Case Analysis / Legal Updates

Trust Agreement | Judgment Recognizing the Trust Company's Liability for Damages Arising from Failure to Perform a Responsible Completion Undertaking

This is a case in which the court recognized the trust company's liability for damages for its failure to perform responsible completion under a trust agreement. The judgment showed that a responsible completion undertaking may be recognized as an enforceable monetary liability for compensation.

1. The Matter Arising Within the Trust Agreement Structure

The Matter Arising Within the Trust Agreement Structure

An overview of the matter arising within the trust agreement structure is set out below.

This matter began in a project financing (PF) loan structure for the construction of a new logistics center in Pyeongtaek, Gyeonggi Province.

In 2022, the PF borrower raised KRW 30 billion from a lender group composed of 23 financial institutions and entered into a managed land trust agreement, with the project site as the trust property, with the defendant, S Asset Trust.

That trust agreement had a responsible completion undertaking structure, under which, if the contractor failed to complete construction within 16 months, the trust company would bear the responsibility to complete construction within 22 months from the date of the loan disbursement.

The contractor, however, failed to complete construction within the deadline, and the defendant trust company also failed to complete the work by the responsible completion deadline set for March 20, 2024.

As a result, the forward purchase agreement, which had been concluded for KRW 36 billion, was rescinded, and the lender group became unable to recover the principal and interest on the PF loan.

The lender group accordingly claimed damages against the trust company on the ground of its failure to perform the responsible completion undertaking.

2. The Trust Agreement Damages Case, the Court's Determination

In the damages case relating to the trust agreement, the court rendered a judgment for the plaintiffs, ordering full compensation of KRW 25.6 billion in loan principal and interest together with default interest thereon.

Issue 1. Recognition of the Validity of the Damages Clause Within the Trust Agreement

The central issue was whether the damages clause set out in the 🔗trust agreement and related documents was valid as a 'predetermined amount of damages' under the Civil Act.

The defendant argued that 'an amount equivalent to the loan principal, interest, and default interest' merely referred to the scope of damages, but the court recognized this as an amount of damages agreed in advance.

The court noted that the same wording was consistently repeated in the special terms of the trust agreement, the provisions of the loan agreement, and the responsible completion undertaking, among other documents.

It determined that, even where no specific amount was stated, an amount of loss fixed in a form that could be calculated without dispute may be regarded as a predetermined amount of compensation.

The court found that this interpretation was also consistent with the substance of the transaction, in which, given the PF project structure, the lender group extended the loan in reliance on the credit and financial structure of the trust company under the responsible completion undertaking.

Issue 2. Whether the Trust Agreement Violated the Financial Investment Services and Capital Markets Act

The defendant, S Asset Trust, argued that the damages clause under the responsible completion undertaking violated the prohibition on loss compensation under the Financial Investment Services and Capital Markets Act.

The court determined, however, that there was no illegality, holding that the priority beneficiary right held by the lender group in this matter was not a financial investment instrument and that the damages under the responsible completion undertaking did not compensate for a loss of the trust property but rather constituted ordinary damages for the trust company's default.

This is a significant determination that clarifies that, in future trust agreements within PF structures, an attempt to avoid liability for damages by asserting a violation of the 🔗Financial Investment Services and Capital Markets Act is unlikely, in practice, to be accepted.

Issue 3. Whether the Predetermined Amount of Damages Under the Trust Agreement Should Be Reduced

The defendant trust company argued that the completion had merely been somewhat delayed, that the logistics center had in fact been completed, and that its appraised value exceeded the loan amount, and it requested a reduction of the predetermined amount of damages.

The court, however, rejected this on the following grounds.

▶The trust company is an operator that has repeatedly handled responsible completion undertaking-type managed land trusts and has received high-level fees under such agreements.
▶The lender group had a vulnerable structure that included many small, regionally based financial institutions, and it relied heavily on the undertaking wording in the agreement.
▶Owing to the defendant's nonperformance, the forward purchase agreement was rescinded, and the plaintiffs lost the very opportunity to recover the loan principal and interest in advance.
▶Even after paying the amount of damages under the trust agreement, the defendant may recover a substantial portion through the sale of the trust property.


The court ultimately held that “requiring the defendant to compensate the full amount of the loan principal, interest, and default interest in accordance with the predetermined amount of damages is consistent with the security purpose of the responsible completion undertaking and with transaction practice, and the plaintiffs bear no fault for the defendant's breach of its responsible completion obligation," and it did not accept the defendant's request for reduction.

The defendant trust company stated that, because the actual loss should take into account the value of the completed property in setting the amount of compensation, the impact of the litigation itself would not be significant; however, an appeal is likely thereafter, so the final scope of liability remains to be seen.

That said, the risk of contingent liabilities for trust companies is also expected to grow accordingly.

3. The Trust Agreement Damages Case, What Was Daeryun's Strategy?

This trust agreement judgment was a case that clearly showed that a trust agreement within a PF structure can function not as a mere management-function agreement but as a substantive security device under which actual monetary liability arises for the trust company.

In future, similar PF projects, a lender group should enter into agreements with the following points in mind.

▶State the wording relating to responsible completion consistently across all documents, including the trust agreement, the loan agreement, and the undertaking.
▶Clearly set out the manner of expression and the scope so that the predetermined amount of damages can serve as a valid standard in an actual dispute.
▶Prepare a multistage recovery plan in advance in case the loan recovery structure, such as a forward purchase agreement, collapses.

A trust company should likewise clearly recognize that a responsible completion undertaking is not a mere declaration but an enforceable obligation, and it should thoroughly analyze risk factors, such as the contractor's construction capacity and the possibility of delays in permits and approvals, before entering into an agreement.

PF, Why Legal Assistance from a Finance Attorney Is Advisable

PF is not a simple real estate contract but a field combining finance, real estate, and administrative regulation, which requires a high degree of expertise.

With the assistance of an attorney experienced in this area, and drawing on experience with numerous similar matters, parties should analyze and respond to risks across the entire project structure.

In particular, this past May, the Financial Supervisory Service announced that it would, within June, resolve half of the PF sites with low project feasibility.

The aim is to focus on the financial sector's role in supplying funds by promptly resolving distressed PF sites.

As of the end of last year, the outstanding loan balance of distressed PF sites reached approximately KRW 24 trillion.

Amid a situation in which there are not a few PF sites that have merely postponed their maturity dates due to the real estate market downturn, the scale of distressed PF is likely to increase despite continued resolution.

The 🔗attorneys handling corporate matters at Daeryun Law Firm LLP provide legal services including ▲drafting and reviewing contracts such as responsible completion undertakings, ▲advisory on the design of PF project structures, ▲risk assessment and due diligence for trust companies and lender groups, ▲representation in litigation and arbitration when disputes arise, and ▲regulatory response and permit and approval advisory relating to PF projects.

If you need basic advisory on project structure design or advisory on liquidation, you are welcome to request a consultation with our firm.

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