Barun Law represented a developer of a low-temperature logistics warehouse.

(1) The creditor is a co-constructor of a low-temperature logistics warehouse development project. As the developer of the project, the client received a PF loan of approximately KRW 55 billion from a financial institution and pledged the shares held by the client's CEO and others as collateral (security interest).  

(2) However, due to the commencement of the rehabilitation process for the joint contractor B, the contractor was unable to complete the construction by the required completion date. As a result, the contractor lost the time benefit of the loan agreement, subrogated the loan to the financial institution, and then received all rights and security rights under the loan agreement from the financial institution.

(3) Subsequently, claiming that it had become a shareholder of the client by executing the share pledge transferred from the financial institution, the contractor filed an application for a provisional injunction seeking confirmation of its shareholder status.

(1) Judgment of the Seoul Central District Court: The first instance court dismissed the provisional injunction application for the following reasons: (i) It would be a violation of the principle of good faith or an abuse of rights for the contractor to acquire control of the client by executing a security right transferred from a financial institution through subrogation. (ii) If the contractor is recognized as a shareholder, it becomes unfair for the client to lose the opportunity to pursue the contractor for damages arising from the contractor's failure to comply with its obligation to complete the construction, as the contractor acquires control of the client.

(2) Judgement of the Seoul High Court: Further, the court of second instance dismissed the appeal against the provisional injunction decision on the grounds that it was unreasonable to allow the contractor, which believed that it would earn a large profit from the project if it acquired the client's right to execute the project, to intentionally default on its responsibility for completion and to pay for the loan instead of the developer to the financial institution, thereby taking the project from the developer.

We argued that (1) the contractor’s failure to comply with its obligations resulted in the acceleration of the loan agreement, (2) it is not interpreted that the contractor that failed to comply with its obligations under the loan agreement is allowed to seize the developer’s right to execute the project by exercising its pledge over the shares, and (3) if it is interpreted otherwise, the contractor may intentionally violate its obligations to comply with its obligations in a project that is expected to be profitable and seize the right to execute the project, which constitutes a violation of the principle of good faith and abuse of rights.

Recently, due to the deterioration of the real estate sector, many disputes have arisen regarding land management trust projects implemented under the responsibility of completion. If the PF loan agreement and trust agreement are interpreted solely according to the text therein, there is room for interpretation that a construction company that defaults on its obligation of responsible construction can subrogate the loan and take away the project implementation rights of the developer by executing security for shares. This case, therefore, is significant as a precedent in that the court determined that it is impermissible for a contractor that is responsible for defaulting on its obligation of responsible construction to exercise its rights under the subrogation of the debtor to acquire the right to execute the project, which is contrary to the principle of good faith.