"Even With Forged Documents Revealed"... Startup Investment Firm Loses Damages Lawsuit [Invest&Law]

'Assignment Contract' Became a Stumbling Block... Court: "Original Claim Extinguished"


Lawsuit Against Global VC Blocked by 'U.S. Local Arbitration' Clause

A startup investment firm filed a damages lawsuit against a partner company that committed illegal acts, but the first instance court ruled that the firm could not receive any compensation, as an additional contract signed during the incident's resolution process prevented such recovery.

According to the legal community on April 1, the Civil Division 29 of the Seoul Central District Court (Presiding Judge Ko Seungil) dismissed all claims brought by startup investment firm A (plaintiff) against investment partner and fund operator B, its CEO, as well as global venture capital (VC) firm C and others, in a lawsuit seeking damages and other remedies.

A So-Called Global Project... Partner Company Even Forged Bank Remittance Receipts

Previously, in January 2020, Company A participated in a startup accelerator program operated by U.S.-based Company C through its partner, Company B. Under this arrangement, Company A invested in the program via Company B and acquired a 15.56% stake in the program.

Over five months, Company A wired a total of 1,371,000,000 won to Company B in four separate transactions. However, it was found that Company B's CEO did not remit part of the funds to the U.S., and even forged a foreign currency remittance certificate from a certain bank to conceal the transfer. Additionally, Company B secretly terminated its partnership with Company C without informing Company A.

After belatedly discovering the situation, Company A took desperate measures to protect its investment. It executed an “assignment contract” to directly acquire the stake that Company B held in the U.S. investment company. Since ten startups had already been selected and were operating within the program, Company A intended to secure the stake directly and continue the program without going through Company B. Subsequently, in 2021, Company A filed this lawsuit, seeking “restoration to the original state (return of investment) and damages for unlawful acts” due to the termination of the investment contract.

'Assignment Contract' to Recover Losses Legally Considered 'Waiver of Rights'

The court acknowledged that Company B had indeed breached the original contract. It stated that the main obligation under the agreement was to transfer the entire investment to Company C, which was not fulfilled. However, the court held that this did not entitle Company A to a refund. This was because, after learning of the forgery and termination, Company A chose to sign the assignment contract instead of demanding rescission of the contract.

The court explained, “Given that Company A entered into the assignment contract while aware of the forged remittance certificate and the termination agreement, this should be seen as terminating the effect of the original investment contract and agreeing that Company A would directly acquire the stake.” In other words, since the earlier agreement had already been replaced by a new one, Company A could not demand a refund based on breach of the previous contract.

The court also stated, “Even if there was deceit on the part of Company B’s CEO, it is difficult to conclude that Company A immediately suffered damages, as Company A secured a stake equivalent to its investment through the assignment contract.”

"Disputes Involving the Global VC Must Be Resolved by U.S. Arbitration"

Company A also sought to hold Company C liable, arguing that the program was poorly managed, but this claim was also dismissed by the court. The reason was an “arbitration clause” buried in the contract.

The court determined that all disputes arising under the contract must be resolved exclusively by arbitration in the United States, and thus found that a lawsuit in a Korean court was inadmissible, issuing a dismissal. A dismissal means the court ends the proceedings without considering the merits because the lawsuit fails to meet procedural requirements or the claim is outside the court’s purview.

Company A has appealed the first instance ruling. The CEO of Company B has been referred to criminal proceedings on charges of fraud under the Act on the Aggravated Punishment of Specific Economic Crimes.

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