The Restriction on the Retroactive Effect of Nullity or Revocation in Long-term Contracts - Observance of the Principle of Retroactivity, Limitations on Liability for Damages -

In principle, a contract is retroactively invalid if it has grounds for nullity or revocation. However, for long-term contracts that have already been executed, the restriction on retroactive effect is often considered due to the difficulty of restitution and the safety of transactions. While this issue primarily arises in employment/partnership contracts, a general theory applicable to all kinds of long-term contract could be also considered. In Germany and Austria, where these discussions have been detailed, it's common to restrict the retroactive effect in aforementioned contract types. However, even there, the prevailing view holds that retroactive effect is accepted in cases involving violations of mandatory provisions, public order and fraud or duress. For other long-term contracts, such as lease, the prevailing view is to stick to the retroactive effect. Expanding the theory of restricting retroactive effect is considered cautiously in general. In Korea and Japan, discussions on this topic have been relatively less substantial until now. However, in Korea, a recent high court decision on a franchise contract is expected to be a good catalyst for coming discussions. And in Japan, the revision of its Civil Code regarding partnership contract is anticipated to serve a similar role. To truly satisfy the purpose of nullity and revocation regulations, the retroactive effect should be maintained even in long-term contracts. Security of transactions could still be protected through existing provisions, and this approach is sometimes necessary to adjust an appropriate scope of protection. While there is a great ‘necessity’ to recognize retroactive effect and restitution, the 'difficulty' of restitution - the main ground for restricting retroactive effect – cannot be a meaningful criterion for distinguished regulations between single-performance and long-term contracts. Its legitimacy and effectiveness are also questionable. Although that concept itself cannot be entirely denied, it should only serve as a supplementary last resort. One could also consider restricting retroactive effect and instead addressing the disadvantages to a contract party caused by nullity or revocation through compensation for damages(tort liability). However, there is clear limitations to this approach. First, the establishment of liability is not guaranteed. And even if that liability is established, the problem of assessing the correct value of performance, which causes the difficulty of restitution, recurs in terms of estimating damages. In litigation practice, based on the assumption of retroactive effect, the limitation on retroactive effect should only be declared at the end of the trial when the difficulty of restitution is confirmed. Prematurely restricting the retroactive effect depending on the type of contract is just a hasty conclusion.