Supreme Court: "Apartment Illegal Subscription Penalty Forfeiture Clause Not Subject to Explanation Duty"

The Supreme Court has ruled that the penalty clause for illegal apartment subscription is not subject to the duty of explanation, so even if it was not separately explained, the developer who sold the apartment can forfeit the penalty when canceling the contract.

The Supreme Court's 2nd Division (Presiding Justice Min Yusuk) announced on the 3rd that it overturned the lower court's partial ruling in favor of plaintiff A, who filed an appeal lawsuit against Korea Land Trust seeking confirmation of his status as a co-subscriber of an apartment and claiming a refund of about 60 million won, and remanded the case to the Seoul High Court.

Supreme Court, Seocho-dong, Seoul.

In March 2018, Korea Land Trust signed a contract to supply an apartment in Suji-gu, Yongin-si, Gyeonggi-do to North Korean defector B for 575 million won. It was a special supply contract targeted at North Korean defectors. On the same day of the contract, they also received 29.5 million won as a supply payment and signed a contract to expand the apartment balcony.

B transferred the apartment subscription rights he had received to A. At that time, B had paid about 118 million won, including the deposit and the first interim payment, out of the total supply payment of over 600 million won required to subscribe to the apartment.

However, a problem arose. During an investigation by the Southern Gyeonggi Police Agency, it was revealed that B had illegally obtained the apartment by handing over his ID card, public authentication certificate, housing subscription savings account, North Korean defector registration certificate, and other necessary documents for subscription application to an illegal subscription recruitment organization in exchange for money. B was summarily prosecuted and fined for violating the Housing Act and disturbing housing supply.

The mayor of Yongin sent an official letter to Korea Land Trust ordering the cancellation of the supply contract for the apartment that violated the Housing Act. Korea Land Trust canceled the apartment supply contract with B and returned the first interim payment of about 57 million won that B had paid to the C association, which had loaned the interim payment. The remaining 60 million won was forfeited as a penalty.

The apartment supply contract between Korea Land Trust and B included a clause stating, "If the buyer violates the rules related to housing supply and the contract is canceled, 10% of the total supply payment shall be forfeited as a penalty."

A, who lost his status as a co-subscriber of the apartment, filed a lawsuit demanding Korea Land Trust return the forfeited penalty of 60 million won, claiming that Korea Land Trust did not explain this important clause to B. During the lawsuit, A assigned the claim for the refund of the supply payment due to contract cancellation from B and notified Korea Land Trust as the creditor.

During the trial, the issue was whether the clause stipulating that 10% of the total supply payment is forfeited as a penalty upon contract cancellation is subject to the duty of explanation.

A argued that Korea Land Trust must return 60 million won to him because the duty to explain important clauses is stipulated in the Act on the Regulation of Terms and Conditions, which Korea Land Trust violated.

Article 3(3) of the Act on the Regulation of Terms and Conditions states, "A business operator shall explain important contents stipulated in the terms and conditions so that customers can understand them. However, if it is evidently difficult to explain due to the nature of the contract, this shall not apply."

However, the first trial court rejected A's claim.

The court reasoned that since B had signed and sealed the page containing the penalty clause in the contract he initially signed, and had also handwritten a signature indicating that he had sufficiently listened to and understood some provisions such as precautions, it could be considered that the contract contents were sufficiently explained and notified.

Furthermore, the first trial court cited a Supreme Court ruling stating, "Even if stipulated in the terms and conditions, if the matter is general and common in transactions and customers could sufficiently anticipate it without separate explanation, or if it merely repeats or supplements what is already stipulated by law, the business operator is not obligated to explicitly explain such matters," and stated, "This penalty clause stipulates that if the contract is canceled due to the buyer's fault such as non-payment of the supply payment or violation of related laws, 10% of the total supply payment is forfeited to the defendant, which is a general and common provision in typical apartment supply transactions."

It further concluded, "As the buyer B could have known or sufficiently anticipated that if the supply contract is canceled due to violating the Housing Act by transferring documents necessary for the special supply subscription for North Korean defectors to a third party in exchange for payment, he would bear the penalty, it is difficult to conclude that there was a duty to explicitly explain this."

However, the second trial court's judgment differed.

The court held that the penalty clause in the contract signed by B was an important matter that could directly affect the conclusion of the contract, thus subject to the duty of explanation under the Act on the Regulation of Terms and Conditions, and if violated, the clause cannot be asserted as part of the contract under Article 3(4) of the same law.

Unlike the first trial court, it also ruled that the penalty clause could not be excluded from the duty of explanation simply because B obtained the apartment through illegal subscription.

The court cited that the penalty clause in the standard apartment supply contract created by the Fair Trade Commission only stipulates "acts violating other housing supply-related rules" as grounds for contract cancellation, but does not include cases where penalties must be paid, and that some supply contracts exclude illegal subscription or violations of housing rules or related laws from penalty imposition grounds.

The court stated, "It is difficult to regard this penalty clause as a general and common matter in apartment supply contracts that subscribers can sufficiently anticipate without separate explanation."

However, the Supreme Court reversed the conclusion again.

The panel first referred to previous Supreme Court rulings, stating, "The business operator's duty to explain terms and conditions is based on preventing the contracting party from suffering unforeseen disadvantages due to important matters stipulated in the terms and conditions without their knowledge. Therefore, even if stipulated in the terms and conditions, if the matter is general and common in transactions and customers could sufficiently anticipate it without separate explanation, or if it merely repeats or supplements what is already stipulated by law, the business operator has no duty to explain."

The court stated, "B, who signed the supply contract with Korea Land Trust or those who enter into supply contracts to receive apartments, can sufficiently anticipate without individual explanation that even if they conclude the supply contract through supply order disturbance acts, the contract cannot be maintained once discovered, and they must compensate the defendant for damages that may occur. This applies even if some housing supply contracts do not include such penalty clauses, unlike this supply contract."

It added, "The lower court erred in judging that the penalty clause was subject to the duty of explanation based solely on the circumstances stated above," and explained that this misinterpretation of the law on the duty to explain terms and conditions affected the judgment, thus remanding the case.

This content was produced with the assistance of AI translation services.