What Happens When Representations and Warranties Are Breached in a South Korean M&A Contract? Four Supreme Court Decisions Analyzed

An acquisition closes. Months later, the buyer discovers that the target company had been participating in a bid-rigging cartel before the deal — a fact the seller warranted against. Regulatory surcharges, civil damages, criminal fines, and litigation costs follow in rapid succession. The share purchase agreement contains an explicit representations and warranties clause. Can the buyer recover? Under South Korean law, the answer turns on how courts interpret contractual obligations and the allocation of economic risk.

The representations and warranties clause — borrowed from U.S. M&A practice — has become a standard fixture in Korean share purchase agreements, asset purchase agreements, and related transactions. Between 2015 and 2022, the Supreme Court of Korea issued four landmark decisions that define how this clause operates: what liability it creates, how damages are measured, when the buyer’s own knowledge is relevant, and whether it extends beyond traditional M&A deals into debt assignments and mixed structures that include settlement clauses. For foreign companies transacting in South Korea — including those operating in the Incheon Free Economic Zone (IFEZ), which encompasses Songdo International Business District, Cheongna International City, and Yeongjong International City — understanding this framework is essential before any deal closes.

What Are Representations and Warranties in Korean M&A Contracts?

A representations and warranties clause (known in Korean as jinsu l·bojeung, 진술·보증) is a contractual provision through which the seller affirms specific facts about the target company’s legal and financial condition and guarantees their accuracy. The clause serves two core functions: it gives the buyer a basis for damages if disclosed facts turn out to be false, and it allocates between the parties the economic risk of unknown or contingent liabilities.

In Korean M&A practice, representations and warranties typically cover the following categories:

• Compliance with applicable laws and regulations — no past violations, no ongoing investigations or administrative proceedings
• Accuracy of financial statements — no undisclosed off-balance-sheet liabilities or contingent obligations
• Clean title to assets — no encumbrances, third-party claims, or unauthorized transfers
• Absence of material litigation, arbitration, or regulatory action
• Validity of material contracts, permits, and licenses

The Supreme Court of Korea characterized this clause as follows in its October 2018 ruling:

What Legal Liability Arises from a Breach of Representations and Warranties?

The Supreme Court of Korea established a two-track framework in the 2017Da6108 decision that governs all subsequent cases.

Track A — Contract Contains Both a Representations and Warranties Clause and a Damages Clause

The damages clause governs. The court must apply it. Whether the resulting liability is strict (no-fault) or fault-based depends on the contract’s language and interpretation. Critically, where the contract specifies a method for calculating the amount of damages, that method is binding and cannot be displaced or restricted by the court unless there are exceptional circumstances justifying departure.

Track B — Contract Contains Only a Representations and Warranties Clause, Without a Damages Clause

Liability is assessed under Article 390 of the Korean Civil Act (채무불이행, chaemubuihaeng), the general provision governing breach of contractual obligations. Damages are then calculated as either the decrease in the value of the target company’s shares as held by the buyer, or the difference between the price actually paid and the price that would have been paid had the breach been disclosed — whichever method best captures the buyer’s actual loss.

This framework was confirmed without modification by the Supreme Court in its January 2022 ruling (2019Da285226).

Cases 1 & 2 — Can a Buyer Who Knew About the Breach Still Claim Damages?

The two rulings discussed in this section arise from the same transaction. Together they represent the most significant judicial development in Korean M&A law on the topic of representations and warranties.

Background Facts (Anonymized)

After closing, Korea’s Fair Trade Commission (KFTC) established that Company A had participated with several other refineries in a price-fixing cartel for military fuel procurement tenders from 1998 to 2000, in violation of the former Monopoly Regulation and Fair Trade Act, Article 19(1)(i). Company A was hit with a corrective order, a surcharge payment order, and ultimately a restated surcharge of KRW 14.511 billion. The government of South Korea subsequently sued the participating refineries for civil damages, resulting in a court-approved settlement under which Company A’s share was approximately 11.84% of the total amount. A criminal fine of KRW 200 million was also imposed.

Issue 1 — Does a Buyer’s Knowledge of the Breach Bar the Claim? (2012Da64253)

The lower courts dismissed X’s claim on the ground that X had itself participated in the same cartel and therefore knew of the breach at the time of signing. The courts held that a buyer seeking to hold sellers liable for a warranty breach it was already aware of, having had every opportunity to factor the breach into the purchase price, was barred by principles of equity and good faith (sincheuk).

The Supreme Court reversed. Its reasoning proceeded as follows:

• The contract contained no clause excluding the sellers’ liability toward a buyer with knowledge of the breach. Under Korean contract interpretation doctrine, where the objective meaning of a written instrument is clear, courts must give effect to it as written. Departing from clear contract language in ways that have a material impact on the parties’ legal relationship requires an even more stringent interpretive standard.
• The purpose of the representations and warranties clause — allocation of economic risk and post-closing price adjustment — remains fully valid even when the buyer is aware of the breach. The analysis does not change based on the buyer’s state of mind at signing.
• The KFTC did not open its investigation until after closing. It cannot be assumed that X, at the time of signing, anticipated that the KFTC would impose substantial surcharges on Company A.
• Restricting a validly formed contractual obligation through general principles such as equity or good faith poses a serious threat to private autonomy and legal certainty. Such restriction is permissible only in truly exceptional circumstances. The fact that the buyer had knowledge of the underlying conduct does not, by itself, create such an exception.

Issue 2 — Does “Loss” Include Regulatory Surcharges and Fines Arising from the Target’s Own Conduct? (2017Da6108)

On remand, the Seoul High Court again dismissed the claim on different grounds: since Company A had itself engaged in the cartel, the surcharges and fines it incurred could not be characterized as “loss suffered by Company A” attributable to the sellers. The Supreme Court reversed a second time.

The agreement’s damages clause provided that where Company A or X suffered loss from a breach of warranty — including newly discovered contingent liabilities — Y1 et al. would compensate X in cash. The Supreme Court held that this language established a specific contractual method for calculating the scope and amount of recoverable loss. Under that method, any contingent liability arising from conduct occurring before the transfer of corporate control, or any impaired asset additionally discovered, constitutes loss recoverable by X — absent special circumstances to the contrary. The fact that Company A itself participated in the cartel did not eliminate the sellers’ liability, because the sellers had warranted that no such conduct had occurred and no such liability existed.

Case 3 — Does the Framework Apply to Debt Assignment Agreements?

Background Facts (Anonymized)

Court’s Analysis

The lower court held that the debt assignment agreement was void for initial objective impossibility — the assigned receivable never existed — and that the contractual penalty clause therefore did not apply.

The Supreme Court partially reversed. It held that Company Q, through Article 5 of the agreement, had made representations and warranties that the assigned receivable existed and was free from defect. Since the receivable had never existed, Company Q was in breach of Article 5. The Article 8 damages clause — providing for payment of the Article 6 penalty and refund of the assignment price in the event of loss to P — operated as a damages provision covering breaches of the warranty clause. P had paid the assignment price and received nothing of value in return; Company Q (and R, who had separately guaranteed the assignment) were therefore obligated to pay the penalty amount as damages.

This ruling confirms that the representations and warranties framework applies beyond traditional share purchase agreements to debt assignments, asset transfers, and other transaction types — wherever one party has warranted specific facts about what is being transferred. It also establishes that contractual penalty provisions can serve as the operative damages mechanism for a warranty breach claim.

Case 4 — How Do Settlement Clauses and Representations and Warranties Interact?

Background Facts (Anonymized)

Key Legal Principles Established

This case addressed several interpretive questions about how settlement clauses and representations and warranties clauses operate together in Korean M&A agreements.

Cutoff date: Sellers’ settlement liability attaches to off-balance-sheet liabilities arising from events occurring before the transfer of corporate control — here, December 8, 2015, the date S paid the balance of the purchase price and received the shares. This principle mirrors the representations and warranties framework from Cases 1 and 2.

Scope of settlement items: The court held that even if the settlement clause’s literal text did not expressly cover asset losses arising from events the parties did not anticipate at the time of signing, such losses fall within its scope by purposive interpretation. The clause’s objective — allocating risk of unknown conditions — warrants an expansive reading.

Proportional liability reduction: Where S’s own post-acquisition management decisions exacerbated the losses from the silicic acid fertilizer defects, the court reduced the sellers’ settlement liability to 80%. This reflects a contributory negligence-adjacent principle applied in the Korean M&A context.

Floor threshold: Because the settlement clause applied only to liabilities exceeding KRW 50 million, the court deducted KRW 50 million from the gross amount of qualifying liabilities before calculating the sellers’ obligation.

Parallel claims: The structure of the agreement — with a settlement clause and a representations and warranties clause as alternative bases for recovery — was not challenged by the court. The two claims may coexist. Where the settlement clause applies, it governs; items outside its scope may separately be pursued under the representations and warranties clause.

Key Practical Takeaways for M&A Transactions in South Korea

The four decisions discussed above yield a set of concrete drafting and litigation principles for any party to an M&A transaction governed by Korean law.

1. Contract Language Is Paramount

Korean courts apply a strict plain-meaning rule to written instruments. The outcome of a dispute over representations and warranties will in most cases be determined by the contract’s text. Ambiguities in the damages clause, the scope of warranted items, or the definition of “loss” will be resolved against the party that could have drafted more clearly. Foreign parties should treat every clause as if it will be enforced literally.

2. Specify the Damages Calculation Method

Where the contract sets out a method for calculating damages — for example, defining loss as “any contingent liability arising from pre-closing events” — Korean courts are bound to apply it. The alternative (no contractual method, defaulting to Article 390 of the Civil Act) produces a less predictable and typically less favorable result for buyers. Buyers should insist on an explicit, comprehensive damages calculation clause.

3. Buyer-Knowledge Exclusion Clauses Must Be Express

A seller wishing to exclude liability toward a buyer that knew of the breach at signing must include an explicit clause to that effect. Relying on equitable principles or good faith to achieve the same result will fail under Korean Supreme Court doctrine. The burden is on the drafting party — typically the seller — to capture this exclusion in writing.

4. Pre-Closing Contingent Liabilities Are Broadly Covered

The scope of “loss” under a Korean M&A representations and warranties clause is interpreted broadly. Regulatory surcharges, civil judgments, criminal fines, and related litigation costs arising from the target’s pre-closing conduct are all recoverable where the seller warranted the absence of regulatory violations. The target company’s own participation in the underlying conduct does not eliminate the seller’s warranty liability.

5. The Framework Extends Across Transaction Types

Whether the transaction is structured as a share purchase, an asset purchase, or a debt assignment, the same representations and warranties liability framework applies under Korean law. Foreign investors acquiring Korean companies or Korean assets in any form should conduct thorough pre-closing due diligence and negotiate comprehensive warranty protection regardless of deal structure.

6. Settlement and R&W Clauses Can — and Should — Coexist

Including both a settlement (earn-out / price adjustment) clause and a representations and warranties clause in the same agreement gives the buyer maximum flexibility. The two mechanisms serve different functions and do not conflict. Buyers in Korean M&A deals should resist seller pressure to include one mechanism at the expense of the other.

Frequently Asked Questions (FAQ)

Representing clients in South Korean M&A disputes — from contract structuring through warranty claims and post-closing arbitration — requires precise knowledge of how Korean courts interpret representations and warranties obligations. Atlas Legal advises corporate clients and foreign investors on transaction documentation, due diligence strategy, and post-closing dispute resolution throughout South Korea. For specific matters, please consult a qualified Korean attorney.

About the Author

Taejin Kim | Managing Partner

Corporate Counseling, Corporate Disputes, White-Collar Criminal Defense

Former Public Prosecutor | Judicial Research and Training Institute, 33rd Class

Korea University LL.B. & LL.M. (Criminal Law), University of California, Davis LL.M.

Atlas Legal | Incheon Songdo, South Korea

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