Consequential loss in the energy sector in South Korea

The term “consequential loss”, strictly speaking, is not a legal term used in Korean law. This expression does not appear in the Korean Civil Act (“KCA”), nor have the Korean courts given this phrase a particular and conclusive meaning.

However, there is a concept of ”‘special loss” under article 393(2) of the KCA that is likely relevant. [1]  This is because, historically, the terms “ordinary loss” and “special loss” used in articles 393(1) and (2) of the KCA each derive from articles 416 [1.1]  and  [1.2]  of the Japanese Civil Code, which in turn are known to have incorporated the concepts of direct loss (limb 1) and consequential loss (limb 2) set out in Hadley v Baxendale (1854) 9 Exch. 341.

Hence, although strictly speaking Korea does not have a concept of “consequential loss”, it does have a concept of “special loss” which is broadly similar to the meaning of “consequential loss” under English law.

In the Standard Form for Construction Contracts (issued by the Korean Ministry of Land, Infrastructure and Transport), which is widely used for Korean domestic projects, there is no exclusion or limitation of liability clause. The phrase “consequential loss” (or “special loss”) is not used in this standard form.

However, it is possible for the parties to add an exclusion clause as a special condition to this standard form under which liability for “consequential loss” may be excluded, although this is unusual in practice.

With respect to international projects, Korean contractors often follow or incorporate international standard forms (e.g. FIDIC forms) to their contract in which the words “consequential loss” are used in an exclusion or limitation of liability clause.

It is likely that the Korean courts would construe the term “consequential loss” in an exclusion clause to have the same meaning as “special loss” under article 393(2) of the KCA. It is reasonable to assume that the Korean courts will take into consideration the historical background and meaning of “special loss” (which derives from consequential loss) when construing the term “consequential loss” in an exclusion clause.

To the extent that “consequential loss” under Korean law is construed as “special loss” (under article 393(2) of the KCA), the meaning of special loss needs to be ascertained. “Special loss” refers to “loss arising from individual or specific circumstances of either party to a contract.” [2]  This is in contrast to the term “ordinary loss” which the Korean Supreme Court defines as “in the absence of special circumstances, a loss which in the notion of general transactions or in light of the experience of the public at large is considered to arise normally as a result of a certain type of breach of contract.” [3]  In practice, determining which type of loss falls under “ordinary loss” or “special loss” is a highly fact-specific task.

It should be borne in mind that if an exclusion clause is included in a standardised contract governed by Korean law which has been drafted or prepared by one party for the purpose of using the contract form with multiple parties, the Act on the Regulation of Terms and Conditions (“ARTC”) may apply. If it applies, the ARTC mandates that such contract must be interpreted in light of good faith and fairness. [4]   Further, the contract must be construed in favour of the customer if the meaning of the terms and conditions is not clear (i.e. contra proferentem). [5]  Also, if the ARTC applies, the Korean courts could – depending on the circumstances of each particular case – interpret the term “consequential loss” in an exclusion clause in a very strict and narrow way.

The general principles governing contract interpretation under Korean law are:

1. natural interpretation – the true and subjective intention of the parties underlying a contract provision.
2. normative interpretation – engaged when natural interpretation fails, is where the objective meaning given to a contract is explored.
3. supplementary interpretation – used as a gap-filling device under which the parties’ common understanding of a certain matter is considered even if such has not been stipulated in the contract.

It should be noted that a special principle of construction applies to exclusion clauses under Korean law – the principle of “strict interpretation”. [6]  Strict interpretation generally refers to narrow interpretation, especially when the language of the exclusion clause is unclear or ambiguous.

It follows that specific heads of loss stipulated in an exclusion clause alongside consequential loss will likely be construed on their own merits in accordance with the contract interpretation principles set out above.

If, as stated in section 3, an exclusion clause is included in a standardised contract to which the ARTC applies, principles such as good faith, fairness and contra proferentem may be further engaged for the construction of an exclusion clause. In that case, the Korean courts could interpret the language of the clause in an extremely narrow manner.

1. Specific performance: Under article 389(1) of the KCA, a party to a contract is entitled to seek an order from the court under which the breaching party to the contract is mandated to specific performance of its contractual obligation. [7]  This remedy concerns the performance of a party’s primary obligation under the contract (seeking damages would be deemed to pertain to a party’s secondary obligation under the contract). A consequential loss exclusion clause, which limits the scope of recoverable damages, is unlikely to affect or restrict a party’s primary obligation (i.e., specific performance obligation) under the contract. Hence, it is unlikely that a consequential loss exclusion clause will have an impact on this remedy.
2. Provisional injunction: A provisional injunction order has the effect of preserving the status quo of the subject matter of the dispute up until a decision on the merits has been rendered by the court. A party seeking such order needs to establish that (i) a prima facie non-monetary claim against the other party exists, and (ii) there is a concern that a party is unable to or will have substantial difficulties in pursuing such claim if such order is not made. [8]  Since a provisional injunction only concerns non-monetary claims, it is unlikely that a consequential loss exclusion clause, which limits the scope of recoverable damages, will have an impact on a party’s right to this remedy.
3. Provisional seizure: A provisional seizure order has the effect of freezing the defendant’s assets up until a decision on the merits has been rendered by the court. A party seeking such order needs to establish that (i) a prima facie monetary claim against the other party exists, [9]  and (ii) there exists a concern that a party is unable to or will have substantial difficulties in the enforcement of its claim (at a later stage) if such order is not made. [10]  Depending on the type of loss being sought by the claimant, a consequential loss exclusion clause could have the effect of negating the existence of a prima facie monetary claim. In those circumstances, a consequential loss exclusion clause could potentially have an impact on a party’s right to this remedy.