Hello, this is Attorney Park Jong-han from Cheongchul Law Firm.

Where a sales advertisement is not incorporated into the sales contract, or where the advertisement differs from the property actually sold and the buyer suffers harm, a buyer seeking to challenge the very validity of the sales contract has four available legal means: ① rescission for mistake, ② rescission for fraud, ③ termination for impossibility of performance, and ④ termination for change of circumstances.

Let us examine, in turn, the requirements of each legal means and the attitude of the courts.

[Question] Requirements for rescinding or terminating a pre-sale contract

[Answer]

가. Rescission of a pre-sale contract for mistake

Article 109(1) of the Civil Act (민법 제109조 제1항) provides that “a manifestation of intention may be rescinded where there is a mistake concerning a material element of the content of a juristic act.” In cases where rescission of a pre-sale contract is at issue, the point of dispute is usually whether there was a “mistake of motive.”

Precedent holds that “for a person expressing intention to rescind a juristic act on the ground that a mistake of motive amounts to a mistake concerning a material element of the content of the juristic act, it is sufficient that the motive was indicated to the other party as the content of that manifestation of intention and that it is recognized, through interpretation of the manifestation of intention, as having become the content of the juristic act; a separate agreement between the parties to make that motive the content of the manifestation of intention is not required. However, the mistake concerning the content of the juristic act must relate to such an important part that an ordinary person, had they been in the position of the person expressing the intention, would not have made such a manifestation of intention.”

A leading precedent applying this doctrine to a sales-advertising case is the Yeongjong Sky City apartment sales-advertising case. In that case, the Supreme Court held that “the content of the sales advertisement cannot be regarded as having become part of the apartment sales contract at the time the contract was concluded, nor can it be regarded as a material element,” and thus declined to recognize rescission of the sales contract on the ground of mistake of motive (Supreme Court Decision 2014Da24317, et al., dated May 28, 2015 / 대법원 2015. 5. 28. 선고 2014다24317 등 판결).

나. Rescission of a pre-sale contract for fraud

Article 110(1) of the Civil Act (민법 제110조 제1항) provides that “a manifestation of intention induced by fraud may be rescinded.” For rescission of a pre-sale contract on the ground of fraud to be recognized, all four requirements must be met: ① a deceptive act committed intentionally by the person committing the fraud, ② the illegality of the deceptive act, ③ the other party's mistake and the resulting manifestation of intention to dispose, and ④ a causal link between the deceptive act and the manifestation of intention.

Precedent takes the position that “while some exaggeration or falsehood accompanying the promotion or advertising of goods lacks deceptiveness so long as it can be tolerated in light of general commercial practice and the principle of good faith, where a specific fact concerning an important matter in a transaction is falsely stated in a manner blameworthy in light of the duty of good faith, it constitutes a deceptive act” (Supreme Court Decision 92Da52665 dated August 13, 1993 / 대법원 1993. 8. 13. 선고 92다52665 판결).

Cases recognizing rescission of a pre-sale contract for fraud include: a case where, although the plan was in fact to install and sell two shops on each of floors 4 through 6 of a commercial building, this fact was concealed and it was explained that only one shop would be installed on each such floor, which was held to constitute a deceptive act allowing rescission of the sales contract (Supreme Court Decision 2003Da69195 dated October 15, 2004 / 대법원 2004. 10. 15. 선고 2003다69195 판결); and a case where advertising that a 1,500-pyeong multiplex cinema would open on the 11th and 12th floors of the “Hi-Brand” shopping mall in Yangjae-dong, Seocho-gu, Seoul, and that it would be “adjacent to the Honam High-Speed Rail Gangnam departure station” was held to constitute a deceptive act, so that rescission of the sales contract was recognized (Supreme Court Decision 2007Da49830 dated November 15, 2007 / 대법원 2007. 11. 15. 선고 2007다49830 판결).

Conversely, cases denying rescission of a pre-sale contract for fraud include: a case where, in selling a commercial building, it was advertised to the effect that “a state-of-the-art entertainment town would be created there and, through consignment management by a professional manager, a certain level of profit would be guaranteed,” in which the Supreme Court held that “where one is sold a special facility with a specified use, matters such as how its operation will be conducted and how much profit it will yield are of a nature to be decided by the investors' own responsibility and judgment, so it cannot be said that such advertising deceived the other party into concluding the sales contract, or that the other party concluded the sales contract due to a mistake concerning a material element of the contract” (Supreme Court Decision 99Da55601 dated May 29, 2001 / 대법원 2001. 5. 29. 선고 99다55601 판결).

Moreover, in a case where the developer of a metropolitan-area new-airport construction project, without confirming whether a PMS (People Mover System, a monorail) could objectively be completed, provided persons at the stage of negotiating lease contracts with the incorrect information that a PMS passing through the commercial facilities would be installed, the Supreme Court recognized liability for damages in tort but found it insufficient to constitute a deceptive act amounting to a ground for rescission, and thus denied rescission of the pre-sale contract for fraud (Supreme Court Decision 2008Da51120 dated August 20, 2009 / 대법원 2009. 8. 20. 선고 2008다51120 판결).

다. Termination of a pre-sale contract for impossibility of performance

Where the content of a sales advertisement has been incorporated into the sales contract, termination of the sales contract on the ground of the seller's failure to perform the advertised content is possible on the basis of breach of contract; but where the content of the sales advertisement has not been incorporated into the sales contract, termination on the ground of impossibility of performance is not recognized.

The Supreme Court held that “among the contents of an apartment sales advertisement, those concerning specific transactional terms — that is, the apartment's exterior, materials, structure, and the like — which, in light of social common sense, appear to be matters whose performance the buyer may demand from the seller as content of the contract become, absent special circumstances such as a reservation of objection to the contrary at the time of concluding the sales contract, content of the sales contract by the implied agreement of the seller and the buyer; however, contents of an apartment sales advertisement other than such matters generally have merely the nature of an invitation to offer, so the seller cannot be held liable for breach of contract for failing to perform them” (Supreme Court Decision 2005Da5812, 5829, 5836 dated June 1, 2007 / 대법원 2007. 6. 1. 선고 2005다5812, 5829, 5836 판결).

In the Yeongjong Sky City case as well, the Supreme Court held to the same effect that “the development project constituting the content of the apartment sales advertisement concerns the apartment's locational conditions and is not a matter of transactional terms such as the apartment's exterior, materials, or structure; moreover, since it is planned and pursued by local governments, the national government, or individual development entities and is not something the defendants can realize, and since the apartment's buyers must also be deemed to have been well aware of this, the defendants cannot be held to bear liability for impossibility of performance on the ground that the said development project became content of the apartment sales contract” (Supreme Court Decision 2014Da24317, et al., dated May 28, 2015 / 대법원 2015. 5. 28. 선고 2014다24317 등 판결).

라. Termination of a pre-sale contract for change of circumstances

Regarding termination of a contract for a change of circumstances, precedent presents the general doctrine that “termination of a contract for change of circumstances is recognized as an exception to the principle of adherence to contracts where a significant change of circumstances that the parties could not have foreseen at the time the contract was formed has occurred, where that change of circumstances arose from a cause not attributable to the party acquiring the right of termination, and where upholding the binding force of the contract as agreed would produce a result markedly contrary to the principle of good faith; and the ‘circumstances’ referred to here mean the objective circumstances that formed the basis of the contract, not the subjective or personal circumstances of one party” (Supreme Court Decision 2004Da31302 dated March 29, 2007 / 대법원 2007. 3. 29. 선고 2004다31302 판결).

In the Yeongjong Sky City sales-advertising case as well, the Supreme Court, following the above general doctrine, held that “the development project constituting the content of this apartment sales advertisement was at the planning or early-progress stage and thus liable to be canceled, changed, or delayed depending on future changes in circumstances, and the defendants themselves had disclosed in the apartment sales advertisement the possibility of cancellation, change, or delay of the development project; in light of these points, the collapse, change, or delay of the development project does not amount to a change of circumstances that the parties could have foreseen at the time of concluding the apartment sales contract,” and thus declined to recognize termination of the sales contract for change of circumstances (Supreme Court Decision 2014Da24327, et al., dated May 28, 2015 / 대법원 2015. 5. 28. 선고 2014다24327 등 판결).

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