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

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.

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.

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 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.

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.