Jun 19, 2014

Material Breach of Contracts Under Korean Law: Primary Obligations vs. Secondary Obligations

In most Western nations a "material" breach of a contract leads to the non-breaching party not having to perform its obligations under the contract, while allowing the non-breaching party to immediately sue for all damages (or performance).

The Restatement (Second) of Contracts 241 notes that the following criteria can be used to determine whether a specific action/inaction constitutes a material breach:
"In determining whether a failure to render or to offer performance is material, the following circumstances are significant: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing."

Korea does not have the concept of "material" breach, however, the outcome of a case in Korea, normally, is identical.

Korea differentiates breaches to "primary" obligations with breaches to "ancillary" obligations.  If a breach is of a primary obligation under the contract the non-breaching party does not have to perform under the contract and may immediately sue.

A primary obligation has been defined by the Korean Supreme Court as being an obligation that if the non-breaching party knew would be breached -the non-breaching party would not have entered into the agreement.  This standard has led the Korean Courts to place a great emphasis on the result of the breach.  If the breach results in great damage to the non-breaching party - the Korean court will, normally, rule that the breach is of a "primary" obligation and, thus, the non-breaching party does not need to perform the obligations under the contract.

Yes, this is a reaction to a case we are working on.  I may be able to note the details once the case is resolved.
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Sean Hayes may be contacted at: SeanHayes@ipglegal.com.

Sean Hayes is co-chair of the Korea Practice Team at IPG Legal. He is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty. He is ranked, for Korea, as one of only two non-Korean attorneys as a Top Attorney by AsiaLaw.