Skip Navigation
Menu
Close
Newsletters

COVID-19: Force Majeure Under Korean Law Considered in Wake of COVID-19 Pandemic

2020.04.03

Companies today face unprecedented challenges as a result of the COVID-19 pandemic; they find themselves in unfamiliar territory in such areas as employment relations, business contracts, and data privacy, to name just a few areas.  To help clients navigate these uncertain times in respect of their business in Korea, Kim & Chang’s COVID-19 Taskforce has been providing newsletters on key issues.   

In this newsletter, we look at the definition, elements and effects of force majeure under Korean law as seen through relevant court precedents. 

We hope that this series will provide useful guidance for companies as they consider whether force majeure may come into play in their business endeavors. 

1.    Definition/Elements of Force Majeure

There are multiple references to “force majeure” in various Korean statutes.  Unfortunately, the black letter law does not provide for a definition of “force majeure.”  Statutes such as the Administrative Appeals Act merely refer to force majeure together with such events as natural disasters and wars. 

However, relevant Supreme Court precedent holds that in order for a party to argue that an event constitutes force majeure, (i) the cause must be outside the realm of the party’s control and (ii) the party, despite having exerted reasonable efforts, was not able to foresee or prevent such event (Supreme Court of Korea Decision 2008Da15940, 15957 Decision).  Based on such court precedent, the elements of a force majeure event are (i) a cause outside of the party’s control and (ii) lack of foreseeability/preventability.  


2.    Effects of Force Majeure

Force majeure is a narrower concept than “no fault” and is applied to limit liability in situations where recognizing “no fault” liability would be too harsh.  For example, even if an agreement assigns liability to a party for breach when the cause is not attributable to such party, force majeure may exempt such party from liability for contractual breach. 

Under the Civil Act of Korea, if it becomes impossible for a party to a bilateral contract to perform its obligation due to a cause that is not attributable to either party, such party may not seek performance of the counterparty’s obligation (Civil Act, Article 537).  Furthermore, the obligee may not claim damages where performance has become impossible and not caused intentionally or negligently by the obligor (Civil Act, Article 390).  Since force majeure refers to a circumstance where a party is not at fault for non-performance of an obligation, recognition of force majeure will allow a party to be exempted from performing a contractual obligation altogether or from damages for non-performance. 


3.    How Korean Courts Have Ruled on Force Majeure

The following table provides a summary of Korean court precedents that we have categorized, based on how the courts have interpreted the elements.  Since exempting a party’s obligations citing force majeure leads to a shift in damage or loss to the other party, Korean courts have interpreted force majeure under a very strict standard and it is difficult to find case precedent where a court exempted a party’s contractual obligation due to force majeure.  
 

A.    Cause Outside of Party’s Control

A.1    If a contractual agreement exists on cause of inability to perform

Jeju District Court Decision 2016GaHap192 rendered on July 21, 2016.

  • The defendant entered into an agreement to use 60 hotel rooms in the plaintiff’s hotel in expectation of renting them out to visiting Chinese tourists.  However, due to the effects of the MERS outbreak and subsequent drop in the number of Chinese tourists, the defendant claimed under the Civil Act Article 537 that the defendant was under no obligation to pay (perform) since neither party to the agreement was responsible for the decrease in the number of Chinese tourists. 

  • The Court decided that under the intent of the agreement for use of hotel rooms, the defendant’s obligation was to pay for the hotel room reservation itself, regardless of whether those rooms were actually used.  Furthermore, the Court held that recruiting Chinese tourists to occupy the 60 hotel rooms was not defined as the defendant’s obligation under the agreement.  Therefore, the Court concluded that the defendant’s circumstance itself did not lead to impossibility to perform and held in favor of the plaintiff.  

  • Although force majeure was not directly considered or reviewed by the Court, this case can serve as a reference as to how a court would determine whether the cause of an event is outside of a party’s control.  In this case, the Court defined the cause of an event narrowly and ruled that the recruitment of Chinese tourists was not the responsibility of the plaintiff, but of the defendant in such an agreement.

A.2    The obligor of the party responsible for performance in an agreement (contractor parts/material supplier, etc.)

Supreme Court of Korea Decision 2005Da59475, 59482, 59499 rendered on August 23, 2007.

  • The defendant, developer A was a contractor for co-defendant company B that constructed and sold condominiums when company B filed for bankruptcy and suspended the project.  

  • The Court held that the bankruptcy and subsequent court receivership of company B (which led the project and sold the condominiums) was not a force majeure event that would exempt developer A from performing its obligations under its agreement for sale of condominiums.

Seoul Central District Court Decision 2018GaHap529238 rendered on May 22, 2019.

  • The purchasers (plaintiffs) of the condominiums demanded the purchase agreement be canceled due to the delay in completion and move-in date.  The developer (defendant) argued that such delay was due to a strike by one of the cement suppliers and thus, it was outside of the defendant’s control and the defendant should not be responsible for such delay. 

  • The Court held that the supply/management of necessary materials such as cement is the responsibility of the developer within context of a condominium sale and purchase agreement.  In addition, the Court found that the defendant’s actions were insufficient because the defendant did not attempt to find an alternate supplier or renegotiate the supply price of the cement.  Further, even if it were not practically feasible to find an alternate cement supplier, the Court held that such risks should be inherently borne by the developer in such agreements.  Thus, the Court ruled that this was not a force majeure event.

A.3    Foreseeability: Expansion of realm of control by a party

Seoul Central District Court Decision 2018GaHap529238 rendered on May 22, 2019.

  • This is the same condominium sale and purchase agreement case as set forth above. 

  • The defendant also argued that the delay was caused by a weak ground foundation, which was a unique geologic characteristic of the development site.  Hence, the defendant argued that this unique geologic characteristic was outside the realm of control by the defendant and thus, the defendant should not be held responsible. 

  • The Court held that the site of the construction and its geologic characteristics were elements that the defendants should have surveyed prior to starting the construction and development.  As a result, the Court held that the weak ground foundation was foreseeable and thus, within the realm of control of the defendant. 

B.    Foreseeability & Preventability

B.1    Principles of Contractual Liability

Supreme Court of Korea Decision 2001Da1386 rendered on September 4, 2002.

  • The plaintiff argued that while it was contracted by the defendant to demolish and construct a new building, the Asian financial crisis caused a force majeure event because among others, it caused significant setbacks in supply of materials, etc. and eventually led to delay in completion. 

  • The Supreme Court held that, “the Court cannot recognize the Asian financial crisis and the resulting setbacks in supply of materials as a force majeure event.” 

  • Although the Supreme Court did not explicitly state the reasoning behind this decision, it is clear that the Court saw the Asian financial crisis as a foreseeable event and thus, did not constitute force majeure. 

B.1    If a Party’s fault is involved

Seoul Central District Court Decision 2009GaHap145966 rendered on June 16, 2010.

  • In a case where a mask supply agreement was executed after the government raised the national crisis stage from “caution” to “warning” due to the swine flu, the party that could not supply the masks due to scarcity of supply claimed force majeure. 

  • The Court held that the plaintiff, at the time it entered into an agreement with the Public Procurement Service (September 2009), was able to foresee the increase in demand for masks and thus the delay in supply could not be considered force majeure within the context of the supply agreement. 

Seoul Central District Court Decision 2009Na37014 rendered on January 15, 2010.

  • The plaintiff entered into an agreement to install air conditioners at a naval base.  But the plaintiff claimed force majeure because it could not perform within the agreed time due to weather conditions and heavy rain that canceled the departure of ships. 

  • The court held that it is common knowledge that a ship can be grounded due to weather (foreseeability) and that the plaintiff never asked for an extension of completion date to the other party (preventability).  The court also reasoned that the plaintiff partially performed during the contract term (ability to perform, or at fault) and since the total duration of rainfall and the amount of precipitation occurring during the contract period could not be specified, force majeure should not be applied in the delay of plaintiff’s performance. 

B.3    Whether other competitors are able to perform or whether performance (payments) can be made through an agent

Supreme Court of Korea Decision 96Da34610 rendered on March 28, 1997. [Damages for Delay]

  • The defendant claimed that the delay in completion and move-in date for plaintiffs as agreed in the purchase agreement was caused by force majeure events such as lack of manpower and necessary materials. 

  • The Court held that since other condominiums that were built during the same time nearby were completed and purchasers were able to move in without delay, the defendant’s claim of force majeure cannot be recognized.

Seoul Central District Court Decision 2018GaHap529238 rendered on May 22, 2019.

  • This is the same condominium sale and purchase agreement case as set forth above. 

  • The Court held that it could not recognize force majeure due to the following reasons: (i) another construction site near the defendant’s site completed its development within the agreed timeline and occupants were able to move in without issue, and (ii) the defendant could have minimized the delay by procuring the required construction equipment through other means, but did not.

 

Share

Close

Professionals

CLose

Professionals

CLose