Hello, I am Attorney Bae Gihyung from Cheongchul Law Firm.
Recently, concerns about the real estate project financing (PF) market have been growing. PF is an essential funding method for large-scale businesses that require significant capital, but its structure is complex and involves various stakeholders, leading to unexpected legal disputes. In particular, who bears the risks that arise during the project process, and how, is a very important issue.
Among the various participants, the 'financial lead' plays a key role in designing the funding structure and managing the overall progress of the project. So, to what extent should the financial lead pay attention to the business participants? If a guarantee insurance that serves as a safety device for the project is not properly maintained, resulting in damages to other participants, can the financial lead be held responsible?
Today, we will take a closer look at an interesting Supreme Court ruling (Supreme Court decision 2023. 11. 16. ruling 2022Da265994) related to this, regarding the scope of obligations based on the principle of good faith that the financial lead bears in project finance.
[Question] In project finance (PF), does the financial lead have an obligation under the principle of good faith to maintain and sustain the performance guarantee insurance that the co-guarantor must subscribe to?
[Answer] The Supreme Court judged that it is difficult to see such an obligation under the principle of good faith for the financial lead.
In other words, unless there is an explicit contract provision, the financial lead is not responsible for ensuring the co-guarantor's fulfillment of their obligation to subscribe to and maintain the insurance.
The key issue in this case was whether the construction company, which bears the obligation to provide cash replenishment in the project finance method, can file for damages against the financial lead for a breach of the 'obligation to manage and supervise the performance guarantee insurance that the co-guarantor must subscribe to and maintain'. From the construction company's perspective, had the performance guarantee insurance been maintained, the amount of cash replenishment they would have incurred could have been reduced, and they claimed that the financial lead had not fulfilled its responsibility to maintain the insurance.
The facts of the case are as follows.
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In response, the lower court (the second instance) found that the defendant was in a position to demand the co-guarantors provide the performance guarantee insurance certificate, maintaining the insurance, and was aware that if the insurance was not maintained, the plaintiff would either have to fulfill its cash replenishment obligation or would not receive compensation for the amount replenished. The court ruled that by explaining to the plaintiff that the performance guarantee insurance was a priority collateral over the plaintiff's cash replenishment obligations, the defendant had given the confidence that the ultimate risk of the loan claims would be underwritten by the performance guarantee insurance company, and thus, held that the defendant bore an obligation under good faith to maintain the performance guarantee insurance that the co-guarantors must subscribe to.
However, the Supreme Court ruling on November 16, 2023, in case 2022Da265994, determined that “the financial lead defendant cannot be recognized to have an obligation under the principle of good faith to maintain the performance guarantee insurance that the co-guarantors must subscribe to.” and overturned the lower court’s ruling.
① As a party participating in the project finance transaction, the plaintiff also evaluated the construction benefits at its own responsibility and examined and analyzed the risks of fulfilling the cash replenishment obligation, subsequently participating as a construction company on an equal footing with the project implementer and the defendant, incurring the risk of fulfilling the cash replenishment obligation to gain the construction benefits. ② This cash replenishment agreement was entered into not just by the lenders but also by the plaintiff and the defendant, and in the cash replenishment agreement where the parties' rights and obligations were agreed, it cannot arbitrarily impose obligations on the defendant that are not specified therein based on the principle of good faith. Furthermore, none of the contracts related to this project, including the cash replenishment agreement, recognized any special status on the part of the defendant to protect the plaintiff's legal interests and prevent encroachment upon them; the mere fact that the defendant holds the position of financial lead does not allow recognizing such a special position or obligation to maintain the performance guarantee insurance. ③ If the defendant's obligation to maintain the performance guarantee insurance is recognized, it would result in acknowledging an obligation of the defendant to eliminate the risk of the plaintiff's cash replenishment obligation, effectively voiding the meaning of the plaintiff's cash replenishment obligation, which serves as a guarantee. ④ Even if the defendant explained to the plaintiff that the performance guarantee insurance is a priority collateral over the plaintiff's cash replenishment obligations, this is meant to convey that the performance guarantee insurance subscribed by the co-guarantors is primary collateral only within the range that it validly covers, and does not imply that the plaintiff had confidence that the ultimate risk of the loan claims would be underwritten by the performance guarantee insurance company throughout the duration of the plaintiff's cash replenishment obligation. |
In complex and multifaceted PF projects, various types of contracts are concluded among several stakeholders, and the types and volumes of those contracts often reach levels that are generally hard to comprehend. Even when contract terms are complex and explicitly defined, if obligations based on the 'principle of good faith' are easily recognized separately from the contract terms, it may further increase the instability of the PF structure, which is characterized by complex interests among multiple parties.
This Supreme Court ruling signifies that “the principle of good faith or social norms, or obligations to act can only be acknowledged for those recognized to have a special status who must protect the legal interests of the other party or prevent infringement upon their legal interests (Supreme Court 2012. 4. 26. ruling 2010Da8709, Supreme Court 2015. 9. 10. ruling 2013Da79993, etc.)”; thus, it demonstrates the position that obligations not explicitly specified in contracts in the PF project should not be easily recognized, strengthening the stability of transaction relationships based on contracts.
Ultimately, according to the implications of the above ruling, participants in PF projects should clarify their roles and responsibilities from the moment of the contract instead of expecting issues to be resolved based on general principles like good faith, and should proactively prepare for potential risk factors by formalizing this in terms of contractual rights and obligations.
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