'SK Hynix China Plant Fire' Chengdu ENG... Supreme Court: "Delayed Damages Must Be Reconsidered"

Published 07 Aug.2025 07:09(KST)

[Supreme Court Ruling]

The Supreme Court upheld the lower court's decision recognizing the joint liability of Chengdu ENG, the parent company of Chengdu Construction, a local contractor in China, in connection with the fire accident at SK Hynix's plant in China. However, the Supreme Court overturned the lower court's dismissal of the claim for delayed damages.

On July 3, the Supreme Court's Civil Division 1 (Presiding Justice Shin Sookhee) ruled in the recourse claim lawsuit (2021Da220741) filed by Chinese insurance companies against Chengdu ENG, a Korean company, that the lower court's finding of joint liability was correct. However, the Supreme Court found that the lower court was wrong to dismiss the claim for delayed damages, overturned that part of the ruling, and remanded the case to the Seoul High Court.

[Facts]

In July 2013, SK Hynix signed a contract with Chengdu Construction, a subsidiary of Chengdu ENG, for the installation of gas supply facilities at its semiconductor plant in Wuxi, China. However, a fire broke out in the gas pipeline, burning 2,500 square meters (approximately 756 pyeong) of the plant. SK Hynix claimed $1.065 billion (about 1.17 trillion won) in insurance from several Chinese insurers, including Company A. Five insurance companies agreed to pay SK Hynix $860 million (about 950 billion won) and received the right to claim damages in return.

Subsequently, the Chinese insurance companies filed a lawsuit for damages against Chengdu Construction in China. The Chinese court ruled that Chengdu Construction must compensate the insurers for 20% of the property damage portion of the insurance payout to SK Hynix. After this ruling was finalized, the Chinese insurance companies filed a lawsuit in Korea against Chengdu ENG, the parent company of Chengdu Construction, seeking 100 billion won in recourse.

[Issues]

- Whether, under Article 20(3) of the Chinese Company Law, a parent company can be held jointly liable for the debts of its subsidiary.

- Whether the interest rate specified by Chinese law can be applied in calculating delayed damages.

[Lower Court Rulings]

The court of first instance ordered Chengdu ENG to pay the insurers about 122.7 billion won. The court found that the fire was caused by the site manager of Chengdu Construction, and that Chengdu ENG, by directing and supervising these individuals, had an employment relationship that could be recognized.

On appeal, the compensation amount was reduced to 12.9 billion won. The appellate court cited several reasons: the circumstances and scale of the fire suggested that both Chengdu Construction and Chengdu ENG were sufficiently aware of the possibility of compensation after the fire; Chengdu ENG was in a position to influence key management decisions at Chengdu Construction, such as dividend resolutions; and it was unusual that a large dividend was decided after the fire, given that Chengdu Construction had never made regular dividends before. Based on these factors, the appellate court recognized Chengdu ENG's joint liability for Chengdu Construction's compensation obligations but dismissed the claim for delayed damages.

For this case, the appellate court conducted remote expert witness examinations of Chinese civil law experts, including Professor Liu Kaixiang of Peking University and Professor Zhang Xinbo of Renmin University of China, and determined that Chinese law would be the governing law for the case.

The appellate court stated, "Chengdu Construction and Chengdu ENG are in a complete parent-subsidiary relationship, forming a corporate group that shares management strategies, with Chengdu ENG, as the headquarters of the group and 100% shareholder, having influence over major management decisions at Chengdu Construction through overlapping management structures. However, as separate legal entities established in different countries, it is recognized that each company operated its business and assets independently for several years until the fire incident."

The court continued, "The construction work was performed by Chengdu Construction under its contract with SK Hynix, holding the necessary licenses in China and utilizing its own material and human resources. Although Chengdu ENG, as the 100% shareholder, ultimately benefited from Chengdu Construction's growth and operating profits, this was due to its shareholding and group structure, not because the profits from the work performed by the construction workers were directly attributable to Chengdu ENG."

However, the appellate court partially recognized joint liability between Chengdu ENG and Chengdu Construction under Chinese company law. Chengdu Construction paid a large dividend to Chengdu ENG immediately after the fire, which the court viewed as an attempt to evade compensation obligations.

The appellate court noted, "Chengdu Construction had never made regular dividends before the fire accident. In 2013, Chengdu Construction did not earn particularly high operating profits; rather, a large-scale fire occurred, employees were being investigated by fire authorities, and SK Hynix had already notified of its intent to claim compensation." The court added, "Even if there was a need for Chengdu ENG to recover its previously invested funds, the hasty decision to pay such a large dividend is highly unusual. It cannot be excluded that the purpose was to evade liabilities arising from the fire accident."

[Supreme Court Decision]

The Supreme Court found that the lower court's recognition of Chengdu ENG's joint liability for the debts of its subsidiary, Chengdu Construction, was correct. However, the Supreme Court found that the lower court was wrong to dismiss the claim for delayed damages, overturned that part of the ruling, and remanded the case to the Seoul High Court.

The bench stated, "Chengdu ENG, as the sole shareholder of Chengdu Construction, abused its authority by causing Chengdu Construction to pay a large dividend immediately after the fire, thereby enabling evasion of compensation obligations related to the fire and seriously infringing on the interests of the plaintiffs as creditors. Therefore, the lower court's recognition of joint shareholder liability under Chinese company law does not contain any error in the legal principles regarding the scope of such liability that would have affected the judgment."

However, regarding delayed damages, the court explained, "This is compensation for delay in performance of obligations and must be governed by the law applicable to the original creditor-debtor relationship. When foreign law is the governing law, its content is a matter of law, not fact, and the court must investigate and determine it ex officio, taking into account interpretations by foreign courts as well."

The court continued, "According to Article 253 of the Chinese Civil Procedure Law and the interpretation of the Supreme People's Court of China, if the monetary obligation specified in a judgment is not performed within the period set by the judgment, 'double interest' must be paid. In fact, in the Chinese court's ruling related to this case, it was held that if Chengdu Construction failed to fulfill its recourse obligation within the deadline, it must pay 'double the contractual interest' as delayed damages."

The Supreme Court concluded, "The lower court should have examined the relevant Chinese ruling and legal provisions to determine whether, in this case where the plaintiffs are claiming joint liability for Chengdu Construction's recourse obligation against the defendant, the defendant is also required to pay delayed damages equivalent to 'double the contractual interest' from the date of the judgment. The lower court failed to consider this issue and dismissed the plaintiffs' claim for delayed damages entirely. This constitutes a misunderstanding of the legal principles regarding the application of Chinese law to delayed damages and a failure to conduct the necessary examination, which affected the judgment."