[Invest&Law] Is 'Presidential Impeachment' a Reason for Contract Termination? Reviewing Past Rulings

Dispute Over 'Force Majeure' in Lawsuit on 'M&A Contract Termination'
Courts Previously Denied It During Impeachment...Trend Now Recognizes COVID-19 and Others

Amid growing concerns about 'liquidity risks' in the capital market due to the national turmoil caused by the emergency martial law situation, market participants are increasingly interested in the extent to which various types of transaction contracts, such as mergers and acquisitions (M&A), can be recognized as force majeure and whether liability can be mitigated if these contracts are canceled.

According to the legal community on the 11th, many hold the view that "the turmoil caused by the presidential impeachment itself is difficult to consider as a reason for contract termination." Typically, transaction contracts include force majeure clauses to exempt parties from liability for damages, but it is hard to regard 'presidential impeachment' as a cause equivalent to a natural disaster.

Generally, under commercial law, if force majeure situations such as war, rebellion, or natural disasters occur and it is proven that damages resulted from these, the party failing to fulfill the contract is exempted from liability. However, since the premise of a contract is to perform its terms, courts have tended to interpret the scope of force majeure narrowly.

This was also confirmed in court rulings related to M&A following the impeachment of former President Park Geun-hye. In 2016, a local shipbuilding company, H Company, entered rehabilitation proceedings due to management difficulties, and the rehabilitation court decided to proceed with the rehabilitation through M&A. During this process, Consortium A participated in the M&A bidding and won the bid. Both parties signed an 'Investment Contract for M&A' on October 11 of that year. The total acquisition price was set at 3 billion KRW, with a deposit of 300 million KRW.

On the day of the contract, H Company established a pledge on the deposit paid by the consortium and awaited the final payment of the acquisition price. A pledge is a security measure that prevents the lender from arbitrarily withdrawing money from the account. However, the consortium delayed the payment of the acquisition price and eventually declared 'contract termination' on December 21 of the same year.

The consortium attributed the failure to pay the acquisition price to the political turmoil caused by the 'presidential impeachment' and demanded the return of the deposit. The consortium argued, "Due to the presidential impeachment, which is equivalent to a natural disaster, the project was delayed, making it difficult to secure funds. The payment became difficult without any fault of the consortium." They particularly cited the clause in the investment contract stating that "if the contract is terminated without fault on the part of the consortium, the deposit must be returned immediately."

In fact, about two weeks after the M&A contract was signed, media reports intensified regarding the tablet PC controversy related to former President Park Geun-hye, and on December 9 of the same year, the impeachment motion was passed. During this period, the won-dollar exchange rate surged from 1,131.5 KRW to 1,175.9 KRW, maximizing market volatility.

On the other hand, H Company argued that "the consortium should bear responsibility for the contract termination," stating that "the deposit paid by the consortium should be forfeited to H Company according to the forfeiture clause, which constitutes liquidated damages. Accordingly, the pledge naturally expires," and filed a lawsuit to cancel the pledge on the deposit claim.

The court ruled in favor of H Company. The first-instance court stated, "It is difficult to view the deposit forfeiture clause as unfairly excessive to the consortium. It is common practice in ordinary contracts to set liquidated damages at about 10% of the contract amount. In this case, the deposit forfeiture clause applies only if the contract is terminated due to the consortium's fault, and the consortium's claim that 'presidential impeachment' is equivalent to a natural disaster cannot be accepted."

Furthermore, the court noted, "It is hard to see that the consortium was in an economically weaker position compared to H Company at the time of the investment contract." Accordingly, the deposit paid by the consortium belongs to H Company under the forfeiture clause, and the pledge in this case also expires according to the contract terms." The consortium did not appeal, and the first-instance ruling was finalized as is.

Meanwhile, in civil lawsuits related to M&A, the question of what extent qualifies as a force majeure 'natural disaster' continues to be a contentious issue. HDC Hyundai Development Company paid a performance bond of about 250 billion KRW, which is 10% of the transaction amount, while pursuing the acquisition of Asiana Airlines in 2019, but a lawsuit for the return of the bond is ongoing after the M&A contract was terminated.

The first and second trials ruled that "the significant deterioration of Asiana Airlines' financial and operational status was due to the natural disaster caused by the spread of COVID-19. This qualifies as an exceptional reason for a materially adverse effect (justifying contract termination)," and judged that Asiana Airlines did not need to return the bond. The case is currently awaiting a Supreme Court decision.