Supreme Court Rules "Effect of Provisional Seizure Remains Even After Mutual Contract Termination"... Precedent Changed

Mutual Contract Termination After Provisional Seizure Cannot Be Asserted Against Creditor
Exception Must Be Proven by Third-Party Debtor; Case Overturned and Remanded

The Supreme Court has ruled that if a creditor seizes receivables owed to them, and then the parties to the contract subsequently agree to terminate the contract, the party obligated to pay, in principle, cannot refuse payment to the seizing creditor on the basis of that contract termination.

On September 29, the Supreme Court in its full bench session, presided over by Justice Kwon Young-jun, overturned a lower court ruling that had found against plaintiff A in a collection suit against company B, and remanded the case to the Ulsan District Court. All 11 justices reached this decision unanimously.

In front of the Supreme Court, Seocho-gu, Seoul. Photo by Jinhyung Kang

In 2015, A invested 300 million won in a company’s business. When the business did not proceed, the company agreed to return 400 million won to A, including both the investment principal and expected returns. Later, this company entered into a contract to transfer its biogas generation business to company B for 850 million won.

In 2020, A placed a provisional seizure on 350 million won of the transaction payment that the company was due to receive from B. Subsequently, A obtained a seizure and collection order transferring this claim into a formal seizure, and filed a lawsuit seeking payment from B. B contended that since the transfer contract between itself and the company had been terminated by mutual agreement after the provisional seizure, its obligation to pay was extinguished.

The courts of first and second instance accepted B’s argument. They reasoned that there was insufficient evidence to conclude that the two companies had terminated the contract simply for the purpose of nullifying the claim seized by A, absent any reasonable justification. This decision followed an earlier Supreme Court precedent that allowed a party to assert the effect of contract termination against a seizing creditor, provided there were no special circumstances even when the contract was mutually terminated after a provisional seizure.

The Supreme Court has now changed this precedent. It held that if, after a provisional seizure has taken effect, the debtor and the third-party debtor subsequently agree to terminate the contract, the third-party debtor, as a rule, cannot assert against the seizing creditor that the seized claim has been extinguished.

The Supreme Court stated, “A mutual termination under these circumstances constitutes an act by the debtor that extinguishes the seized claim while the prohibition against disposition is in effect,” and added, “In essence, this is no different from an act disposing of the claim itself.” The Court noted that, under the previous precedent, even if a creditor expended time and money to secure a provisional seizure, the effect could be nullified by a subsequent agreement between the debtor and a third-party debtor.

However, the Supreme Court allowed for exceptions: if statutory or contractual grounds for termination already existed, or if refusing to recognize the effect of mutual termination would be manifestly unreasonable considering the nature of the contract and the circumstances of the agreement, an exception may be recognized. The Court clarified that it is up to the third-party debtor, who would otherwise be required to pay the seized funds, to prove the existence of such exceptional circumstances.

 

Because the lower court did not examine whether there were any exceptional circumstances justifying recognition of the contract termination, the Supreme Court ordered a rehearing of the case. The Court explained, “This ruling is significant in that it shifts the principles and exceptions concerning mutually agreed contract terminations after a claim is seized, prioritizing the interests of the seizing creditor over the debtor’s freedom of disposition.”

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