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JIPYONG Secures Supreme Court Decision to Quash and Remand the Case Related to Developer’s Obligation to Explain Terms and Conditions Under the Terms and Conditions Regulation Act

2023.04.13

In Korea, the housing supply is insufficient compared to the demand, and the price of housing supplied under the procedures prescribed by the Housing Act (the so-called housing sale price) is lower than the normal market price. Therefore, speculative demand for housing purchase contracts is prevalent. In order to prevent speculation through housing purchase contracts and build a foundation for the housing supply system focusing on occupancy-oriented housing seekers, the Housing Act specifies sanctions on an act of disturbing the supply order (See Constitutional Court En Banc Decision No. 2019HeonGa26 dated March 21, 2022). 
 
Article 65 (1) of the Housing Act prohibits an act of disturbing the supply order, such as the transfer or acquisition of status entitling a person to be provided with housing and Article 65 (2) stipulates that a housing purchase contract entered into as a result of an act of disturbing the supply order shall be revoked. 
 
If a housing purchase contract entered into as a result of an act of disturbing the supply order is cancelled or rescinded, the developer must spend considerable amount of time and efforts to resell the house. In order to prevent such a loss, some developers include in their housing purchase contracts a clause specifying the confiscation of penalties upon the cancellation or rescission of a housing purchase contract due to a violation of the Housing Act. 
 
In this case, the issue before the Supreme court was whether the clause under the housing purchase contract that specifies confiscation of the penalties in case of the rescission of the housing purchase contract is subject to the obligation to explain terms and conditions under the Act on the Regulation of Terms and Conditions (the “Terms and Conditions Regulation Act”). The effect of the penalty clause remained unclear due to the conflicting precedents in the lower courts. Against this backdrop, JIPYONG Construction & Real Estate Group represented the developer and secured the Supreme Court Decision that the penalty confiscation decision is not subject to the explanation obligation under the Terms and Conditions Regulation Act. 
 
1. Case Summary 
 
A North Korean defector “A” entered into a special housing purchase contract (the “Housing Purchase Contract”) for an apartment unit located in City “B” (the “Apartment”). It turned out, however, that “A” had applied for the developer’s housing sale offer in exchange for payment from a criminal organization aiming to illegally enter into a contract. After then, with regard to the Apartment, Mayor B sent a public notice stating, “As a result of the regional police C’s investigation into any violation of the Housing Act (Article 65(1) 1 and 2), it turned out that there are some households that had illegally entered into a housing purchase contract by assigning documents, etc., necessary for the application for the housing sale offer after receiving a certain amount of money from the criminal organization, we hereby order the developer to cancel the housing purchase contracts in accordance with Article 65(2) 2 of the Housing Act,” and the Apartment was included in the list of apartments for which housing purchase contracts are subject to cancellation. In light of the foregoing, the Developer notified A of the rescission of the housing purchase agreement. The court issued a summary order requiring A to pay a KRW 3 Million fine for violating the Housing Act, which became final and conclusive. 
 
Meanwhile, the housing purchase contract specifies that if the contract is rescinded due to the Purchaser’s act violating the Rule on the Housing Supply, 10% of the purchase price shall vest in the developer as a penalty (the “Penalty Clause”). 
 
The plaintiff is a person who acquired the claim for the return of the ownership of the Apartment lot and housing purchase price, etc. from the criminal organization for illegal purchase contract. The plaintiff filed a claim seeking for the court’s order that the developer must perform the procedure for the registration of ownership transfer for the apartment lot as a primary claim and return of the down payment as a secondary claim. The plaintiff claimed that the housing purchase contract constitutes the terms and conditions and the defendant failed to explain the penalty clause to A in accordance with the explanation obligation under Article 3 (3) of the Housing Purchase Contract and thus the defendant cannot confiscate 10% of the total housing purchase price based on the penalty clause. 
 
The court of first instance ruled that the Housing Purchase Contract had been legally rescinded and the penalty had been deducted and thus the defendant has no amount payable to the plaintiff. 
 
However, the high court ruled that the penalty clause constitutes material terms and conditions and therefore the defendant has the obligation to specify and explain the clause. This is due to the fact that Article 65 (3) of the Housing Act and Article 74 (2) of its Enforcement Decree provide that the housing purchase price paid by the purchaser who de facto disturbed the supply order may be collected, and the Penalty Clause not only nullifies the effect of the agreement but also places the burden of penalty on the contracting party, which exceeds the scope guaranteed by the Housing Act and its Enforcement Decree, and the act of disturbing the supply order is excluded from the event subject to a penalty under the master apartment lot purchase agreement disclosed by the Fair Trade Commission. 
 
 
2. Summary of Supreme Court Decision 
 
The Supreme Court put an emphasis on the intent of the obligation to specify and explain terms and conditions under Article 3(3) of the Housing Purchase Contract. It held that the business entities’ obligation to explain terms and conditions is based on ensuring that material matters of the terms and conditions must be specified in the contract so as to avoid unforeseen disadvantages to the customers, so if the matter is general and common in the transaction and the customer could have sufficiently anticipated it without a separate explanation, or if the matter is only to repeat or add what has already been stipulated by law, the business entity has no obligation to explain (See Supreme Court Decision No. 2003Da15556 dated May 30, 2003; Supreme Court Decision 2006Da87453 dated April 27, 2007, etc.) 
 
In addition, the Supreme Court explained the unlawfulness of the “act of violating Article 65(1) of the Housing Act” which served as the basis for the rescission of the Housing Purchase Contract and attribution of the penalties. It held that the act of violating Article 65(1) of the Housing Act is an act of violating the housing supply order in violation of the housing supply system as well as the fair housing supply procedures focusing on occupancy-oriented housing seekers by arbitrarily transferring to a third party the status eligible for purchasing specially-supplied housing based on social and policy considerations, thus constituting an act with a high degree of social reprehensibility and responsibility that is subject to criminal punishment, and the purpose of the Penalty Clause is to provide for anticipated damages payable upon the occurrence of damage when it becomes impossible to maintain the Housing Purchase Contract due to a reason attributable to the purchaser. 
 
In other words, the Supreme Court ruled that, in light of the illegality of the violation of Article 65(1) of the Housing Act, the people who purchased the apartment lots by entering into a housing purchase contract with the defendant, including A, may sufficiently anticipate that it has the obligation to compensate damage that may be sustained by the defendant without the defendant’s separate explanation, and thus the Penalty Clause is not subject to the obligation to specify and explain. 
 
 
3. Implications of the Decision 
 
The purpose of requiring business entities to specify and explain the terms and conditions under the Terms and Conditions Regulation Act is to ensure that material matters of the terms and conditions must be specified in the contract so as to avoid unforeseen disadvantages to the customers (See Supreme Court Decision 2006Da87453 dated April 27, 2007). 
 
As a result, it is necessary to decide on a case-by-case basis whether a matter constitutes "material terms and conditions" subject to the explanation obligation while also considering the situation and circumstances of each case. Likewise, it is necessary to decide on a case-by-case basis whether a matter constitutes "a matter that may sufficiently be anticipated" that is exempt from the explanation obligation while considering each customer (i.e., litigation party)’s situation (See Supreme Court Decision 2007Ma1328 dated December 16, 2008 and Supreme Court Decision 2016Da276177 dated May 30, 2019). 
The High Court, however, overlooked the point that the purchaser’s act of entering into the contract itself constitutes a criminal act and instead decided that the defendant has the obligation to provide an explanation. 
 
A violation of Article 65(1) of the Housing Act, such as the one in this case, is a systematic abuse of the special housing supply system operated as a social support policy to help North Korean defectors stably settle in South Korea, so it is a serious offense that exacerbates social inequality as an increasing number of individuals are unable to fulfill their housing purchase contracts due to deteriorating economic conditions. 
 
It cannot be said that the obligation to compensate the defendant for damages that might occur if the Housing Purchase Contract is terminated as a result of a disruption of the supply order is a sanction that the criminal organization that engages in a criminal offense finds it difficult to anticipate. The High Court misunderstood the fundamentals of the legal principles on the explanation obligation, erroneously assumed that the individuals who unlawfully entered into the contact are ordinary and average customers and wrongfully determined that the developer must perform the explanation obligation. 
 
The Supreme Court reaffirmed the legal principle that “whether a person is subject to the obligation explanation under the Terms and Conditions Regulation Act must be judged on the basis of the individual and distinct case of each customer, instead of general and abstract customers. It is of significance in that it may prevent disputes surrounding the effect of the penalty provision of the developer as well as damage caused by a disruption of damage.

Awards & Commissions Jipyong and Duroo were Honored with “Public Interest Award” at the 6th Korea Legal Awards 2023.12.12

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