Hello, this is Attorney Baek Gi-hyeong from the law firm Cheongchul.

In a trust, the trustee manages the trust property while entering into various contracts with third parties. In particular, recently, land trusts or managed land trusts have been actively used in real estate development projects, leading to frequent occurrences of the trustee entering into contracts with numerous stakeholders such as construction companies, designers, and various service providers.

However, since the trust agreement usually specifies a specific period for the trust, it can be an important issue regarding how the contractual relationships associated with the trust are handled after the end of the trust agreement, and whether the trustee can still be held liable under the contract.

[Question]

In the case of the termination of a trust, can the trustee escape liability arising from the contractual relationship with third parties?

[Answer]

In principle, the mere termination of the trust does not relieve the trustee of liability arising from the contractual relationship with third parties. The Supreme Court has ruled that the trustee is fully responsible for the contracts entered into with third parties while handling trust affairs, and if not covered by trust property, they must bear responsibility with their own assets as well (Supreme Court Decision 2004. 10. 15. 2004Da31883).

Under trust law, trust property becomes a separate property independent of the trustor's assets, and the trustee is treated as fully authorized to act as the owner of the trust property, so the contractual liabilities incurred by the trustee during the handling of trust affairs are in principle borne by the trustee.

However, in practice, the following contractual clauses are used to limit or exempt the trustee's liability.

First, it is to include a clause that limits the trustee's liability to the scope of the trust property. It is entirely possible to limit the scope of liability through contracts between the parties.

Second, there is a method to include a contractual takeover agreement stating that all rights and obligations of the trustee will transfer comprehensively to the trustor or beneficiary upon termination of the trust.

The Supreme Court also recognizes the effectiveness of the contract takeover agreement if there is a tripartite agreement stating that "with the termination of the trust agreement, all rights and obligations of the trustee are comprehensively succeeded by the trustor" in real estate sale contracts (Supreme Court Decision 2007. 12. 27. 2005Da23674, Supreme Court Decision 2005. 4. 15. 2004Da24878).

Especially, recently, real estate trust companies have been using standardized contract forms, and it has become common practice to include such exemption clauses and contract takeover agreements as essential elements. In practice, these clauses are required to be included in sales contracts, construction contracts, design service contracts, etc.

For parties entering into a contract with the trustee, it is necessary to be mindful of the following circumstances to prevent future damage.

A trust involves a complex legal relationship with numerous stakeholders, including the trustor, trustee, and beneficiary, as well as construction companies, designers, various service providers, and buyers. Therefore, it is important to clarify the legal relationships upon termination of the trust from the contract conclusion stage, and to properly review liability limitation clauses and contract takeover agreements to secure transaction stability.

Attorney Baek Gi-hyeong has worked in the construction/real estate team of the Defense Facilities Agency and a large law firm, specializing in real estate development projects, finance, trusts, construction litigation, and advisory services. Various legal relationships and principles are intertwined in real estate development, trusts, and construction disputes. If you encounter related issues, please feel free to contact me.

Cheongchul Law Firm consists solely of attorneys from Korea's top five law firms, including Kim & Chang, Gwangjang, Taepyungyang, Sejong, and Yulchon, as well as from corporate legal teams. Rather than one attorney, specialized attorneys in the relevant fields related to the case form a team to respond. Cheongchul provides legal consulting focusing on delivering comprehensive solutions for the entire business rather than merely resolving specific issues, ultimately achieving what clients want. If you need assistance in achieving your goals, do not hesitate to contact Cheongchul.