Whether a penalty penalty may be reduced by analogically applying Article 398(2) of the Civil Act to the estimate for damages (negative) and the validity of a penalty agreement excessively heavy compared to the interests of creditors who have obtained compulsory performance of their duties (=Partial or entire invalidation) / Method of restrictive interpretation of a penalty agreement

The agreement on the penalty for breach of contract is set to secure the performance of an obligation, and is different from the content of the scheduled compensation for damages, and thus, Article 398(2) of the Civil Act regarding the scheduled amount of damages cannot be reduced by analogy. However, if the agreed penalty is excessively excessive compared to the interests of creditors resulting from the compulsory performance of an obligation, the entire or part of the agreed penalty shall be null and void against the public order and good morals. However, when the area of private autonomy, such as the penalty agreement, is narrowly interpreted through the public order and good morals, it shall be very careful, such as comprehensively examining the details and contents of the contract.

Articles 103 and 398 of the Civil Act

Supreme Court Decision 2010Da56654 Decided December 23, 2010, Supreme Court Decision 2013Da63257 Decided December 26, 2013

Plaintiff 1 and two others (Law Firm Taedong, Attorneys Lee Dong-soo et al., Counsel for the plaintiff-appellant)

Defendant 1 and one other (Law Firm Barun, Attorneys Park Jae-sik et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2012Na3014 decided November 29, 2013

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Regarding ground of appeal No. 1

After compiling the adopted evidence, the lower court acknowledged the facts as indicated in its reasoning. Based on its stated reasoning, it rejected the Defendants’ assertion that the instant agreement and the instant agreement on the purchase and sale of shares, etc. (hereinafter “instant agreement, etc.”) were rescinded on or around December 2006, and determined that the instant agreement, etc. was lawfully rescinded on or around January 5, 2007 by the Plaintiffs’ notice of cancellation on December 15, 2006, which was based on the Defendants’ non-performance of contractual obligations.

In light of the records, the above judgment of the court below is just, and contrary to the allegations in the grounds of appeal, the court below did not err by exceeding the bounds of the free evaluation of evidence.

2. Regarding ground of appeal No. 2

A. Article 398(2) of the Civil Act regarding the determination of compensation for damages shall not be reduced by applying mutatis mutandis the determination of compensation for damages, as the content of the agreement is different from that of the determination of compensation for damages. However, if the penalty agreed upon by the compulsory performance of the obligation is excessively excessive compared to the interests of creditors arising from the compulsory performance of the obligation, it shall be null and void in light of the public order and good morals. Provided, That in the case of the limited interpretation of the area of private autonomy, such as the penalty agreement, through the public order and good morals, a contract shall be concluded in a very careful manner (see, e.g., Supreme Court Decisions 2010Da5654, Dec. 23, 2010; 2013Da63257, Dec. 26, 2013).

나. 원심은, 주식회사 이비티네트웍스(이하 ‘이비티’라고 한다)의 경영상 어려움에도 불구하고 동업자 사이의 의견 충돌로 아무런 결정을 할 수 없는 상황에서 신속하고도 확실하게 동업관계를 정리할 필요가 있었던 점, 당시 소외인과 피고 1 사이에 불신이 심하여 이 사건 합의 등의 이행을 확실하게 담보할 수단이 필요했던 점 등에 비추어 보면, 이 사건 합의에 따른 위약벌인 30억 원과 이 사건 주식매매 등 계약에 따른 위약벌인 116억 원은 공서양속에 반할 정도로 과도하게 무거운 것으로 보기 어렵다고 판단하였다.

C. However, the following circumstances revealed by the reasoning of the judgment below and the evidence duly admitted: ① penalty amounting to 14.6 billion won under the penalty agreement of this case is 30,000 shares of Cheongcheon C&C Co., Ltd. (hereinafter “Cheongcheon D&C”) and the amount equivalent to 5,345,640,000 shares of Cheongcheon C&C; and ② the price that the Defendants agreed to receive from the Defendants is 5.8 billion won as consideration; ② the Plaintiffs rescinded the agreement of this case on the ground of the Defendants’ nonperformance; ③ the Plaintiffs may not be able to compensate the Defendants for all damages incurred by the Defendants’ nonperformance of their obligations separately from the penalty of this case; ④ the Defendants’ agreement of this case was cancelled, in light of the circumstance and circumstances surrounding the conclusion of the agreement of this case with the Defendants, as well as the agreement of this case, to the extent that the Defendants violated the aforementioned agreement with Cheongcheon D&C Co., Ltd. (hereinafter “Cheongcheon D&C”), and the aforementioned agreement was concluded with the Defendants’ intent.

D. Nevertheless, the lower court determined that the instant penalty agreement was entirely effective solely on the grounds stated in its reasoning. In so doing, the lower court erred by misapprehending the legal doctrine on the validity, scope, and partial invalidation of the penalty agreement contrary to the public order and good morals, thereby failing to exhaust all necessary deliberations on the grounds of invalidation. The allegation contained in the grounds of appeal on this point is with merit.

3. Regarding ground of appeal No. 3

A. The lower court rejected the Defendants’ counterclaims premised on the validity of the instant joint management agreement on the premise that the instant joint management agreement was invalidated by the instant agreement after comprehensively taking account of the adopted evidence.

In light of the records, the above judgment of the court below is just, and there is no error in the incomplete hearing or omission of judgment as to whether the non-party's profit from the sale of shares with capital increase by issuing new stocks is realized.

B. Even if the joint management agreement of this case is valid, it is difficult to view that the non-party was processed by the resolution of the board of directors and the general meeting of shareholders of this non-party. The non-party did not have any evidence to acknowledge that the non-party acquired the management premium while transferring the right of this case’s management, and thus, it cannot be deemed that Defendant 1’s damage claim against the plaintiffs or the non-party exists, and thus, the court below rejected the set-off defense of the defendants.

Inasmuch as the lower court’s determination that the joint management agreement of this case was null and void as seen earlier is just, the propriety of the aforementioned assumptive and additional determination does not affect the conclusion of the judgment, and thus, the ground of appeal on this point cannot be accepted without further review.

4. Conclusion

Therefore, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kwon Soon-il (Presiding Justice)