On July 14, 2016, the Supreme Court reversed the lower
court's decision in the lawsuit brought by a consortium of
investors led by Hanwha Chemical Corporation (such consortium,
"Hanwha") against the Korea Development Bank
("KDB") and the Korea Asset Management Corporation
("KAMCO," and together with KDB, the
In its lawsuit, Hanwha sought the return of the performance
guarantee deposit, which it delivered in connection with its
attempted acquisition of DSME Co., Ltd. (the "Deposit").
Hanwha argued that despite the relevant agreement expressly
providing that the Deposit constitutes a penalty in case of a
breach of the agreement, the Deposit constitutes a liquidated
damage in case of a breach of the agreement.
The Supreme Court's decision in this case is deemed
exceptional, because despite the contractual language providing
that the Deposit constitutes a penalty, the Supreme Court ruled
that it constitutes liquidated damage, and accordingly, reduced the
amount of such liquidated damage.
Details of the Decision – Long-standing Principles, Key
Facts, Court's Discretionary Power:
In its decision, the Supreme Court reaffirmed the long-standing
In determining whether certain down payment or performance
guarantee deposit payable under an agreement and subject to
forfeiture in case of a breach is deemed a penalty, or whether
liquidated damage should be made, a court will take into account
the intent of the parties and the totality of the facts and
In case such down payment or performance guarantee deposit is
forfeited upon a breach of the agreement, it is presumed that the
forfeited amount constitutes liquidated damages rather than
penalties. For such amount to be deemed a penalty, exceptional
facts and circumstances are required to be shown.
Applying the principles above to this case, the Supreme Court
held that the following facts indicate that the parties intended
for the Deposit to be a means to enforce the execution of a
definitive agreement, and cover all monetary compensation that may
arise in the future. Thus, the Court reasoned, the Deposit should
be deemed liquidated damage.
Key facts include:
The memorandum of understanding between the parties (the
"MOU") provides that all monetary damages should be
covered and addressed through the forfeiture of the Deposit;
During the negotiation:
Hanwha was not able to fully understand the risk of executing a
definitive agreement without confirmatory due diligence;
Hanwha was not in a position to object to the performance
guarantee deposit provision.
While a court cannot reduce the amount of penalties unless the
imposition of such penalties is against public order and good
morals, a court may – in its discretion – reduce the
amount of unreasonably excessive liquidated damage.
Here, the Supreme Court reasoned that the amount of the
Sellers' damages arising from the termination of the MOU should
be limited to losses arising from the Sellers' reliance on the
execution of the MOU. Therefore, the Court ruled that approximately
KRW 315 billion of the Deposit forfeited is unreasonably excessive,
and should be reduced.
Specifically, the Court stated that:
The MOU does not provide any representation or warranty
regarding the value of the DSME assets. The MOU only includes a
performance guarantee deposit provision binding on Hanwha;
Hanwha did not have any opportunity to conduct confirmatory due
diligence despite the sizable amount of the Deposit.
Impact of the Decision:
When entering into an agreement that includes performance
guarantee deposit clauses providing for liquidated damages or
penalties, it would be advisable for the parties to comprehensively
take into account the relevant facts (e.g., the underlying facts
for including such clauses in the agreement) and the intent of the
parties to prevent potential disputes over the nature of such
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Ministry of Corporate Affairs ("MCA") vide Notification1 dated December 7, 2016 had notified various provisions of the Companies Act, 2013 (hereinafter referred as "CA 2013") which have come into force with effect from December 15, 2016.
When buying a franchise, you should understand your rights, to make an informed decision before signing the agreement.
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