Advisory Case on Breach of Trust Risk Surrounding the Mutual Termination of an Equipment Purchase Agreement

1. The Client's Situation

A mid-sized manufacturer commissioned the production of equipment from an external supplier, but because the supplier failed to meet the required technical specifications, the manufacturer sought to terminate the contract. In this process, the company was reviewing a settlement proposal under which it would forgo recovery of the contract deposit already paid, in exchange for not being charged any additional costs by the supplier. Internally, legal concerns were raised as to whether such a decision might constitute breach of trust in the course of business (occupational breach of trust).

On the premise that the transaction would be interpreted as a "mutual rescission" under the Civil Act, Your Legal Team reviewed whether the non-recovery of the deposit constituted a legitimate business judgment. The team analyzed that maintaining the contract could in fact lead to even greater losses, and that economic reasonableness was recognized given that the supplier was responsible for failing to meet the specifications. In addition, to prevent breach-of-trust risk, the team recommended clearly reflecting the provisions concerning the allocation of modification costs in the settlement agreement, and carrying out and documenting the internal decision-making procedures.

With Your Legal Team's assistance, the client effectively eliminated the risk of occupational breach of trust and achieved an amicable termination of the contract with the supplier. By blocking the possibility of additional cost claims, the client prevented future financial risk and established a record-keeping system capable of withstanding internal audits and board reporting.