Hello, this is Attorney Ki-hyung Bae of Cheongchul Law Firm.

When large-scale defects arise in an apartment complex, residents often want to hold the 'builder' – the large construction company that actually built the building – directly liable, rather than the 'developer (seller)', which is often unfamiliar to them and short on funds.

In the past, because there was no direct sales contract between the buyers (unit owners) and the builder, bringing a damages claim directly against the builder was very difficult. However, since the Act on the Ownership and Management of Multi-Unit Buildings (집합건물법, hereinafter the 'Multi-Unit Buildings Act') was amended, a path has opened to hold the builder directly liable for defects once certain requirements are met.

Today, I will explain, together with Supreme Court precedent, the specific legal requirements under the amended Multi-Unit Buildings Act for buyers to claim damages in lieu of defect repair directly from the builder (construction company) rather than from the developer.

The Builder's Direct Warranty Liability – Requirements for Applying Article 9 of the Amended Multi-Unit Buildings Act

[Question] The counterparty to our sales contract is the developer, but the defective construction was actually done by the builder (construction company). Can residents claim damages for the defects directly from the builder?

[Answer] For apartments (multi-unit buildings) sold on or after June 19, 2013, the builder may be sued directly for damages if 'special circumstances' are proven showing that the developer lacks the capacity to compensate, such as bankruptcy or insolvency.

To understand this, it is necessary to look at the differences before and after the amendment and the specific requirements for such a claim.

1. Limits Before the Amendment: Indirect Claims by Subrogating the Developer

Previously, Article 9 of the Multi-Unit Buildings Act provided only for the warranty liability of the 'seller (developer)'. The Supreme Court accordingly held that "the builder of a multi-unit building does not bear warranty liability under the Multi-Unit Buildings Act unless there are special circumstances, such as the builder being construed as a party to the sales contract" (Supreme Court Decision 2009Da25111, December 8, 2011). As a result, residents of apartments sold on or before June 18, 2013 could not hold the builder directly liable and had to claim damages indirectly, by exercising the developer's rights against the builder through the 'creditor's subrogation right'.

2. The Amended Multi-Unit Buildings Act: Builder's Direct Warranty Liability Made Explicit

To remedy this unfairness and better protect buyers, Article 9(1) of the Multi-Unit Buildings Act (집합건물법 제9조 제1항), as amended on December 18, 2012 (effective June 19, 2013), expressly provides that "a person who constructs and sells a building (the seller) and a person who constructs the building under a contract with the seller (the builder) are liable under warranty to the unit owners." In other words, the amendment extended liability so that the builder, too, bears direct statutory warranty liability toward unit owners.

3. Essential Requirement for a Direct Claim: Insolvency of the Seller (Developer), etc.

However, it should be noted that the builder's liability is not unlimited. To prevent the builder's liability from expanding excessively, Article 9(3) of the Multi-Unit Buildings Act (집합건물법 제9조 제3항) sets a strict proviso: the builder is liable to unit owners for damages "only where the seller has filed for commencement of rehabilitation proceedings or for bankruptcy, has been dissolved, is insolvent, or has any other comparable cause." This means the builder bears only a supplementary liability relative to the developer. Therefore, for buyers or the council of occupants' representatives to claim damages in lieu of defect repair directly from the builder, they must affirmatively plead and prove grounds such as the insolvency of the seller (developer); if they fail to prove this, the direct claim against the builder will inevitably be dismissed.

Both the Timing of Sale and the Developer's Insolvency Must Be Proven

From the standpoint of the apartment's council of occupants' representatives (the plaintiff), the first step before bringing a defect lawsuit directly against the builder is to confirm whether the apartment was sold after the amended Act took effect (June 19, 2013). But this only determines whether there is a legal basis for holding the builder directly liable, so one must separately confirm that the warranty period for each type of defect – 10 years for major structural parts and foundation work, 2 to 5 years for other defects, under Article 9-2 of the Multi-Unit Buildings Act (집합건물법 제9조의2) – running from the date of the use inspection (common areas) or the date of delivery (exclusive areas), has not yet expired. After that, the decisive preliminary task for the success of the lawsuit is to objectively prove the developer's 'state of insolvency' through a thorough investigation of materials such as the results of an order to submit tax records, financial statements (balance sheets, etc.), and whether the company has been liquidated.

Conversely, from the builder's (defendant's) standpoint, the strategy should be to defend against an improper direct claim by pointing out that the developer is still solvent, or by showing that the builder has already performed its obligation to compensate the developer under the construction contract and has therefore been released from liability (the latter part of Article 9(3) of the Multi-Unit Buildings Act (집합건물법 제9조 제3항 후단)).

Lawsuits seeking the builder's direct warranty liability sit at the intersection of a precise analysis of when the amended Multi-Unit Buildings Act applies and the demanding burden of proving the developer's financial condition, so a concrete legal review is needed from the earliest stage of the litigation.

Cheongchul Law Firm, with its deep understanding of large-scale apartment defect disputes and multi-unit building law, provides optimal solutions to protect residents' legitimate rights to compensation amid complex competing interests. If you are facing difficulties over a developer's bankruptcy or a direct defect lawsuit against a builder, please consult the experts at Cheongchul Law Firm.

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Attorney Ki-hyung Bae has worked at the Defense Installations Agency and in the construction and real estate team of a major law firm, providing legal advice on every stage of government contracts and construction projects – including large-scale construction works, defense facility projects and SOC construction projects – and has extensive experience and skill in resolving related litigation. If you need assistance with public works, private construction projects, public procurement contracts, or state, local or public property matters, please feel free to contact us at any time.

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Cheongchul Law Firm is composed solely of attorneys from Korea's top five law firms, the prosecution service and in-house legal teams of major corporations. Rather than a single attorney, a team of specialists in the field relevant to each case responds together. Beyond resolving specific issues, Cheongchul provides comprehensive solutions for the business as a whole, focusing on legal consulting that ultimately achieves what the client wants. If you need help achieving your goals, please do not hesitate to contact Cheongchul.