[Focus on This Ruling] Court Rules "Not Liquidated Damages"… KB Real Estate Trust Wins Its First Completion Guarantee Lawsuit

"Actual Damages Must Be Compensated for Non-fulfillment of Obligations"
New Interpretation Overturns Previous Rulings
Most Arguments by Defendant’s Counsel, YK Law Firm, Accepted

A court has ruled that when a real estate trust company enters into a management-type land trust agreement with a lender group that includes a "responsible completion" clause—requiring compensation for loan principal, interest, and late interest in the event of incomplete project completion before the agreed deadline—the agreement cannot be interpreted as a provision for liquidated damages. Instead, the court found that such a clause should be seen as a commitment to compensate for actual damages incurred due to a breach of obligation.

This interpretation contrasts with earlier court decisions in similar cases, where trusts' failure to meet their completion obligations was deemed as a liquidated damages clause, resulting in rulings requiring the trust companies to pay the entire amount of loan principal and accrued interest. Going forward, attention is focused on how higher courts will rule on the matter.

KB Real Estate Trust headquarters located in KB Life Tower, Yeoksam-dong, Gangnam-gu, Seoul. KB Life

"Liquidated Damages—Full Compensation" vs. "Merely Examples—Actual Loss Compensation"

According to legal sources on September 22, the 46th Civil Division of the Seoul Central District Court (Presiding Judge Kim Hyung-Cheol) dismissed a claim by NewsState Jaycha Co., Ltd. against KB Real Estate Trust Co., Ltd., which sought "400 million won and interest" under a damages agreement. This ruling was handed down on September 9, denying the plaintiff's claims.

The court stated: "The disputed provision in this case cannot be regarded as a damage guarantee contract or a liquidated damages clause requiring the defendant to compensate the plaintiff for the full amount of the loan principal and late interest, regardless of any actual loss suffered by the plaintiff."

It continued: "Accordingly, while the defendant is required to compensate the plaintiff for actual damages incurred due to the failure to fulfill the responsible completion obligation, the plaintiff did not provide specific arguments or evidence regarding the difference between the recoverable loan principal under the responsible completion obligation and what could actually be recovered. Therefore, the plaintiff's claim cannot be accepted."

The plaintiff, NewsState Jaycha, is a special purpose company (SPC) established to finance the construction and sale of an officetel in Udong, Haeundae-gu, Busan, with IMDC Co., Ltd. as the project developer and Shinwon Construction as the contractor. The lender group (including the plaintiff) signed a loan agreement with IMDC as the borrower and project developer, in which IMDC borrowed a total of 46 billion won. NewsState Jaycha was a subordinated lender (Tranche C), lending 4 billion won to the borrower at an annual interest rate of 8%, a late interest rate of 11%, and setting the maturity date as 35 months from the initial drawdown date.

KB Real Estate Trust entered into a management-type land trust agreement with NewsState Jaycha, which included a clause stipulating that in the event the trust company failed to meet its responsible completion obligations, it would compensate the lender group for any losses incurred (i.e., repayment of loan principal and late interest).

The contractor failed to meet its responsible completion deadline, which was 29 months from the initial loan drawdown date (October 13, 2021), and KB Real Estate Trust also failed to comply with its responsible completion deadline of 35 months from the initial drawdown (September 12, 2024). As a result, the loan matured, the borrower failed to repay the principal, and ultimately, KB Real Estate Trust completed and received approval for the building on October 20, 2025.

During the trial, the scope of compensation stipulated in the loan agreement's collateral-related clause and the trust agreement's "responsible completion" clause was a key issue. Specifically, the parties disputed the interpretation of the language stating that "if the trust fails to fulfill its responsible completion obligations, it shall compensate the lenders for any losses incurred (loan principal and late interest)."

The plaintiff demanded that KB Real Estate Trust, having failed its responsible completion obligation, pay the full amount of the 4 billion won loan principal, agreed interest, and all late damages as predetermined losses under the guarantee or liquidated damages agreement between the two parties.

Seoul Central District Court, Seocho-gu, Seoul. Photo by Yonhap News Agency

Article 398 of the Korean Civil Act provides that parties may stipulate the amount of damages to be paid in the event of a breach of contract, allowing the creditor to claim the stipulated amount by merely proving non-fulfillment by the debtor, without the necessity of establishing the occurrence or amount of actual damages.

KB Real Estate Trust countered that the language "loan principal and late interest" in the clause merely provided illustrative examples or explanations of loss rather than stipulating liquidated damages. Therefore, the defendant is only obliged to compensate for the actual loss arising from the failure to fulfill the responsible completion obligation.

They further argued that such losses would consist either of (i) the legal interest accrued between the day following the last responsible completion date (when the plaintiff would have been able to recover the loan principal from trust assets if obligations had been met) and the day the use approval was granted, or (ii) the difference in building value between the responsible completion deadline and the day use was approved, if this affected the recoverable loan principal for the plaintiff.

Additionally, KB Real Estate Trust claimed that there was no specific argument or evidence from the plaintiff proving the occurrence or scope of damages, nor a causal connection between the delay and actual losses. They pointed out that, given the value of the building as of October 20, 2025 (upon completion), the plaintiff would be able to recover all principal and late interest, meaning no damages would have occurred.

The court ultimately accepted KB Real Estate Trust's arguments and dismissed the plaintiff's claim in its entirety.

YK Law Firm for the Defendant: "Accepted Argument—Violation of Capital Markets Act and Other Laws"

This ruling represents a completely different interpretation from prior decisions that placed all responsibility for delayed completion on the trust company. Since May last year, Seoul Central District Court has ruled against the trust company in more than seven similar cases; the new interpretation may establish a fresh standard for determining where risks lie in project financing (PF) for real estate projects going forward.

Previous rulings determined that the relevant clause constituted an independent obligation for damages by the trust, not a guarantee, since it concerned compensation for losses from the failure to perform responsible completion duties.

However, in this suit, YK Law Firm, representing KB Real Estate Trust, advanced new arguments, including: ▲ If interpreted as the plaintiffs claimed, it would constitute a guarantee and loss compensation prohibited under the Capital Markets Act; ▲ It would violate the principle of limited liability of a trustee under Article 38 of the Trust Act; ▲ It would breach the Insurance Business Act by effectively engaging in guarantee insurance business without Financial Services Commission approval; and ▲ It would be null and void as a socially wrongful act under Article 103 of the Civil Act. The court largely accepted these new arguments.

The bench held that "regarding the full loan principal and late interest as liquidated damages would amount to improper loss compensation or profit guarantee prohibited by the Capital Markets Act. Requiring such compensation regardless of actual loss runs counter to the fundamental principle of equitable and reasonable distribution of loss within the damages compensation system."

YK Law Firm further argued that in related cases, it was the lenders themselves who stated during the process of assignment of loan receivables that claims for losses arising from failure to perform completion duties were personal guarantees ancillary to loan receivables. They emphasized to the court that transferring losses to the trust company could cause serious disruption in the financial market, justifying strict judicial oversight.

Jaewan Park, Attorney at Law YK. Law Firm YK

Jae Wan Park, attorney at YK Law Firm, stated, "This decision is the first to interpret the clause at issue as a commitment to compensate for actual damages, not as a liquidated damages provision. It further clarifies that, as argued by the lender group, interpreting it as liquidated damages would amount to a payment guarantee or loss compensation prohibited by the Capital Markets Act and others, running contrary to the foundational purpose of the damages compensation system." He added, "Through this ruling, the exact legal nature and interpretation of responsible completion-related provisions in management-type land trusts have become clear."

Park further commented, "This case confirms that simply dressing up a provision as 'damages for breach of responsible completion obligation' does not exempt it from the Capital Markets Act and other legal requirements. It also confirms that imposing blanket losses on the trustee, even when actual damage is unclear—such as missing the responsible completion deadline by a single day—cannot be allowed. These points are significant in preventing unnecessary confusion in the Korean financial market."

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