Atlas Legal recently represented the defendant (seller) in an earnest money dispute regarding residential property in Incheon, successfully dismissing the plaintiff’s claim for double reimbursement by proving the non-establishment of the sales contract and absence of penalty clause agreement.
Basic Concept and Types of Earnest Money
Earnest money refers to money or valuable goods delivered by one party to the other at the time of contract formation, and is presumed to be withdrawal money under Article 565 of the Korean Civil Act. Earnest money can have four characteristics: ① 證約金 (confirmation money) (evidence of contract formation), ② 解約金 (withdrawal money) (consideration for reservation of withdrawal right), ③ 違約金 (penalty) (predetermined damages for breach of contract), ④ 先給金 (advance payment) (partial prepayment of the purchase price). Importantly, these characteristics are not mutually exclusive, meaning a single earnest money deposit can serve multiple purposes simultaneously.
Analysis of Atlas Legal’s Successful Case
Case Overview
The plaintiff (buyer) paid earnest money to purchase residential property in Incheon owned by the defendant. However, the defendant immediately returned the money, asserting that “no sales contract was established.” The plaintiff filed a lawsuit claiming that the defendant unilaterally terminated the contract and demanding double reimbursement of the earnest money pursuant to Article 565 of the Civil Act.
Key Issues and Court Ruling
The court examined two key issues: ① Was the sales contract definitively established? ② Was there a penalty clause agreement? Atlas Legal proved the absence of agreement on essential terms (purchase price, balance payment timing, etc.) and the non-existence of an explicit penalty clause. The court ruled that “it is insufficient to recognize that a sales contract was concluded or that a penalty clause agreement was definitively established between the parties,” and dismissed the plaintiff’s claim.
How to Terminate a Contract Using Earnest Money
Article 565, Paragraph 1 of the Civil Act stipulates that “until either party commences performance, the depositor may abandon the earnest money and the recipient may return double the amount to terminate the contract.” This is a legal presumption that requires clear evidence to overturn. Even if earnest money has not yet been paid or only partially paid, the right of withdrawal can be exercised based on the total agreed earnest money amount.
Treatment When Earnest Money and Penalty Coexist
Even when earnest money is designated as a penalty, it retains the character of withdrawal money. Therefore, parties can choose between: ① terminating the contract by forfeiting the earnest money or returning double the amount, or ② claiming damages due to the other party’s breach of contract. A penalty clause is presumed to be a predetermined damages amount under Article 398, Paragraph 4 of the Civil Act.
Return of Earnest Money Upon Contract Nullification or Termination
When a contract is void or rescinded, the principle of unjust enrichment return (Article 748 of the Civil Act) applies. A recipient in good faith must return only existing benefits, while a recipient in bad faith must compensate the entire amount received plus interest and damages. When a contract is terminated, earnest money must be returned with interest according to the principle of restoration to original state (Article 548 of the Civil Act).
Key Practical Considerations
First, mere exchange of earnest money does not establish a contract, so essential terms such as subject matter, purchase price, and payment timing must be clearly agreed upon and documented. Second, the nature of earnest money (withdrawal money/penalty/advance payment) should be specified in the contract. Third, if there is no intent to contract, earnest money must be immediately returned with written notice of non-establishment. Fourth, objective evidence proving commencement of performance (certified mail, email, photos, etc.) should be secured. Fifth, excessively high earnest money (generally exceeding 10-20% of contract value) may be reduced by the court or recognized only as advance payment.
