Hello, this is Attorney Baek Gi-hyung from Cheongchul Law Firm.

When certain matters are promised and a contract is signed, it is common to naturally think of the option to 'terminate the contract' if the other party does not keep their promises.

So, if the other party actually violates their contractual obligations, can the contract always be terminated?

[Question]

Can the contract always be terminated if the other party violates their contractual obligations?

[Answer]

The Supreme Court ruled that “According to Article 544 of the Civil Act, to terminate a contract for breach of contract, the relevant obligation must be essential and indispensable for achieving the purpose of the contract, and if not fulfilled, it must be at a level where it can be considered that the creditor would not have entered into the contract if the purpose could not be achieved, meaning it must be a principal obligation; otherwise, if it is merely a breach of ancillary obligations, the contract cannot be terminated.” Hence, it is recognized that a contract can only be terminated if the 'principal obligation' is breached (Supreme Court ruling 2022. 6. 16. Case No. 2022Da203804).

Then, how can 'principal obligations' and 'ancillary obligations' be distinguished?

[Question]

How can we distinguish between 'principal obligations' and 'ancillary obligations' that determine the possibility of exercising the right to terminate?

[Answer]

The Supreme Court has stated, “Moreover, in distinguishing between principal and ancillary obligations among the contractual duties, it should be determined based on the parties' rational intentions that were clearly and objectively expressed at the time of the contract, regardless of the independent value of performance, taking into account various circumstances such as the content and purpose of the contract, and the consequences of non-performance.” (Supreme Court ruling 2022. 6. 16. Case No. 2022Da203804).

From the contents of the above ruling, it is indeed not easy to distinguish between principal and ancillary obligations. In a typical 'sale contract', the seller’s obligation to transfer ownership of the object and deliver it is treated as the principal obligation, while the buyer’s obligation to pay the price is also treated as a principal obligation. Other matters, for example, cooperating with moving, cooperating with construction work, or cooperating with loans, are likely to be treated as ancillary obligations.

So, can a contract always not be terminated in the case of a breach of such ancillary obligations?

[Question]

Is it always impossible to terminate a contract for the breach of ancillary obligations?

[Answer]

It is not possible to exercise the statutory right of termination provided by the Civil Act due to the breach of ancillary obligations, but if there is an agreement to reserve the right to terminate the contract in case of a violation of ancillary obligations, then the contract can be terminated.

The Supreme Court ruling on January 18, 1983, also states, “In the case of this contract for work, it is an agreement to grant the right to terminate to the plaintiff, who is the contractor, in the event that there is a breach of the ancillary obligations by the subcontractor, allowing the contractor to terminate the contract by a unilateral expression of intent, which is known as a reservation of the right to terminate.” This clarifies that there can be an agreement to reserve the right to terminate due to a breach of ancillary obligations.

One of the responses to the other party's non-performance is often to simply express the intention to 'terminate the contract', but in reality, there are many cases where a ruling states that the contract cannot be terminated.

In such cases, if the other party challenges the unlawful termination of the contract, it can lead to a claim for damages on that basis, which may result in even greater losses.

Therefore, if possible, it is necessary to explicitly agree on certain matters as principal obligations from the time of contract execution, or to carefully examine the contract to allow for the inclusion of a provision reserving the right to terminate. It is particularly important to clarify that in the case of reserving the right to terminate, it should be stated separately that a claim for damages can be made independent of the exercise of the right to terminate.

Above all, especially when engaging in transactions of a certain scale, it is advisable to draft contracts after review by professional legal experts to adequately prepare for unforeseen situations.

Attorney Baek Gi-hyung has accumulated extensive experience in civil litigation and enforcement while working with the Defense Facilities Agency and a large law firm's construction/real estate team, leveraging this experience to explore various possibilities and strategies for debt collection from the pre-litigation stage.

Cheongchul Law Firm consists solely of lawyers from Korea's four major law firms: Kim & Chang, Kwangjang, Taepyeongyang, and Sejong. Rather than having a single attorney, teams of specialized lawyers related to each case are formed to respond. Cheongchul provides comprehensive legal consulting that focuses not just on resolving specific issues but on achieving the overall goals of clients. If you need help achieving your goals, please feel free to contact Cheongchul.