Recent Trends of the Korean Courts on Parties’ Obligation to Cooperate in Public Offering Project Financing (PF) Business

Introduction

Korea’s public offering PF business is a public-private joint real estate development project which utilizes public offering and PF loan methods. After a private sector (generally in a form of a consortium) who presents the optimal business plan and the highest price for a specific site owned by the public sector is selected through the public offering, the selected private sector and the public sector jointly invest to establish a project company (Project Financing Vehicle, PFV); the public sector sells its site to the PFV; and the PFV and the private sector finance through PF loan to implement the project.

Overseas examples of public-private joint real estate development project include the Battery Park City project in Manhattan, New York, and the Roppongi Hills project in Tokyo, Japan. Due to its strengths, creating synergies through combining the public sector’s know-how in real estate development with the private sector’s creative ideas and enhancing the reliability of the project through the public sector’s direct participation, public-private joint real estate development project has also been invigorated within Korea but distinctively with public offering and PF loan methods.

However, since public offering PF business is usually large in size and carried out over a long period of time, changes in circumstances or financing which both parties could not have expected at the time of concluding the Implementation Agreement may occur. When the event of default (EOD) occurs, in order to return the loan, the public sector returns the land price received by the private sector to the lenders which results in private sector’s non-payment of the land price; therefore, the public sector terminates the Land Contract and the Implementation Agreement. Regarding such public sector’s termination, private sector emphasizes the characteristics of the public offering PF business and refutes that the public sector has violated its obligation to cooperate which is generally stipulated in the Implementation Agreement for the project.

Parties’ Obligation to Cooperate in Public Offering PF Business

The Korean Court generally judges that both parties to a public offering PF business are obligated to cooperate, such as adjusting the implementation plan, to the extent that it is reasonable to carry out the project. The Korean Court generally acknowledges the obligation to cooperate in light of the principle of good faith and the principle of circumstance change and based on the following reasons: ① The terms and conditions of a Implementation Agreement state that there is an open possibility amending the plan or agreement, ② the possibility of any future change is generally anticipated at the time the Implementation Agreement because it is common to carry out the project for a long period of time, ③ the risk of any changes in circumstances is considerable due to the large scale of the investment and the high ratio of other persons’ capital input and financing through future business activities in terms of financing method, ④ holding only the private sector liable to bear all risks incurred in the project is unfair, ⑤ the public sector is not just a mere land seller who pursues only private interests due to its obligation to seek public interests, such as improving the citizens’ standard of living and promoting efficient utilization of the land, and etc.

However, even if the parties are recognized to have the above obligation to cooperate or to adjust the implementation plan, the specific details, scope, and violation of such obligation should be determined by comprehensively considering the attitude of the parties, the cause of the change of the business environment, and all circumstances before and after the consultation process in each case. The main criteria recognized for judging the content of the obligation to cooperate and whether it is violated are as follows.

First, the risk that was unpredictable or difficult to predict at the time of concluding the Implementation Agreement should be realized later and cause a serious obstacle to the project’s implementation, making it impossible or significantly difficult to carry out the project. In determining the size, timing, and method of financing necessary for the project, a private sector must first consider the financial risks and economic fluctuations in order to establish a plan, so the disability within the general scope should be resolved by the private sector and cannot be a legitimate reason to change the implementation plan (Seoul High Court Oct. 19, 2016, 2015Na2045060 (principal action), 2015Na2045077 (counter action)).

Second, the obligation to cooperate is only a general obligation to cooperate in the light of the principle of good faith and does not mean an obligation to adjust the implementation plan with specific content. Therefore, even if one party did not accept a specific plan change requested by the other party, it alone cannot be regarded as a violation of the obligation to cooperate. Since the public sector selects the private sector by evaluating implementation plans submitted by several private sectors, it should be considered that the private sector is basically obligated to pursue the project according to the implementation plan submitted by itself, and that it is left to the will of the parties on what and how the business plan is to be adjusted in detail according to the subsequent circumstances (Seoul Central District Court, June 2, 2015, 2013Gahab553847).

Third, the obligation to cooperate is difficult to be recognized for changes to the essential parts of the public offering guidelines and implementation plans. Since the Implementation Agreement of the public offering PF business is concluded by the public offering method and the evaluation of the implementation plan is considered an important factor in selecting the private sector, the change of the essential contents of the implementation plan or the Implementation Agreement somehow favorable to the private sector after the conclusion of the Implementation Agreement undermines the legitimacy and fairness of the public offering as it is providing preferential treatment to the selected private sector against others who have failed the public offering (Seoul High Court, Jan. 11, 2017, 2015Na2058714).

Implications

Due to the characteristics of the public offering PF business, the parties’ obligation to cooperate is very important since there exists a high possibility of significant changes in the business environment or difficulties in financing that the parties may not have expected in advance.

In light of the principle of good faith or the principle of circumstance change, the obligation to cooperate, which is recognized as the obligation to adjust the implementation plan or the Implementation Agreement within a reasonable extent to carry out the project, is a general obligation given to the parties who promote the public offering PF business, but in certain cases, the contents of the obligation to cooperate and the judgment on whether it is violated should take into account the characteristics and specific facts of each development project.

In this regard, the precedents discussed above suggest the recent trends of the Korean court regarding parties’ obligation to cooperate in public offering PF business and the standards that should be considered important in determining whether it is violated; therefore, it seems necessary for the parties or stakeholders promoting the public offering PF business to pay attention to in promoting the project and proceeding with mutual consultation.

By Yulchon, Korea, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact korea@transatlanticlaw.com 

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