시에 이 액수를 이시중을 대위하여 수령함으로써 사실상 우선 변제를 받을 수 있을 것이다.

채권자가 보증인의 사해행위를 취소하지 않았다고 해서 주채무자가 이를 문제삼을 여지는 없다. 심지어 채권자가 보증인의 채무를 면제해 주더라도 주채무자는 자신의 채무 전액에 대하여 채권자에게 상환해야 한다. 따라서 박명리의 주장은 터무니 없다.

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1. Providing additional security

  • Creditor may agree to have additional debtors, who will jointly and severally be liable to perform the identical obligation.
  • If, however, it is against the wish of the original debtor, a third party who has no interest to protect may not undertake to perform. Art. 453(2)
  • Performance by a third party who has no interest to protect will extinguish the original debtor's obligation only when it is not against the wish of the original debtor. Art. 469(2)

2. Replacing the debtor (novatio)

  • Replacement of the debtor may not be done without the creditor's consent. Art 453(1), Art 454.
  • Once the creditor has given the consent, the replacement becomes irrevocable. Art 456.
  • Security, surety and guarantees of a third party securing the original debtor's obligation shall extinguish unless providers of such security agree otherwise (agree to the replacement of the debtor). Art 459
  • Security which was provided by the original debtor shall not extinguish. 96Da27476

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1. Assignability of a contractual claim

  • In principle, claims are assignable
  • By nature, some claims are unassignable: claims from employment contract, mandate
  • By statute, some claims are unassignable: child support claims, pension claims, accident compensation claims, wage 87Daka2803 (assignable, but not claimable?)
  • By agreement, the parties may agree not to assign a contractual claim (however, assignees in good faith are protected) 99Da67482

2. Assignment notice

  • Assignment notice must be given by the assigner to the debtor
  • Once the notice is given, it may not be revoked without the consent of the assignee, Art. 452(2)
  • Once the notice is given, the debtor's payment in good faith to the assignee will discharge the claim (even if the assignment was somehow ineffectual), Art. 452(1)
  • Acquiescence by the debtor:
    • If the debtor acknowledges the assignment, assignment notice is unnecessary (provided that there is no other assignee)
    • If the debtor acknowledges the assignment in an unqualified manner, the debtor may not subsequently refuse to perform on the grounds which existed at the time of the unqualified acquiescence.

3. Priority among assignees and competing claimants

  • competing claimants: several assignees of an identical claim; an assignee and a pledgee; an assignee and attachment creditor(s)
  • the priority among competing claimants shall be determined by the priority of the date certified notice of assignment. Art 450(2), 93Da24223
  • 71Da2048 (when none of the assignees could produce a date certified notice)

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1. Authority to conclude a contract on behalf of another person

  • to carry out a transaction in the name of the principal
  • to attribute the legal effect of the transaction to the principal

2. Creation of authority

  • By law or by appointment of the court
    • parent, guardian, husband and wife
    • court-appointed manager of an absentee, court-appointed receiver
  • By contract (mandate, employment, partnership, etc. Art. 709: presumption of agency)
    • mandate may be terminated at any moment
    • termination of a mandate does not have retroactive effect on transactions entered into before the mandate is terminated
    • agent may resign at any moment
    • cf. Art. 689
    • death of the principal or the agent (exc. commercial contracts, legal representative, emergency, Art. 691)

3. Ostensible authority

  • Art. 125
    • Principal's representation to the counterpart
    • handing over the documents showing the power of attorney to the 'agent' may also qualify as principal's representation (indirect representation) to the counterpart. 2000Da2566 (principal told the creditor that he would be the guarantor; but later realised that the debt was too much and told the debtor that he cannot be the guarantor; the debtor, however, acted as the 'agent' of the principal to conclude the guaranty contract using the principal's seal certificate and other documents)
    • principal will be bound by the transaction of the 'agent' as long as it falls within the 'represented' power
    • If the principal does not wish to be bound by the transaction, the burden of proof lies with the principal to show the counterpart's knowledge (of the lack of power of attorney) or negligence
  • Art. 126
    • When agent's transaction falls outside his power of attorney
    • the 'power of attorney' for this purpose would include the 'ostensible power of attorney' as well; 69Da2149 (former agent overstepping his power)
    • power of attorney created by law (parent, guardian, lawful wife and husband, etc.) would also provide a basis for this purpose. 81Da524 (mistress purporting to represent her lover in borrowing money and offering security)
    • If the counterpart wishes to compel the principal to perform, the burden of proof lies with the counterpart to show that there was "justifiable ground" to believe that the transaction was within the agent's power of attorney.
    • 98Da18988 (Daehan Guarantee Insurance; wife purporting to represent husband to guarantee her brother's debt)
  • Art. 129
    • Where the power of attorney has expired, the principal may be bound by the agent's transaction which was made after the expiry.
    • If the principal does not wish to be bound, the burden of proof lies with the principal to show the counterpart's knowledge (of the expiry of the power of attorney) or negligence.
    • 97Da55317 (Land Development Corp; KEB, who was the agent, appointed sub-agent after the death of the principal)

4. Liabilities of an "agent" who cannot prove power of attorney (Art. 135)

  • Where the principal denies the validity of the transaction on the ground of a lack of power of attorney, the counterpart may:
    • seek to compel the principal's performance on the ground of the ostensible authority under Arts. 125, 126 and 129
    • sue the 'agent' under Art. 135
  • the 'agent' may be compelled to perform the contract instead of the principal (in this case, the 'agent' may, while not a party to the contract, avail himself of the contractual rights as if a party to the contract), or
  • the 'agent' may be asked to pay damages (performance measure)
  • the 'agent' may avoid liabilities by showing
    • that the counterpart should have known that the 'agent' had no power of attorney, or
    • the 'agent' was not of full capacity, or
    • the agent had the power of attorney

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1. Action oblique (creditor's derivative action)

  • A creditor may exercise debtor's rights, if the debtor does not diligently pursue them and if their exercise is necessary to ensure satisfaction of the creditor's claim. Art 404
  • Art. 1166 of French Civil Code: Les créanciers peuvent exercer tous les droits et actions de leur débiteur, à l'exception de ceux qui sont exclusivement attachés à la personne.

When?

  • The debtor must be "insolvent", or,
  • the creditor's claim must be closely connected to the debtor's right which is to be exercised by the creditor.
  • un-assignable rights of the debtor are not to be exercised by the creditor

Features

  • The creditor may not exercise rights which the debtor himself cannot exercise
  • The creditor may exercise the debtor's rights against the wishes of the debtor.
  • If, however, the debtor already exercises his rights, the creditor may not intervene.
  • The creditor's right must exist and become due. (however, see Art 404(2))
  • 67Da2440(If the chain of real estate transaction collapses, the buyer at the end of the chain may claim damage from the seller at the beginning of the chain, on behalf of intervening parties), 83Gahap4501(Assignee of the claim for key money may bring an eviction suit against the tenant), 79Da1928(Purchaser of unregistered building may bring an eviction suit against squatters on behalf of the building owner)
  • Res judicata, 74Da1664 (if debtor knew about the suit between his creditor and his debtor, the debtor shall be bound by the judgment of that suit.)
  • Negotiorum gestio, Art 743 ff.

2. Setting aside collusive dispositions

  • Transactions entered into by the debtor
    • after the creditor acquired the claim
    • which renders the debtor insolvent
    • (if the debtor is already insolvent) prefers only one or a few of the creditors above the others
    • any transfer or abandonment of rights to property and includes a sale, lease, mortgage, pledge, delivery, payment, release, compromise, donation or any contract therefor, but does not include a disposition in compliance with an order of the court
  • debtor's intent to prejudice creditors must be proven; however, the intent will be inferred once the objective nature of the transaction is demonstrated. 97Da57320
  • the beneficiary is presumed to have the knowledge of the prejudicial nature of the transaction; but this is rebuttable presumption: the beneficiary of the debtor's disposition may resist the creditor's attempt to have the transaction set aside by demonstrating his good faith.
  • if the beneficiary knowingly transfers the goods to a third party in good faith, the beneficiary will be required to disgorge the benefit (the transaction between the debtor and the beneficiary will be set aside).
  • The creditor must bring a lawsuit against the beneficiary or the third party who, with the knowledge that it would prejudice creditors, received the goods from the beneficiary.
  • The lawsuit must be brought within a year from the date the creditor had the knowledge of the impeachable disposition (or, in any case, within 5 years from the transaction). Art. 406(2)
  • 99Da2515(Registering the option will be regarded as impeachable disposition)

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1. 'Difference' theory

Damages should correspond to the difference between the economic position in which the aggrieved party finds himself as a result of a breach (infringement) and the economic position in which the party would have been absent the breach (infringement).

2. 'Performance' measure v. Reliance measure

  • The amount of damage aims to put the aggrieved party, as far as practicable, in a position where he would have been in if the contract had been duly performed (‘performance’ measure).
  • 91Da33070 (conveyance effected by forged documents); cf. tort measure of damage
  • Where contract is terminated on the ground of the other party's breach, performance measure of damage is normally claimable. But the plaintiff may instead elect to claim reliance measure of damage (이행이익을 초과하지 않는 범위 내에서 "신뢰이익" 배상을 선택하는 것도 가능). 대법원 2002. 6. 11 선고 2002다2539 판결, 대법원 2003. 10. 23 선고 2001다75295 판결 (The costs incurred in reliance of the contract are claimable.  The costs which are usually incurred for the purpose of concluding the contract and readying oneself for the performance of the contract are claimable regardless of whether the other party knew about such costs.  Any costs over and above the usual costs are claimable only to the extent foreseeable by the other party. However, the amount claimable under the reliance measure of damage may not be more than the performance measure of damage.)

3. Damages must be real and measurable

  • Hypothetical possibilities not to be compensated.
  • Reasonable degree of certainty is enough: 2001Da22833
  • However, difficulty of assessment is no bar to an award of damages
  • 2000Da5817, 2004Da48508 (The court may determine the quantum “on the basis of the totality of all relevant facts emerged from the proofs and pleadings”)
  • Chaplin v. Hicks [1911] 2 K.B. 786 (a candidate in a beauty competition was, in breach of contract, not allowed to compete in a later stage of the competition)

4. Loss which must be compensated

  • causation: deals with "what loss" must be compensated
  • ordinary loss/special loss: deals with "how much" of the loss must be compensated
  • ordinary loss, Art 393(1):
    • the loss which would obviously arise in the ordinary course of things viewed from an objective standpoint.
    • the defendant may not plead that the loss was not foreseeable for him (for it was objectively foreseeable)
    • 2004Gahap9444 (dairy cow meat)
    • 95Da11344 (a lorry hitting an electricity pole, causing the power cut which lasted for more than 12 hours. Farmers sustained loss from the frosting of flowers which were being grown in the nearby green houses. Held, the loss was not foreseeable.)
    • damnum emergens + lucrum cessans
    • Art. 51(2) of Sale of Goods Act 1979 of UK (Damages for non-delivery) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract.
    • Art. 53(2) of Sale of Goods Act 1979 of UK (Damages for breach of warranty) The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty.
  • special loss, Art 393(2):
    • the loss which occurred because of the special circumstances
    • Special loss needs to be compensated only when it was foreseeable (at the time of the contract (Art 74 of CISG)? or at the time of the breach?)
    • 84Daka1532 (Daewoo)
    • 91Da29972 (cotton T-shirts)
    • Art. 54(1) of Sale of Goods Act 1979 of UK: Nothing in this Act affects the right of the buyer or the seller to recover interest or special damages in any case where by law interest or special damages may be recoverable, or to recover money paid where the consideration for the payment of it has failed.

5. 'Reference date' for damage assessment

  • General principle: at the close of hearing (변론종결 시점) 지원림 1115면.
  • However, special rules apply:
    • Buyer's loss in the event of repudiation/impossibility of the seller's performance: loss assessed at the time of the breach. Subsequent increase of the market price can only be a "special loss" (claimable only when foreseeable by the seller), subsequent decrease of the market value is irrelevant (because it is not the buyer's property, therefore buyer has no reason to bear the loss from the downward fluctuation) 94Da61359, 2005Da63337
    • Where the buyer claims damages in lieu of performance against the seller who is in delay, the damage calculation must be done as of the time when the seller fails to comply with the buyer’s demand for performance within a reasonably extended deadline. This is the moment when the buyer definitively gives up the claim for the performance and seeks damages in lieu of performance. 66Da1842
  • Seller's loss in the event of buyer's repudiation:
    • If the seller terminated the contract and subsequently sold the thing to a third party at a lower price (assuming that it is not 'unusually low'): the difference between the two prices plus interest between the original due date and the date on which the lower price was received (2004Da3543).
    • If the seller terminated the contract but did not sell the thing: the difference between the contract price and the market value of the thing at the close of hearing (because that is the "economic benefit which remains with the seller in the case of termination").
    • If the seller terminated and subsequently sold the thing at a higher price than the economic benefit the seller would have obtained if the original contract had been properly performed on time by both parties (contract price+interest from the original due date), then no loss. Hence no damage.
    • If the seller terminated and chose to retain the thing: the difference between the "economic benefit the seller would have obtained if the original contract had been properly performed" (original contract price plus interest from the original due date) and the market value of the thing at the close of hearing. If the price drop in the meantime was unforeseeable by the buyer, seller may not claim. The seller may not disregard the appreciation of the market value in the meantime (whether foreseen or unforeseen by the buyer). Benefit does not need to be foreseeable. It is only the loss which needs to be foreseeable if the compensation is to be ordered.
    • If the seller does not terminate the contract in spite of the buyer's repudiation, then the seller shall be entitled only to a delay damage (if the thing sold was already delivered) plus specific performance. Seller cannot normally claim delay interest on the purchase price if the seller does not surrender possession of the thing sold and enjoys the possession of the thing sold.

6. Liquidated damages, Art. 398(1)

  • Agreement as to the amount of loss, in advance of a breach
  • Actual amount of loss is irrelevant. No need to prove, nor is it possible to disprove the amount of loss.
  • Excessive amount of liquidated damages would justify court's intervention
  • The court can, even if the party does not claim a reduction, reduce the amount of damage.  대법원 2009. 2. 26 선고 2007다19051 판결
  • Penalty v. liquidated damages
  • In common law, penalty clause is invalid

7. Comparative negligence, duty to mitigate

comparative negligence: Articles 396, 763

'duty to mitigate' 2003Da22912

신의칙 또는 손해부담의 공평이라는 손해배상제도의 이념에 비추어 볼 때, 불법행위의 피해자에게는 그로 인한 손해의 확대를 방지하거나 감경하기 위하여 노력하여야 할 일반적인 의무가 있으며 피해자가 합리적인 이유 없이 손해경감조치의무를 이행하지 않을 경우에는 법원이 그 손해배상액을 정함에 있어 민법 제763조, 제396조를 유추적용하여 그 손해확대에 기여한 피해자의 의무불이행의 점을 참작할 수 있고, 한편 손해의 확대를 방지하거나 경감하는데 적절한 법적 조치가 존재하는 경우 이는 손해경감조치에 해당될 수 있고, 피해자가 그 법적 조치를 취함에 있어 감당하기 어려운 많은 비용이 소요된다든가, 그 결과가 불확실하다거나, 판단을 받기까지 현저하게 많은 시간이 필요하다는 등의 사정이 없음에도 불구하고 합리적인 이유 없이 그 법적 조치를 취하지 아니한 경우에는 그 손해확대에 기여한 피해자의 의무불이행의 점을 손해배상액을 정함에 있어 참작할 수 있다.

Keechang Kim, "Measure of Damages under Korean Contract Law", 2 Asian Business Lawyer (2008)

Damage v Cost or expenses: 99Da9646

Art 74, CISG

Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.

FIDIC Standard Conditions of Contract (for Construction, EPC/Turnkey Projects, Plant and Design Build) template clause:

Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract...

Croudace Construction Ltd v Cawoods Concrete Products Ltd [1978] 2 Lloyd's Rep. 55 at 62. (‘consequential’ does not cover any loss which directly and naturally results in the ordinary course of events from late delivery)

Ferryways NV v Associated British Ports [2008] 1 C.L.C. 117 at 138

Koufos v C. Czarnikow Ltd. [1969] 1 A.C. 350 at 385 (Sugar price falling, delivery of sugar delayed for 9 or 10 days. Loss of profit must be compensated. Forseeable loss = directly and naturally caused loss?): "The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract [...]"

김기창, “결과적 손해 또는 간접적 손해”에 대한 면책 조항의 해석- 영국 법원의 계약 해석 사례 및 시사점 - 비교사법, 제28권 제2호(2021)

 

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1. Art 389 (Compulsory performance, as a default remedy)

  • If an obligation is not voluntarily performed, the claimant can ask the court to compel performance unless the nature of the obligation does not permit compulsory performance.
  • Compelling the performance is the primary remedy for a breach of contract. (Cf. In tort, monetary damages is the default remedy.)
  • Compulsory sale of debtor's assets, delivery of movables or immovables by bailiffs
  • Application to have performance done by a substitute (the costs to be reimbursed by the promisor). Art. 389(3)

2. Prohibitory Injunction (restraining order)

  • if Defendant has breached a contractual obligation to refrain from engaging in a certain activity and Plaintiff proves that the Defendant is likely to engage in that activity in the future, the court may grant a permanent injunction restraining the Defendant from engaging in the activity in the future.
  • 93Da40614 ('milk war' case)
    • Tort remedy.
    • "Apology" cannot be compelled. Such an order is unconstitutional (89헌마160).
    • Where the likehood of repeat occurrence is proven, the court may issue prohibitory injunction together with a penalty in the event the injunction is not complied with.
  • No injunction may be sought whether as an interim remedy or as an ultimate remedy with regard to ‘preparation for a breach’ or ‘likelihood of a (first time) breach’.

3. 'Personal' performance

  • If the nature of the act does not permit performance by a substitute
  • Compulsory performance not available if it is against public policy to compel the act
  • The court may order a payment of penalty, calculated usually on daily basis until the act is performed. The court who decides the substantive entitlement is also capable of ordering payment of penalty (i.e., enforcement order) in the event of the non-compliance. 2020Da248124
  • 99Ma6107: a corporation was ordered by the court to admit the claimants into its premises during normal office hours for 20 days excluding public holidays and to provide certain documents so that the claimants can inspect and photocopy them. The order came with a daily penalty payable for the period of non-compliance.
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