"Full Compensation for Loan Principal and Interest Over a Guaranteed-Completion Breach Was Wrong"... Reversed Ruling

[Financial News] A court has issued its first ruling that a real estate trust company should not be required to automatically compensate a lender consortium for the full amount of loan principal, interest, and default interest, even if it misses the agreed completion deadline under a guaranteed-completion obligation. In short, the standard should be the actual loss incurred, not the full amount, even when the completion deadline is not met.
There have recently been cases in which trust companies prevailed in disputes over whether they failed to fulfill their guaranteed-completion obligations. However, this is the first time a trust company has won a lawsuit concerning the scope of damages for a breach of such an obligation, and the ruling is expected to have a major impact on related litigation.
According to industry sources on the 17th, Seoul Central District Court recently dismissed in its entirety the plaintiff's claims in a lawsuit filed by the lender consortium—Newstate Jicha, the plaintiff—against KB Real Estate Trust, seeking payment under a guaranteed-completion damages agreement.
Under a guaranteed-completion land trust arrangement, the real estate trust company assumes responsibility for completing the project if it fails to fulfill its guaranteed-completion obligation by the deadline. Until now, court precedents have defined the damages a trust company must pay for breaching that obligation as the full amount of the loan principal, interest, and default interest. In lawsuits over the scope of damages, trust companies argued that they should compensate lenders only for the losses they had actually incurred, but the courts did not accept that argument.
This lawsuit likewise involved a lender consortium claiming that the defendant, the trust company, should compensate it for the full amount of the loan principal, interest, and default interest because the company had breached the guaranteed-completion deadline.
What is notable is that the court accepted all of the trust company's arguments while ruling against the plaintiff. The trust company argued that the wording of the agreement merely listed examples of items that could constitute actual losses, rather than requiring full compensation for the principal and interest.
It also argued that requiring compensation for the full amount of the loan principal, interest, and default interest would conflict with the Financial Investment Services and Capital Markets Act, which prohibits trust businesses from making up losses or guaranteeing profits. In addition, it maintained that full compensation would go beyond the original purpose of the guaranteed-completion system.
An industry official said, "In previous rulings, the courts simply repeated the lender consortium's position almost verbatim, without presenting specific reasoning or grounds in response to these arguments from trust companies. But in this case, the court accepted that the previous rulings were wrong."
Four recent cases have resulted in trust companies prevailing in lawsuits disputing whether they failed to fulfill their guaranteed-completion obligations. This is the first time a trust company has won a case concerning the scope of damages for a breach of such an obligation.
A representative of Shin & Kim LLC, which represented the trust company, said, "This is the first case in which a court has reached a conclusion different from those in previous rulings regarding the scope of damages. It is expected to have a significant impact on decisions in other ongoing lawsuits involving guaranteed-completion obligations against real estate trust companies." The representative added, "The ruling demonstrates that the scope of liability for damages is not automatically determined solely by the fact that a guaranteed-completion obligation was breached."
[email protected] Lee Jong-bae Reporter