Hello, I am lawyer Shin Jun-seon of the Law Firm Cheongchul.
Recently, disputes related to sales contracts in the real estate market have been ongoing. In particular, there has been an increasing trend in lawsuits concerning sales contracts for knowledge industry centers, residential-type accommodation facilities, and officetels. The developer or sales agency (hereinafter referred to as “the developer”) has actively promoted the possibility or the ratio of the interim loan, or misleadingly advertised that residential-type accommodation facilities could be occupied for actual residency, which has led to numerous legal disputes.
In this regard, in the second half of 2024, there have been consecutive rulings from the courts confirming that a buyer can cancel the sales contract due to the developer's incorrect explanations, reinforcing the point that the developer's explanations made during the sales process could incur legal responsibility. However, cases where contract cancellation is legally recognized are actually limited, and it requires strict conditions to be asserted through litigation and ultimately acknowledged. In this blog, we will examine the legal issues surrounding the cancellation of sales contracts and practical implications through case analysis.
[Question] Under what circumstances is it possible to cancel a sales contract?
[Answer]
1. Major Legal Issues in Litigation
There are not a few cases where a person wants to cancel a contract after signing a sales contract. However, as a rule, the courts tend to strongly recognize the binding power of contracts after they have been signed. It is difficult for a contract to be canceled on the basis of simple expectations or mistakes; certain legal requirements must be met. In particular, the key issue becomes how the explanation from the sales agency affected the actual contract.
At this point, legally, the main issue revolves around whether it is possible to cancel the contract due to mistake or fraud.
(1) Mistake (Civil Code Article 109)
If, at the time of signing the contract, the buyer concludes the contract contrary to their intention, and it is clear that they would not have concluded the contract had it not been for that mistake, they may cancel the contract on the basis of that mistake.
However, for a cancellation due to mistake to be recognized, there must be a mistake concerning an essential aspect of the contract (such as the possibility of interim loan) and the other party must have either been involved in creating the mistake or must not have had significant negligence concerning the mistake.
(2) Fraud (Civil Code Article 110)
If the developer or sales agency actively provides false information leading the buyer to be deceived, cancellation of the contract is possible.
For a cancellation due to fraud to be recognized, it must be proven that the sales agency intentionally informed false facts and that this explanation directly influenced the conclusion of the contract. Simple exaggerated advertisements or speculative explanations are not easily recognized by the courts.
2. Case Review
(1) Seoul Central District Court Case of Cancellation of Residential-type Accommodation Facility Sales Contract
l Case Overview: Buyers of the residential-type accommodation facility 'Belief Paragraph' in Haeundae-gu, Busan, filed a lawsuit against the developer and the trust company for cancellation of the sales contract and for the return of the sales proceeds.
l Court Judgment: "The developer caused the buyer's mistake by promoting the residential-type accommodation as capable of actual residency, and as a result, the contract was concluded, making cancellation and return of sales proceeds justified."
l Result: Cancellation of the contract recognized, judgment ordering the developer to return the sales proceeds.
This ruling is a problematic case where the developer advertised that the residential-type accommodation was capable of actual residency without considering its legal use (hospitality business), and the court assessed the impact it had on the buyer's decision to enter into the contract as significant.
(2) Seoul Southern District Court Officetel Sales Contract Cancellation Case
l Case Overview: The plaintiff (Mr. A) concluded the contract after hearing from the sales agency staff that "interim loans are possible," but in reality, the loan was rejected.
l Court Judgment: "The buyer significantly considered the possibility of a loan at the time of the contract, and the explanation of the sales agency was a decisive factor, hence cancellation due to mistake is possible."
l Result: Cancellation of the contract recognized, judgment ordering the developer to return the deposit.
(3) Gwangju High Court Officetel Sales Contract Cancellation Case – Partial Victory in Appeal
l Case Overview: The plaintiff asserted cancellation of the contract for a specific officetel room (Room K).
l Court Judgment: The sales consultant stated that "interim loans are guaranteed," and the buyer trusted this and signed the contract. Considering that the loan was rejected, cancellation due to mistake is recognized.
l Result: Cancellation recognized only for the rooms where the loan was actually denied.
In the previous ruling, the first instance dismissed the case based on the reasoning that 'the contract stated that "loan execution is not guaranteed" and it was not proven that the sales agency's explanation constituted a fraudulent act.' However, in the appeal, it was determined that the mistake regarding the loan was the decisive factor in the contract conclusion, thus recognizing cancellation for some rooms where the loan was denied.
3. Practical Implications – Required Level of Proof for Cancellation of Sales Contracts
In lawsuits for cancellation of sales contracts, the level of proof required by the courts to recognize mistake or deceit is quite high. The courts do not cancel contracts based on simple expectations or mistakes, but rather make a comprehensive judgment of the circumstances at the time of contract conclusion and related evidence. Therefore, to assert a claim for cancellation, buyers must thoroughly prove the elements below.
(1) Clear Deceit by Sales Agencies or Developers (False Explanations)
It must be confirmed that false facts were provided objectively, not based on simple expectations or subjective interpretations. Actual case law has used promotional materials, consultation records, and explanatory documents provided during the sales contract process as evidence.
For example, in the case regarding the 'Belief Paragraph', the repeated statement of 'capable of actual residency' in the developer's official consultation materials became decisive evidence, and in the case of the Seoul Southern District Court's officetel, specific consultation records regarding the possibility of interim loans became significant factors in judgment.
(2) Decisive Factor in Contract Conclusion
The courts require proof that the false explanation was a core motivation for the conclusion of the contract to recognize cancellation. It must be clearly revealed that at the time of contract conclusion, the buyer significantly considered the possibility of the interim loan or the capability for actual residency.
The courts recognize cancellation due to mistake when they determine that the explanations from developers or others were critical in inducing the contract conclusion. In the Gwangju High Court case, it was recognized that the explanation given by the sales consultant regarding the possibility of the loan directly influenced the decision of the buyer, who did not have the financial capacity to pay the interim payment, thereby allowing the cancellation of the contract.
It is worth noting that typically, sales contracts contain clauses stating that the possibility of the interim loan is the buyer's responsibility and that the developer does not guarantee this, which makes it difficult for the buyer to assert a mistake. However, if it can be proven that explanations contradicting the contract contents were provided during the consultation process, this can be recognized as a cause of mistake.
(3) Methods of Proof and Required Materials
The plaintiff asserting contract cancellation must submit objective materials supporting the circumstances at the time of contract conclusion to the court. The main evidence includes:
l Records of Sales Consultation and Text Messages: If there are records of the consultant guaranteeing the possibility of a loan or mentioning the capability for actual residency, they will serve as strong evidence.
l Sales Advertisements and Official Promotional Materials: It is important whether the materials officially distributed by the developer included misleading content.
l Sales Contracts and Additional Confirmations: If there are inconsistencies between the contract clauses and the content of sales consultations, the possibility of cancellation may increase.
l Testimony from Third Parties (Buyers): The court often references the statements of other buyers who signed contracts under the same explanations. In the examples above, the fact that multiple buyers heard the same explanation influenced the verdict, and in the Gwangju High Court case, it was recognized that several buyers experienced the same explanations. If testimony can be provided that other buyers also signed contracts after hearing identical explanations, it can impact the court's judgment.
4. Conclusion
By synthesizing recent court precedents, it appears that the courts recognize contract cancellation when it is confirmed that the developer and sales agency engaged in excessive promotions or provided false explanations. However, the reason that actual contract cancellations are rarely acknowledged lies in the challenges of proof. Therefore, when considering contract cancellation, it is essential to thoroughly secure evidence related to the consultation process at the time of contract conclusion and to specifically prove discrepancies between the content of the contract and the actual explanations. Accordingly, if one is contemplating cancellation, it is necessary to strategically respond after sufficient consultation with legal experts.
Shin Jun-seon is a lawyer with extensive experience in various disputes related to real estate contracts and provides practical advice on contract cancellation and damages lawsuits. Please feel free to contact us if you need legal advice on related matters.
