Whether a penalty for breach of contract may be reduced by analogical application of Article 398(2) of the Civil Act on the estimate of damages (negative) and, in cases where the agreed penalty is excessively excessive compared to the creditor’s interest obtained by coercion of obligation, whether a part or whole of the penalty agreement becomes null and void against public order and good morals (affirmative) / Matters to be considered when determining whether the penalty agreement is contrary to public order and good morals

Since an agreement on penalty for breach of contract is determined to secure the performance of an obligation and is different from the scheduled amount of compensation, the amount may not be reduced by analogical application of Article 398(2) of the Civil Act regarding the scheduled amount of compensation for breach of contract. However, if the agreed penalty is excessively excessive compared to the interests of creditors who forced the obligation, all or part of the agreed penalty would be null and void against the public order and good morals.

However, the court’s intervention in the specific contents of the contract and invalidation of the whole or part of the agreement on the ground that the amount of penalty for breach of contract agreed by the parties is excessive may be a serious limitation on the principle of private autonomy, and may result in protecting the parties who intend to deviate from the binding force of the contract by failing to implement the agreement voluntarily. Therefore, it should be avoided as much as possible.

From this point of view, when determining whether a penalty clause goes against the public order and good morals, prudence should be taken into account such factors as the status of a party, such as whether a party was to enter into a contract by taking advantage of the exclusive status or superior status, the details and details of the contract, motive and background leading up to the contract formation agreement, the process of breach of contract, etc. In short, it should not be readily determined as null and void solely on the ground that the amount of penalty is large.

Articles 103 and 398 of the Civil Act

Supreme Court Decision 2013Da63257 Decided December 26, 2013 (Gong2016Sang, 116) Supreme Court Decision 2014Da14511 Decided December 10, 2015

Hanyang Technology Corporation (Law Firm Woo, Attorneys Dog-won et al., Counsel for the defendant-appellant)

C. C.C. (Law Firm K.S., Attorneys Lee Jae-hwan et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2014Na2044909 decided September 17, 2015

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

The court below rejected the defendant's assertion that the business agreement of this case between the plaintiff and the defendant, the loan agreement between the defendant and the financial institution, the joint trust agreement between the joint company and the joint trust agreement between the defendant is concluded in order to achieve the common purpose of the project of this case, and thus the business agreement of this case shall be deemed a contract under the condition of suspension which is the condition of the execution of the above loan agreement and the trust agreement of this case. The above loan agreement of this case was null and void because it was not a prior condition of the loan, and the trust agreement of this case is confirmed to be null and void as the trust registration of the real estate of this case is not completed and the condition of suspension is not fulfilled as the trust registration is not fulfilled.

In light of the relevant legal principles and records, the lower court did not err by misapprehending the legal doctrine on the legal nature and interpretation of the instant agreement, as otherwise alleged in the grounds of appeal.

2. Regarding ground of appeal No. 2

Article 5(3) of the Business Agreement provides that “If this contract is terminated or terminated due to any cause attributable to the other party, the party who has violated the contract shall pay 500 million won to the other party a penalty in addition to the compensation for damages.”

In accordance with the instant business agreement, the lower court determined that, inasmuch as the Defendant secured the ownership of the entire real estate of this case for the implementation of the instant business and performed the cancellation and removal of the legal and physical matters, and specifically, the Defendant was obligated to prepare funds to cancel the instant real estate by performing all the prior terms and conditions set forth in the loan agreement with financial institutions, and thus, was not able to implement the instant loan by waiver of the loan itself without performing the prior terms and conditions of the loan execution, and the execution of the instant business was entirely nonexistent, and thus, the instant business agreement was legally rescinded by the Plaintiff’s declaration of intent to cancel the contract on the ground that the Defendant’s above reasons attributable to the foregoing, and thus, the Defendant was liable to pay penalty against

In light of the relevant legal principles and records, the lower court did not err by misapprehending the legal doctrine regarding the interpretation of a penalty agreement, or by failing to exhaust all necessary deliberations, contrary to what is alleged in the grounds of appeal.

3. As to the third ground for appeal

A. Since an agreement on the penalty for breach of contract is determined to secure the performance of an obligation, and is different from the scheduled amount of damages, the amount may not be reduced by analogical application of Article 398(2) of the Civil Act regarding the scheduled amount of damages by analogy. However, the position of precedents where the penalty agreed in comparison with the interests of creditors arising from the enforcement of the obligation is excessively excessive, such an agreement is deemed null and void in whole or in part contrary to public order and morality.

However, the court’s intervention in the specific contents of the contract and invalidation of the whole or part of the agreement on the ground that the amount of penalty for breach of contract agreed by the parties is excessive may be a serious limitation on the principle of private autonomy, and may result in protecting the parties who intend to deviate from the binding force of the contract by failing to implement the agreement on their own. Therefore, it should be avoided as much as possible.

From this perspective, in determining whether a penalty clause goes against the public order and good morals, caution should be taken into account, such as whether one of the parties was concluded by taking advantage of his/her exclusive status or superior status, such as the status of the party, the details and details of the conclusion of the contract, the motive and background leading up to the conclusion of the penalty agreement, the process of breach of the contract, etc., and the sole reason that the amount of the penalty is large, is not to be determined as null and void solely on the sole ground that the penalty amount is large (see Supreme Court Decision 2013Da63257, Dec. 26, 2013).

B. The lower court rejected the Defendant’s assertion that the penalty is wholly or partially null and void against public order and good morals, on the ground that it excessively imposes a penalty of KRW 500 million on the Defendant. ① In entering into the instant business agreement, it cannot be deemed that the Plaintiff was in a superior position to compel the Defendant to pay the penalty provisions, ② the penalty provisions are equally prescribed on the terms and conditions, not only the penalty against the Plaintiff, but also on the same terms and conditions. ③ The real estate of this case is anticipated to have a significant increase in its development value at least 9 billion won. If the instant business agreement was not rescinded, the Plaintiff would have been able to obtain considerable profits from the design, supervision, and construction supply and demand for construction on the ground of the instant real estate as the contractor even after the conclusion of the instant business agreement (Article 3 of the instant business agreement). ④ In light of the fact that the Plaintiff’s claim for damages for reasons attributable to the Plaintiff, other than the instant agreement, could not be seen as being attributable to the Plaintiff and the Plaintiff’s claim for damages for reasons attributable to the Plaintiff.

C. The above determination by the court below is in accordance with the legal principles as seen earlier, and contrary to the allegations in the grounds of appeal, there were no errors by misapprehending the legal principles on the validity of the penalty agreement

4. Conclusion

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Yong-deok (Presiding Justice)