In a case where Company A entered into a product supply contract with Company B to manufacture and supply chemical disinfection equipment with Company B, and then sought compensation for damages, such as cost of developing prototypes, against Company B and its representative director, even if the aforementioned disinfection equipment was developed and supplied to Company B, the case holding that Company B cannot be deemed as liable for the payment of cost of creating prototypes, on the grounds that Company B’s delivery of products with performance generally required under the generally accepted social norms was continuously brought about, or that Company B cannot be deemed as having ordered the manufacture of prototypes under the contract, and it cannot be deemed that Company B, etc. was liable for the payment of cost of creating prototypes, in view of the fact that Company B continuously brought about the quality of prototypes.

A Co., Ltd. entered into a product supply contract with Eul Co., Ltd. to manufacture and supply chemical disinfection equipment, and then developed and deliver the prototype to Eul Co., Ltd., the aforementioned disinfection equipment sought compensation for damages, such as cost of developing prototypes, even if Eul Co., Ltd. supplied the prototype to Eul Co., Ltd.

The case holding that in light of the fact that the above contract is made to satisfy the demand of Eul company, since it constitutes a production supply contract for the ancillary goods to meet the demand of a specific ordering person, and that the above contract provides that the product development expenses shall be included in the product supply price, and that Eul company shall be paid for the product development expenses only when the chemical disinfection equipment is supplied to Eul company and the product is able to receive the price of supplied goods, and that Eul continuously raises a problem about the quality of the product, the main structure of the chemical disinfection equipment is manufactured as agreed, and it cannot be recognized that Gap company delivered Eul company with the performance generally required by social norms, or that Eul company ordered both products after the manufacture of the product. Thus, it cannot be viewed that Eul company cannot be viewed that it was liable for the payment of the cost of the product development on the premise that the product can be supplied normally after the completion of the work as stipulated in the contract.

Articles 64 and 665 of the Civil Act

C. S. S. S. S. T. S. E.S. (former trade name: C. S.C.)

Rowon Co., Ltd. and one other

Seoul Central District Court Decision 2017Gahap510596 Decided January 19, 2018

August 22, 2018

1. The plaintiff's appeal against the defendants is dismissed in entirety.

2. The costs of appeal shall be borne by the Plaintiff.

The judgment of the first instance is revoked. The Defendants jointly and severally pay to the Plaintiff 136,204,240 won with 6% interest per annum from January 25, 2016 to the service date of a duplicate of the complaint of this case, and 15% interest per annum from the next day to the day of full payment.

1. Basic facts

(a) Status of the party concerned (Evidence A 1-1);

The Plaintiff is a company established on May 14, 2015 for the purpose of conducting research, development, manufacturing, etc. of instruments, equipment, etc. of cold and hot water purifiers, and Defendant Lowon Co., Ltd. (hereinafter “Defendant Co., Ltd.”) is a company incorporated on January 21, 2013 for the purpose of conducting the manufacture, sale, etc. of chemical air conditioners, and Defendant 2 was a representative director of the Defendant Co., Ltd. from February 3, 2015 to May 31, 2016.

(b) Conclusion of a contract for supply of products (certificate No. 1);

On August 31, 2015, the Plaintiff entered into a product supply contract between the Defendant Company and the Plaintiff, which the Plaintiff would produce and supply the chemical disinfection equipment (hereinafter “instant contract”) (hereinafter “instant contract”), and the main contents are as follows.

(2) The purpose of this Agreement is to clarify the scope of duties and responsibilities to be performed by each owner in the manufacture and supply of chemical products (hereinafter referred to as “products”) contained in the main sentence of Article 1. The purpose of this Agreement is to contribute to mutual development through cooperation. ① The specifications of this product are to be manufactured by the Plaintiff after obtaining prior consent from the Defendant Company. ② The Plaintiff shall indicate the trademark of the Defendant Company on the products and their packaging, and the forms and methods shall not be determined by the Defendant Company. Furthermore, the Plaintiff shall not use matters concerning the production of each product entered into with the Plaintiff for purposes other than the implementation of this Agreement. ③ This provision shall not apply to cases where the production is delayed or interfere with production by reason of the Plaintiff’s fault. ② The alteration of the terms and conditions of the Agreement between the Defendant Company and the Defendant Company’s supply of the products by type (hereinafter referred to as “individual contract”) shall be determined by the agreement between the Plaintiff Company and the Defendant Company by the end of the third month period. The alteration of the terms and conditions of the Agreement between the Plaintiff and the Defendant Company’s supply of the products.

(c) The progress of a criminal case (a evidence No. 1-3)

1) On May 2016, the Plaintiff filed a complaint against Nonparty 1 and Defendant 2 against the violation of the Unfair Competition Prevention and Trade Secret Protection Act (hereinafter “Unfair Competition Prevention Act”) by asserting that Nonparty 1 and Defendant 2 had no capacity to pay development costs for, and place production order for, the food disinfection equipment, by deceiving the Plaintiff, and provided various designs, design drawings, and trade secrets developed by the Plaintiff to a third party without permission.

2) On July 17, 2016, the prosecutor of the Seoul Eastern District Prosecutors’ Office (Seoul East District Prosecutors’ Office) found that the prosecutor was not in compliance with the disposition of non-prosecution by Nonparty 1 and Defendant 2 as punishment No. 28397 on July 17, 2016, and the Plaintiff’s inside director Nonparty 2 filed an application for adjudication with Seoul High Court No. 2010, Seoul High Court, but the said court dismissed the said application for adjudication on December 5, 2016.

2. Summary of the plaintiff's assertion

The Defendants are jointly and severally liable to pay to the Plaintiff the total of KRW 136,204,240,000, which the Plaintiff did not incur while preparing for the development and production of the prototypes of the chemical type disinfection equipment (hereinafter referred to as “markets”), and the total of KRW 101,204,240,000, and damages for delay therefrom, for the following reasons.

A. Liability under the instant contract

At the time of the conclusion of the instant contract, the Defendants agreed to pay the Plaintiff a prototype development cost, and the Plaintiff developed the prototype in accordance with the orders of Nonparty 3 dispatched from the Defendant Company to provide technical support, and obtained approval from the Defendant Company and supplied the Defendant Company with the Defendant Company on January 25, 2016. As such, the Defendants are obliged to pay the Plaintiff the cost of developing the prototype in accordance with the instant contract.

(b) Liability for damages caused by tort;

The Defendants concluded the instant contract by deceiving the Plaintiff without any intention to pay development costs, etc. of the prototype from the beginning and without any clear market for the equipment disinfection apparatus, and had the Plaintiff spend the cost of developing the product and installing the production equipment. Furthermore, the Defendants supplied the design drawings, design drawings, etc. submitted by the Plaintiff to the Defendant Company to a third party without permission, and thereby manufactured the product similar to the Plaintiff’s prototype, thereby infringing the Plaintiff’s copyright and trade secret.

Therefore, the Defendants are liable for damages incurred by the Plaintiff due to such tort.

3. Determination

A. Whether the obligation to pay development costs under the instant contract exists

1) Relevant legal principles

The so-called production supply contract under which one of the parties agrees to supply goods made of his own use of his own materials according to the order of the other party and the other party agrees to pay the price for the manufacture. Since the nature of the contract is of the nature of the sale and the nature of the transaction in terms of the supply, the applicable law applies to the sale and purchase of the goods which should be made and supplied under the contract, but if the goods are the substitute goods for the purpose of meeting the demand of the specific orderer, the supply of the goods and the manufacture are made with the nature of the contract.

In addition, unless there is a special agreement or custom between the parties on the date of payment of remuneration in a production supply contract, the contractor shall pay remuneration to the contractor simultaneously with the delivery of the completed object. In principle, the delivery of the object does not mean a simple transfer of possession of the completed object, but it includes the delivery of the object by the contractor to the extent that the contractor explicitly or implicitly expresses that the object has been completed according to the contents of the contract after the inspection

Meanwhile, in the contract for work, the burden of assertion and proof on the completion of work is against the contractor who requests the payment of remuneration for the result of work, and in order to complete the date of the contract for the supply of the product, the fact that the contract for the supply of the product ends once the last stage of the original scheduled work is insufficient, and the main structure of the product must be constructed as agreed and have the performance generally required by social norms. Thus, the contractor who requests the payment of remuneration for the production of the product must assert and prove not only that the last process stipulated in the contract for the production of the product ends, but also that the main structure of the product is constructed as agreed upon and has the performance generally required by social norms (see Supreme Court Decision 2004Da21862, Oct. 13, 206, etc.).

2) Facts of recognition

A) On October 26, 2015, in the course of the Plaintiff’s development of a prototype pursuant to the instant contract, Nonparty 1 sent to Nonparty 4’s employee Nonparty 1 a message stating that “The amount of dust and the noise of the earth and sand outing will be determined as a problem as a result of the climatic in the instant contract.” On November 2, 2015, Nonparty 4 exchanged Nonparty 1 and Nonparty 4 on December 2, 2015 the Plaintiff’s opinion on the development of climatic products by ordering luminous and general type 2 cases upon the completion of the internal test.”

B) However, around December 29, 2015, the Defendant Company sent to the Plaintiff a document stating that it is impossible to place an order as a result of the decline in the value of the product due to the lack of the target value and soil outflow and cost increase, etc. (Evidence 5) and the Defendant Company supplied prototypes from the Plaintiff around January 25, 2016, pointed out the noise problem of trial products (the testimony by Nonparty 4 of the first instance trial witness).

3) Specific review

A) The nature of the instant contract

In light of the above facts, according to the contract of this case, the plaintiff is to produce and supply the chemical disinfection equipment in accordance with the order of the defendant company and to receive the price, and the chemical disinfection equipment is produced to meet the demand of the defendant company. Thus, the contract of this case constitutes a contract for the supply of production of ancillary articles to meet the demand of a specific client, and thus has the nature of the contract of this case.

In addition, according to Article 4 (3) of the contract of this case, the plaintiff may claim development costs to the defendant company including the product supply price. Accordingly, the plaintiff's development costs will be paid when the equipment is supplied to the defendant company and the price of supplied goods can be paid.

B) Whether the Defendants are obligated to pay development costs

First of all, the above facts alone are insufficient to recognize that the main structure of the fire-fighting disinfection apparatus produced by the Plaintiff was manufactured as agreed, and accordingly, the Plaintiff delivered the product with the performance generally required by social norms to the Defendant company, and there is no other evidence to acknowledge this otherwise.

Rather, as seen earlier, the Defendant Company: (a) sent Nonparty 1, in the process of developing prototypes, to Nonparty 4, on November 11, 2015, the message stating that “the number of the articles to be disinfected, ......... the general type of food, 10, and 12 luminous.” However, considering that the Defendant Company continuously raised issues regarding the quality of prototypes (Evidence A No. 2), the message was merely delivered in the process of developing prototypes, and thus, it cannot be deemed that the Defendant Company approved that the prototypes were manufactured under the instant contract and ordered the Plaintiff to the products for mass production.

Therefore, under the premise that the Plaintiff can normally supply the fire-fighting disinfection equipment upon completion of the work as prescribed by the instant contract, the Defendants cannot be deemed to bear the obligation to pay trial products development costs.

B. Existence of liability for damages caused by a tort

1) First, there is no evidence to acknowledge that the Defendants, in the absence of the intent of the Defendants to pay development costs of prototypes from the beginning, deceiving the Plaintiff as if there was a market for a burner disinfection machine, and caused the Plaintiff to disburse development costs of prototypes. Therefore, the Plaintiff’s assertion premised on this premise is without merit without further consideration as to the remainder of the issue.

2) In addition, from September 2015 to October 2010 of the same year, the Plaintiff paid KRW 4.95 million for the process of developing a prototype under the instant contract and received the design and design drawings, respectively, under the name of the design development cost and design cost, and the design and design drawings are recognized as having been delivered to the Defendant Company (Evidence 1-1), but there is no evidence to acknowledge that the Defendants supplied them to a third party without permission, and based on this, sold products identical or similar to the Plaintiff’s prototypes. Thus, the Plaintiff’s assertion of copyright infringement or trade secret infringement on the premise thereof is without merit without any need to further examine the remainder.

4. Conclusion

Thus, all of the plaintiff's claims against the defendants should be dismissed as it is without merit. The judgment of the court of first instance is just in conclusion, and the plaintiff's appeal against the defendants is dismissed as it is without merit.

Judges Lee Jae-hee (Presiding Judge)