[1] The legal nature of the joint supply and demand for construction works where the joint supply and demand is made by organizing a joint supply and demand organization by means of a joint supply and demand organization (=the Civil Code), / In a case where a member of the joint supply and demand organization fails to perform his/her obligation of investment, whether the joint supply and demand organization may refuse to distribute profit per se or deduct the contribution or interest from the amount of profit distribution (negative in principle)

[2] Whether a special agreement is permissible between the members of a joint venture to directly connect an investment obligation and a distribution of profit (affirmative) / In a case where a member of a joint venture agrees to receive a distribution of profit only when he/she has performed the investment obligation first, to reduce the amount of profit distribution according to the degree of non-performance of the investment obligation, or where a member of the joint venture agrees to deduct the amount of profit distribution from the amount of profit distribution in case where he/she delays the investment, whether the joint venture may refuse a distribution of profit or deduct the amount of investment from the amount of profit distribution under the Civil Act (affirmative)

[3] In a case where the authenticity of a disposal document is recognized, regardless of whether a disposal document, such as a joint supply and demand agreement, prepared by the members of a joint supply and demand contractor, is offset or the expression of intent of offset, the unpaid amount of investment, etc., can be deducted from the amount of profit distribution and the authenticity of the disposal document

[4] In a case where a special contract was concluded to deduct the unpaid amount from the profit distribution fund prior to the commencement of rehabilitation procedures for a partner who failed to perform an investment obligation, whether the legal effect of the mutual aid is generated (affirmative in principle)

[1] In principle, where the parties form a joint supply and demand organization and receive construction from a contractor, the joint supply and demand organization constitutes a partnership under the Civil Act. Members of the joint supply and demand organization have the obligation to contribute to the joint supply and demand organization while the joint supply and demand organization has the right to claim a distribution of profit from the joint supply and demand organization. Therefore, even if the members of the joint supply and demand organization fail to perform their obligation to contribute, the joint supply and demand organization may not refuse a distribution of profit on the ground of the failure to perform its obligation to contribute, and the amount of contribution or overdue interest shall not be automatically deducted from the amount of profit distribution to be paid to the members. However, if the claim for profit distribution against the members of the joint supply and demand organization offsets the amount of the two claims, the amount of

[2] A special agreement between the members of a joint venture that directly connects the investment obligation and the distribution of profits is permissible under the principle of freedom of contract. Therefore, only when the members first performed the investment obligation, the members may agree to receive the distribution of profit, or to reduce all or part of the amount of profit distribution according to the degree of non-performance of the investment obligation. Furthermore, in a case where a member who has agreed to contribute money delays the investment, the joint venture may enter into an agreement to deduct the amount of contribution and the interest accrued therefrom from the amount of profit distribution to be paid by the members of the joint venture. If such agreement is concluded, the joint venture may deduct the amount of contribution and the interest accrued from the amount of profit distribution to be paid to the members who have refused to

Unless otherwise agreed, such “deduction” is possible regardless of whether both parties’ claims are set-off or not, and does not require separate declaration of intention. In this respect, it is distinguishable from set-off (Article 493(1) of the Civil Act) in which creditors holding claims on set-off are obliged to express their intent separately. Of course, even in the case of set-off, a special agreement can be concluded that if both parties’ obligations are set-off on a set-off basis, they shall be set-off without a separate declaration of intent. However, in principle, if there is a mutual-aid agreement,

[3] In a case where the authenticity of the disposal document is recognized, barring special circumstances, it shall be deemed that there was an agreement for deduction in accordance with the language and text stated in the disposal document, unless there are special circumstances, where the joint supply and demand agreement between the members of a joint supply and demand organization states that the disposal document, such as a joint supply and demand agreement, can automatically deduct the unpaid amount of contribution

[4] Even if rehabilitation procedures commenced for a partner who failed to perform an investment obligation, if a special agreement was made to deduct the unpaid amount of contribution from the amount of profit distribution prior to the commencement of rehabilitation procedures, it does not affect the legal effect of the mutual aid, barring any special circumstance.

[1] Articles 492, 493, 703, 705, and 711 of the Civil Act / [2] Articles 105, 492(1), 493(1), 703, 705, and 711 of the Civil Act / [3] Articles 105, 492(1), 493(1), 703, 705, and 711 of the Civil Act; Article 202 of the Civil Procedure Act / [4] Articles 105, 703, 705, and 711 of the Civil Act; Articles 144(1), and 145 subparag. 1 of the Debtor Rehabilitation and Bankruptcy Act

[1] Supreme Court Decision 99Da49620 Decided December 12, 200 (Gong2001Sang, 276) Supreme Court en banc Decision 2009Da105406 Decided May 17, 2012 (Gong2012Ha, 1057) / [2] Supreme Court Decision 2005Da16959 Decided August 25, 2006 (Gong2006Ha, 1610) / [3] Supreme Court Decision 2004Da67264, 67271 Decided May 13, 2005 (Gong205Sang, 947)

The administrator, representative director, and the administrator of the EEX Construction Corporation, a lawsuit taken place by Nonparty 1, Nonparty 2, the administrator of the EEX Construction Corporation, a lawsuit taken place by Nonparty 2 (Law Firm SEEX, Attorneys Lee E-sik et al., Counsel for the plaintiff-appellant)

Hyundai Construction Co., Ltd. (Law Firm Subdivision, Attorneys Kim Ji-hyung et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2014Na52355 decided October 27, 2015

All appeals are dismissed. The costs of appeal are assessed against each party.

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

1. Relationship between the obligation of members of a joint contractors to contribute and the right to claim distribution of profits;

In principle, where the parties form a joint venture with the method of joint performance and receive construction from a contractor, the joint venture shall be a partnership under the Civil Act (see, e.g., Supreme Court Decisions 9Da49620, Dec. 12, 2000; 2009Da105406, May 17, 2012). Members of a joint subcontractor have the obligation to contribute to the joint venture, while the joint venture has the right to claim a distribution of profits, the right to claim a distribution of profits and the obligation to contribute are separate rights and obligations. Therefore, even if the members of the joint venture fail to perform their obligation to contribute, the joint venture may not refuse the distribution of profits per se due to the failure to perform their obligation to contribute, and the contribution or overdue interest shall not be deducted from the distribution of profits to be paid to them. However, if the members of the joint venture with the obligation to contribute to the joint venture with the payment of contributions and the obligation to pay to them are set off on an equal amount of claims in accordance with the Civil Act on set-off.

Meanwhile, inasmuch as the principle of freedom of contract applies to a partnership agreement, the parties may determine the content of the partnership agreement according to free will. If there exists an agreement to regulate internal legal relations between the parties, the parties’ rights and obligations among them shall, in principle, be determined in accordance with such agreement (see Supreme Court Decision 2014Da111574, 11581, Jan. 12, 2017). In the context of a joint venture agreement, “a special agreement to directly connect an investment obligation and distribution of profits” between the members of a joint venture agreement is permissible under the principle of freedom of contract. Therefore, an agreement may be concluded to allow distribution of profits only when the members first performed an investment obligation, or to reduce all or part of the amount of profit distribution depending on the degree of non-performance of an investment obligation. Furthermore, where a partner who has made a decision to contribute money delays, a joint venture may enter into an agreement to “deduction” out of the amount of profit distribution to which the members are entitled to receive an investment obligation under such special agreement, or deduct profits and overdue interests from the members (see Supreme Court Decision 20096Da.

Unless otherwise agreed, such “deduction” is possible regardless of whether both parties’ claims are set-off or not, and does not require separate declaration of intention. In this respect, it is distinguishable from set-off (Article 493(1) of the Civil Act) in which creditors holding claims on set-off are obliged to express their intent separately. Of course, even in the case of set-off, a special agreement can be concluded that if both parties’ obligations are set-off on a set-off basis, they shall be set-off without a separate declaration of intent. However, in principle, if there is a mutual-aid agreement,

In the event that a joint supply and demand agreement between the members of a joint supply and demand organization states that a disposal document, such as a joint supply and demand agreement, can automatically deduct the unpaid contribution, etc. from the amount of profit distribution, regardless of whether it is offset or the declaration of intent of offset, and the authenticity of the disposal document is recognized, it shall be deemed that there was an agreement of deduction in accordance with the language stated in the disposal document, unless there are special circumstances (see Supreme Court Decision 2004Da67264, 67271, May 13, 2005, etc.

In addition, even if rehabilitation procedures commenced for a member who failed to perform an investment obligation, if a special agreement was made to deduct the unpaid amount from the amount of profit distribution before the commencement of rehabilitation procedures, it does not affect the legal effect of the mutual aid, unless there are special circumstances.

2. Judgment on the Plaintiff’s grounds of appeal

A. According to the reasoning of the lower judgment, the following facts are revealed.

(1) On May 10, 2010, the Defendant organized a joint supply and demand company with 11 companies, including KCC Construction and New East Asia Construction Co., Ltd., and participated in the said joint supply and demand company by succeeding to the said joint supply and demand company on August 10, 2010, the Busan High International Financial Center Complex Development Project Co., Ltd. (hereinafter referred to as the “Nonindustrial Complex Construction Project”). The Plaintiff (hereinafter referred to as the “Plaintiff”) was awarded a contract for KRW 18,896,90,000 from the Busan High Financial Center Complex Development Project.

(2) As to the operation of the above joint supply and demand organization, the agreement between the joint supply and demand organization provides that “if a member of the joint supply and demand organization delays the payment of joint contributions, the Defendant shall deduct the unpaid contributions from the progress payment to be paid to the member, the Defendant shall deduct the unpaid contributions from the portion of the joint supply and demand organization.”

B. According to the above facts and the various circumstances recognized by the lower judgment, 11 companies, including the Plaintiff and the Defendant, constitute a joint supply and demand organization under the Civil Act as a joint supply and demand organization in the form of joint performance, and its members agree to deduct the unpaid contributions from the progress payment to be paid by the Defendant to its members in the event that they are liable to pay joint contributions in accordance with the joint supply and demand operation agreement, and delay. The Plaintiff’s obligation to contribute to the Defendant constitutes an investment obligation and the Plaintiff’s obligation to pay the unpaid contributions to the Defendant constitutes the Plaintiff’s claim for distribution of profits. However, according to the agreement that the Defendant

The judgment of the court below to the same purport is justifiable in light of the aforementioned legal principles, and contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal principles on misconception of facts or mutual aid concerning a special agreement that directly connects the performance of an investment obligation and the distribution of profits, and by misapprehending the legal principles on Article 144(1) and Article 145

3. Judgment on the Defendant’s grounds of appeal

A. According to the reasoning of the lower judgment, the following facts are revealed.

(1) On December 31, 2010, the Defendant concluded a joint supply and demand agreement with the Plaintiff, Kook Construction Co., Ltd., and Hanyangyang Co., Ltd. for the joint performance method, and received contracts from the 356,480,080,00 won for construction work for the lease of degree course facilities in the Daegu Special Metropolitan City Co., Ltd. (hereinafter “Tgu Construction”) on December 31, 2010.

(2) The special terms and conditions of a contract for construction works made between the ordering authority and the joint contractor for construction works (hereinafter referred to as “the contract for construction works in Daegu”) shall be prescribed in the main sentence of Article 2(1) of the Act as follows: “In making payment for consideration, etc., a project operator shall require the representative of the joint contractor to submit a written application classified by members of the joint contractor.” Article 2(2) of the Act as follows: “ Upon receipt of a request under paragraph (1), a project operator shall pay to the Defendant the full amount of the application by members of the joint contractor, and the Defendant shall pay it to each member of the joint contractor within 10 days. Provided, That if it is deemed that there is any obstacle to the execution of the construction works in this case, such as default, bankruptcy, corporate rehabilitation, or delay in payment of the project cost, the project operator shall pay directly to the Defendant

(3) In addition, a standard form of joint supply and demand agreement made between the joint supply and demand contractors with respect to the operation of the said joint supply and demand organization (hereinafter referred to as “Tgu Construction Agreement”) shall specify the members’ percentage of investment in Article 9, and shall be determined to be distributed or shared in accordance with the ratio set forth in Article 9 if any of the following profits

(4) Meanwhile, in the event of an application for commencement of rehabilitation procedures for a member of the Daegu Joint Supply and Demand Company, a contractor shall be exempted from liability if he pays the progress payment to the defendant who is the representative, only an agreement is made to distribute the profits or losses according to the ratio of investment, and there is no agreement to link the distribution of profits among the members of the Joint Supply and Demand Company with the performance of the obligation

(5)In the case that each joint contractor does not pay the funds that the representative contractor has executed or claimed in advance for the performance of the Project, the representative shall deduct the outstanding amount of the construction cost and the interest for delay received in advance from the ordering entity, and shall deposit and process only the remaining amount to the joint contractor, and the joint consignee shall agree thereto after deducting the outstanding amount of the construction cost and the interest for delay received in advance from the ordering entity.” (Article 8(b) of the Joint Supply Operation Agreement, including the content, is written, but the above draft was not effective.

B. In addition to these facts, in light of the circumstances revealed in the reasoning of the lower judgment, the Defendant, as the representative of a joint contractor for Daegu Construction, is obligated to pay the payment for each joint contractor upon receipt of the payment for the completed portion from the contractor, and it is not allowed to deduct the unpaid contributions or contributions from the payment for the completed portion. In the case of Daegu Construction, there is no agreement to deduct the unpaid contributions or contributions from the payment for the completed portion, unlike the Busan Construction in the foregoing 2th day. Therefore, the Defendant may only offset the Plaintiff’s contributions or contributions only when the Plaintiff’s claim for the completed portion is set-off, and may not deny the payment of the payment for the completed portion itself on the ground that he did not perform the investment,

The judgment of the court below to the same purport is justifiable in light of the above legal principles, and contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal principles regarding the interpretation of Article 2(2) of the Special Conditions of the Construction Contract and the meaning of the draft of the Operating Agreement, or by failing to exhaust sufficient deliberation.

4. Conclusion

The grounds of appeal by the Plaintiff and the Defendant are without merit, and all costs of appeal are assessed against each party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Chang-suk (Presiding Justice)