2016Da267067 Undue gains

Korea

Construction Financial Cooperative

[Defendant-Appellant] Plaintiff 1 and 2 others

Seoul High Court Decision 2016Na2045197 Decided October 25, 2016

July 8, 2021

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. A. Under a contract for construction works, the so-called advance payment that is received is paid to the contractor in advance so that the contractor may smoothly perform the construction work without any difficulty in securing materials and paying wages. Therefore, if the contractor returns advance payment to the contractor due to reasons such as cancellation or termination of the contract after the advance payment was made, it shall be appropriated for the unpaid amount of the contract amount up to the maturity without a separate offset declaration. The contractor bears the duty to pay the unpaid amount only if there are other construction costs (see, e.g., Supreme Court Decision 9Da5519, Dec. 7, 199). The contractor bears the duty of reasonable interpretation of the terms and conditions of the contract for construction works that may be appropriated for the advance payment under the empirical rule-based agreement between the parties to the contract (see, e.g., Supreme Court Decision 9Da5519, Dec. 20, 199). If the parties to the contract directly pay the advance payment to the subcontractor, it shall be excluded from the obligation to pay the advance payment.

B. The scope of liability of a guarantor who has entered into a guarantee agreement on the return of advance payment is determined by the agreement on the details of advance payment between the parties to the contract. In light of the general legal principles of guarantee and insurance, the existence and scope of the guarantor’s liability should be determined based on the agreement entered into under the contract at the time of entering into the advance payment guarantee agreement. As such, if the contractor agrees to pay the subcontract price directly to the subcontractor at the time of entering into the contract after entering into the contract for advance payment and the contractor’s liability is aggravated if the obligation of the guarantor is increased if the contract is agreed to exclude the contractor’s liability from the details of the advance payment that is the object of appropriation for advance payment (see, e.g., Supreme Court Decisions 2013Da9051, Feb. 27, 2014; 2014Da201179, Jul. 14, 2016).

2. According to the reasoning of the lower judgment and the record, the following facts are revealed.

A. On June 24, 201, the Plaintiff, as a contractor, included the terms and conditions of the construction contract, which is the contract rules of the Ministry of Strategy and Finance, in entering into a contract for the entire construction project with the Scar General Construction Co., Ltd. (hereinafter “Scar Construction”), as the contractor.

B. Article 43(1) of the General Conditions of the Construction Contract provides that "where a subcontractor has received a judgment against the other party to the contract and has a final and conclusive judgment ordering the payment of the subcontract price for the portion executed by the subcontractor, the other party to the contract becomes unable to pay the subcontract price to the subcontractor due to bankruptcy, dishonor, suspension of business, revocation of license, etc. (Article 43(1)1), where the other party to the contract becomes unable to pay the subcontract price to the subcontractor due to bankruptcy, bankruptcy, suspension of business, revocation of license, etc. (Article 44(5)2) or where the other party to the contract fails to submit a payment guarantee letter for the subcontractor pursuant to the provisions of the Fair Transactions in Subcontracting Act (Article 43(3)) or the Framework Act on the Construction Industry (Article 3) provides that "the other party to the contract shall be deemed to have requested the subcontractor for the payment of the price for the portion executed by the subcontractor under Articles 39 and 40 of the Framework Act on the Construction Industry, the other party to the contract may first pay the remainder of the subcontract amount payable by offsetting."

C. On February 23, 2012, the Plaintiff entered into a contract with the Defendant for the instant secondary construction (hereinafter “instant secondary contract”). On March 8, 2012, Scar Construction entered into an advance payment guarantee contract with the Defendant, and issued an advance payment guarantee to the Plaintiff. On March 12, 2012, the Plaintiff paid KRW 600 million to Scar Construction as advance payment for the instant secondary construction.

D. From October 31, 201 to June 4, 2012, Scar Construction concluded a subcontract with subcontractors, and the Plaintiff, Scar Construction, and subcontractors agreed to pay the subcontract price directly to the subcontractors pursuant to Article 14(1)2 of the Subcontract Act.

E. On October 18, 2012, Scar Construction discontinued all the instant secondary construction works, submitted a letter of waiver of construction works to the Plaintiff, and the Plaintiff terminated the instant secondary contract around that time.

3. Examining these facts in light of the aforementioned legal doctrine, the following determination is possible.

A. The Plaintiff and Scar Construction entered into an exceptional settlement agreement for appropriation of advance payment by including the proviso to Article 44(6) of the General Conditions of the Construction Contract in the instant secondary contract. The proviso to Article 44(6) of the General Conditions of the Construction Contract stipulates the grounds for direct payment of the subcontract price corresponding to exceptional settlement agreement based on the grounds prescribed in Article 43(1). However, Article 43(1) of the General Conditions of the Construction Contract stipulates the grounds for direct payment of the subcontract price under Article 14(1)2 of the Subcontract Act (hereinafter “direct payment agreement”).

However, the direct payment agreement is an agreement that represents the payment of the price to the contractor by the ordering person by directly paying the subcontract price to the subcontractor. If the direct payment agreement was reached under exceptional settlement agreement such as the proviso of Article 44(6) of the General Conditions of the Construction Contract, it is reasonable to view that such direct payment agreement includes an exceptional settlement agreement that excludes the payment of the subcontract price subject to the direct payment agreement from the details of the initial construction cost subject to an advance payment. In concluding the contract, it is difficult to deem that the ordering person and the contractor who expressed their intent to guarantee the payment by excluding the original construction cost subject to the advance payment, which is the object of the direct payment. In concluding the contract, it is difficult to deem that the ordering person and the contractor expressed their intent to cover the advance payment by directly paying the subcontract price under the direct payment agreement. Accordingly, even in this case, it is difficult to deem that the Plaintiff and the contractor agreed to appropriate the advance payment for the subcontract price under the direct payment agreement concluded between the ordering person and the subcontractor. Accordingly, the Plaintiff may not be deemed as having concluded an advance payment under the direct termination agreement.

B. If it can be deemed that an exceptional settlement agreement was concluded by direct payment as above, the scope of return of advance payment to the ordering person is increased since the subcontract price that was directly due to the reasons for the direct payment of the advance payment is excluded from the details of the advance payment to be appropriated for the advance payment. However, such increase in the scope of return of advance payment is not immediately applied under Articles 4(6) and 43(1) of the General Conditions of the Contract for Construction Works as originally agreed upon, but also arising from the legal effect of the separate agreement that is direct payment after the conclusion of the contract. In particular, the exceptional settlement agreement under the direct payment agreement increases the scope of return of advance payment and the scope of the guarantor’s liability for the advance payment solely with the agreement between the ordering person, contractor and the subcontractor except for the advance payment guarantor, and the subsequent agreement does not affect the interest of the guarantor. In addition, the surety’s guarantee agreement cannot be seen as an increase in the scope of return of advance payment under the direct payment agreement and thus, it is difficult for the Defendant to accept such advance payment terms and conditions.

C. Nevertheless, the lower court calculated the amount of advance payment to be paid by the Defendant on the basis of the amount settled after the Defendant’s advance payment guarantee agreement was concluded, on the premise that the exceptional settlement agreement on the subcontract price that the Plaintiff and Scar Construction and the subcontractor agreed to pay was also applicable to the Defendant, and the Defendant calculated the amount to be paid by the Defendant on the basis of the amount settled, excluding the details of the advance payment from the details of the subscription price appropriated as an advance payment. In so doing, the lower court erred by misapprehending the legal doctrine

4. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Cho Jae-chul et al.

Justices Min You-sook

Justices Lee Dong-won

Justices Yang Tae-sung