[edit] Supreme Court Decision 2000Da37296, 37302 delivered on May 10, 2002 [Contract Price of Sale, Damages]

【Main Issues】

[1] When a contract for work is terminated under Article 673 of the Civil Code, whether it is possible for the party placing the order for work to plead a reduction of liquidated or unliquidated damages on the basis of the contractor's fault or contributory negligence or on the basis of equity (negative)

[2] When a contract for work is terminated under Article 673 of the Civil Code, whether the benefit accrued to the contractor as a result of the termination of the contract must be deducted in calculating the damages payable by the party who terminated the contract (affirmative)

【Summary of Decision】

[1] The Civil Code, Article 673 allows the party placing an order for work to terminate the contract unilaterally provided that the party compensates for the loss sustained by the contractor due to the termination of the contract. The compensation must be for the full amount of expenses already incurred by the contractor as well as the profit which the contractor would have enjoyed had the contract been fully performed. In the absence of exceptional circumstances, the party who thus terminates the contract under Article 673 is not allowed to plead the reduction of the amount of compensation or liquidated damages on the basis of the contractor's fault or contributory negligence.

[2] When a creditor or a victim has sustained a loss as well as enjoyed a gain due to the non-performance of the debtor or an unlawful act of a tortfeasor, the amount of such a gain must, as a matter of fairness, be deducted from the amount of compensation without waiting for the party's argument to that effect. Likewise, when a contract for work is terminated pursuant to Article 673 of the Civil Code, the profits which the contractor has made by using his resources or efforts which became available due to the termination of the contract, or would thus have been able to make(but did not due to his or her laziness or neglect), or could make by utilizing the materials no longer needed due to the termination of the contract in some other uses or by selling them must necessarily be deducted from the amount of compensation.

【Reference Provisions】 [1] The Civil Code, Articles 396, 398, 673 / [2] The Civil Code, Articles 393, 673

【Plaintiff(Defendant in the counter-claim), Appellant】 Housing Improvement Redevelopment Association of Shin GongDuk Area {Attorney Kim Dong-jin, Counsel for plaintiff(defendant in the counter-claim)-appellant}

【Defendant(Plaintiff in the counter-claim), Appellee】 Park Jin-hwan {Attorney Kim In-cheol, Counsel for defendant(plaintiff in the counter-claim)-appellee}

【Court of First Instance】 Seoul District Court Judgment 98Gahap14979, 99Gahap3662 delivered on September 16, 1999

【Court of Second Instance】 Seoul High Court Judgment 99Na57890, 57906 delivered on June 2, 2000

【Disposition】 The judgment of the court below shall be reversed. The case shall be remanded to Seoul High Court.

【Reasoning】 1. Summary of the judgment of the court below

The court below found that; On February 3, 1996, the plaintiff(the defendant of the counter-claim, hereafter referred to as "the plaintiff"), a partnership for construction of apartments and attendant facilities, entered into a contract with the defendant (the plaintiff of the counter-claim, hereafter referred to as "the defendant") whereby the defendant, who is a sculptor, was to produce and install an item of decorative arts as required by the old Culture and Arts Promotion Act (which had been in force until amended by the Act No. 5454 of December 13, 1997) at the apartment complex built by the plaintiff during the period between February 5, 1996 and June 30, 1999 in return for a payment of 236 million won ("the contract"); On February 16, 1996, the plaintiff paid the defendant 70,800,000 won as the contract deposit and advance payment (but applicable tax was deducted by the plaintiff so the defendant actually received 70,021,200 won); But the Seoul Metropolitan Government's Municipal Ordinance regarding Culture and Arts Promotion requires that he or she who intends to construct a building as described by the Rules of the Culture and Arts Promotion Act must file an application to the Mayor of Seoul for consultation of the plan for installation of items of decorative arts once the planning permission or approval for the building project has been obtained; Accordingly, the plaintiff and the defendant agreed at the time of the contract that 'the defendant shall commence the production of the item after the completion of the consultation process for the plan for installation of the item of decorative arts'; The defendant therefore chose Proposal No. 1 (entitled "The road to peace and harmony") among the three proposals he had submitted to the plaintiff's Board of Directors and prepared a model and a booklet for the purpose of application for consultation, and in April 1997, the plaintiff applied for consultation using the model and the booklet provided by the defendant. But on June 12, the application was turned down after the Consultation Committee concluded that the proposed item lacked artistic value; The defendant then prepared another model and booklet on the basis of Proposal No. 2 (entitled "flower tree family") and the plaintiff submitted them to the Chief Officer of Mapo-gu District Office on June 27, 1997. But on June 30, due to a member shift of the plaintiff's Directors, it was decided that the proposed art work would need to be newly considered by the plaintiff's Board of Directors. The application submitted to the Mapo-gu District Office was therefore withdrawn; Subsequently, the defendant repeatedly requested the plaintiff to resubmit the application. But the application was put on hold by the plaintiff who explained that the delay was caused by the change of its Directors. In April 1998, the plaintiff indicated to the defendant that the apartment complex which was being built was of the Korean style and requested the defendant to prepare a new proposal which was suitable for the style of the apartment complex. The defendant thereupon prepared an entirely new proposal (entitled "Half moon in mid-day", which will be referred to as "Proposal 4"). In May 1998, the defendant provided the plaintiff with the completed model and booklet for the reapplication for consultation. But, to this date, the plaintiff has not applied for consultation.

The court below rejected every one of the plaintiff's arguments alleging that the contract has been cancelled due to the defendant's fraudulent act or the plaintiff's mistake, or that the contract has been rescinded upon the defendant's non-performance or that the plaintiff has chosen to have the contract deposit forfeited and exercised the right to terminate the contract. The court below reasoned, however, that as the plaintiff placed an order and the defendant agreed to provide non-substitutable sculpture which will be created by the defendant's creativity and efforts, the contract between the plaintiff and the defendant was a contract for work, and since the party ordering work can lawfully terminate the contract before the completion of the contracted piece of work, the contract in question was terminated in accordance with Article 673 of the Civil Code when the plaintiff stated its intention to that effect which was set out in its written submission to the court dated August 18, 1999. As the contract was lawfully terminated, the court below held, the defendant's counter-claim which alleges the plaintiff's breach of contract was also groundless.

The court below went on to consider the plaintiff's claim for restitution upon the termination of the contract in accordance with Article 673 of the Civil Code and the defendant's claim for damages arising from the plaintiff's termination of the contract. It was held that the defendant should return to the plaintiff the contract deposit of 70,800,000 won but that the plaintiff should also pay the damages to compensate the costs incurred by the defendant and the lost profit which the defendant would have made had the contracted not been terminated under Article 673 of the Civil Code. The court below found that the defendant incurred the total costs of 70,260,080 won (10,363,000 won for the production of the model for Proposal 1 + 15,661,700 won for the production of the model for Proposal 2 + 14,036,600 won for the production of the model for Proposal 4 + 20,800,000 won for purchase of material stones + 5,695,000 won for building an installation stand + 2,352,880 won for the liability insurance + 378,500 won for notarial fees + 778,800 won of taxes + 193,600 won of miscellaneous expenses). The lost profit was calculated at 112,739,920 won (236 million won of the contract price - 70,260,080 won of costs already incurred - 52 million won of further costs and expenses necessary to complete the production of the contracted item on the basis of Proposal 4 - 1 million won for cutting and trimming the installation stand). The court below therefore concluded that the plaintiff must pay to the defendant 70,260,080 won of costs and expenses as well as 112,739,920 won of lost profit whereas the defendant must return to the plaintiff the contract deposit of 70,800,000 won. Accordingly, it was ordered that the plaintiff shall pay 112,200,000 won (70,260,080 won + 112,739,920 won - 70,800,000 won). The court below thus dismissed the plaintiff's claim and the defendant's counter-claim was allowed to the extent of 112,200,000 won and the interest thereto.

2. The judgment of Supreme Court

A. The evidence before the court below would warrant the conclusion regarding the amount of expenses already incurred by the defendant in order to perform the contract, expenses which would have been incurred toward the completion of the defendant's contractual obligations, expenses which the defendant no longer need to incur now that the contract has been terminated, and the profit which the defendant would have enjoyed had the contract been fully performed. We have not been able to find any error with the court below's weighing and evaluating of the evidence it had. The appellant's argument on this point cannot be accepted.

B. It must also be noted that the Civil Code, Article 673 allows the party placing an order for work terminate the contract unilaterally, provided that the party compensates for the loss sustained by the contractor due to the termination of the contract. The compensation must be for the full amount of expenses already incurred by the contractor as well as the profit which the contractor would have enjoyed had the contract been fully performed. In the absence of exceptional circumstances, the party who thus terminates the contract under Article 673 is not allowed to plead the reduction of the amount of compensation or the liquidated damages on the basis of the contractor's fault or contributory negligence. This rule is not to be regarded unjust or against sound social policy or good faith. Even if the contractor may, to some extent, have been at fault or even if the contracted price may appear to be somewhat excessive, it would not provide a sufficient ground to unsettle this rule. The decision of the court below to order the compensation for the full amount of the defendant's lost profit may not be criticized as unjust against sound social policy or good faith merely because it did not reduce the amount of compensation reflecting the alleged fault on the part of the defendant. The appellant's argument on this point cannot be accepted, either.

C. However, the extent of compensation allowed by the court below is not wholly justifiable for the following reasons.

When a creditor or a victim has sustained a loss as well as enjoyed a gain due to the non-performance of the debtor or an unlawful act of a tortfeasor, the amount of such a gain must, as a matter of fairness, be deducted from the amount of compensation without waiting for the party's argument to that effect. Likewise, when a contract for work is terminated pursuant to Article 673 of the Civil Code, the profits which the contractor has made by using his resources or efforts which became available due to the termination of the contract, or would thus have been able to make(but did not due to his or her laziness or neglect), or could make by utilizing the materials no longer needed due to the termination of the contract to some other uses or by selling them must necessarily be deducted from the amount of compensation.

But the record of the case and the judgment of the court below make it plain that 53 million won (52 million won + 1 million won) which was deducted as further expenses necessary to complete the work did not include the value of the defendant's efforts which would also be required to complete the contracted piece of work. It is also to be assumed that the stones and the installation stand (full costs for their acquisition were regarded by the court below as forming part of the defendant's loss to be compensated) which could not be used due to the termination of the contract can be sold for a price. The court below, therefore, ought to have inquired into the amount of profit the defendant made or would have made using his resources and efforts which became available because of the termination of the contract as well as into the price which the defendant would have achieved by selling the stones and the installation stand. The amounts thus established should have been deducted from the amount of compensation awarded to the defendant.

The court below overlooked this requirement for offsetting profits and losses and did not at all inquire into these issues. As a result, it awarded the compensation without any adjustment taking account of the defendant's profits. To this extent, the judgment of the court below is a reversible error affecting the conclusion of the judgment. The appellant's argument pointing this out can be accepted.

3. Conclusion

For these reasons, the judgment of the court below is reversed and the case is remanded to the court below for retrial and determination. This decision is delivered with the assent of all Justices who reviewed the appeal.

Justices Song Jin-hun (Presiding Justice)

Byun Jae-seung

Yoon Jae-sik (Justice in charge)

Lee Kyu-hong

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