Series Index
Part 1 | Attorney Hong Seung-kwon: “AI Arrives in the Legal Profession”
Part 2 | How Should Lawyers Use AI?
Part 3 | Dividing Roles Between AI and Lawyers
Part 4 | AI Legal Advice Isn’t Enough—Here’s Why Lawyers Still Matter
Part 5 | Attorney Hong Seung-kwon: Korea’s AI Law—KRW 30 Million Fine Threshold
Part 7 | You Can’t Remove a Co-CEO Just Because You Want To
Part 8 | Why ₩10M Deposit May Not Qualify as Small Tenant
Part 9 | Hong Seung-kwon | Why Korea’s Property Registry Still Lacks Public Credibility
Part 10 | Hong Seung-kwon | Can a Seller Cancel After a Provisional Deposit?
By Hong Seung-kwon
Principal Attorney, PAN Law Firm (skh@law-pan.com)
Most readers will already be familiar with the idea of a contract deposit. A deposit is an upfront payment made to confirm the formation of a contract, and while the amount is left to the parties, it is commonly set at around 10 percent of the total transaction value. It serves as evidence that the contract has been concluded and, where necessary, can also function as a basis for termination and damages.
What, then, is a provisional deposit? Put simply, it refers to paying part of the full deposit in advance. It is not a formal legal term, but it is widely used in practice.
The reason is easy to understand. In real estate transactions or residential lease agreements, the purchase price or lease amount is often very large, which means the deposit itself can amount to tens of millions of won. For many parties, paying the full sum at the initial stage is burdensome.
Consider a property sale worth 900 million won. In that case, the ordinary deposit would be 90 million won. Because that amount may be difficult to prepare all at once, parties sometimes pay only part of it first under what is commonly described as a provisional deposit.
If the transaction proceeds smoothly, there is usually no issue. The legal problem arises when the contract does not go forward. Although the provisional deposit is smaller in amount, disputes involving it can become more complicated than many people expect.
Take the following example. A buyer agrees to purchase an apartment for 900 million won. The agreed deposit is 90 million won, but the buyer initially pays only 20 million won as a provisional deposit. If housing prices then continue to rise and the seller decides not to proceed with the sale, can the seller terminate the deal? If so, how much must the seller return?
If the full 90 million won deposit had already been paid, the answer would be relatively simple. The seller could terminate the contract by returning the 90 million won already received, together with an additional 90 million won, for a total of 180 million won. This is the familiar rule of returning double the deposit.
The issue becomes more complicated when only a provisional deposit has been paid. In that situation, the matter should be examined step by step. The two main questions are whether the parties made any additional agreement at the time of payment and whether the contract can already be regarded as legally formed.
If there were a penalty clause, that clause comes first
The first point to examine is whether the parties agreed on how to handle a breach when the provisional deposit was paid. In practice, provisional deposit arrangements are often made through a licensed real estate agent, and sometimes include a clause similar to an ordinary deposit provision: if the seller breaches, the seller must return double; if the buyer breaches, the buyer forfeits the amount paid.
If such a clause exists, that agreement will generally govern first. In the example above, the seller would be able to terminate the deal by returning the 20 million won provisional deposit and an additional 20 million won as the agreed penalty, for a total of 40 million won.
If there were no separate agreement, contract formation would become the key issue
If a provisional deposit was paid but there was no separate agreement on breach, penalty or cancellation, the next question is whether the contract itself was legally formed. In general, contract formation is often assessed by looking at such factors as whether a written agreement was prepared and whether the deposit was paid. In provisional deposit cases, however, those elements are often incomplete or unclear.
If the contract is found not to have been formed, then there is little need to discuss termination in any strict sense. Since no contract came into existence, the seller would only need to return the provisional deposit already received. In the example above, that would mean returning 20 million won.
If the contract was formed, but there was no penalty clause, the issue becomes more difficult
The more difficult case is one in which there was no separate penalty clause, but the contract is nevertheless regarded as having been formed. In that situation, the legal analysis becomes considerably more complex.
There is Supreme Court precedent suggesting that when only part of the deposit has been paid, the seller’s right to terminate should not be readily recognized. Even where termination is allowed, the amount to be returned may have to be determined not on the basis of the provisional deposit alone, but by reference to the full deposit amount agreed by the parties.
That said, the exact scope of the precedent is not entirely free from ambiguity. In my view, the more persuasive interpretation is that termination should be allowed where the seller returns not only the provisional deposit already received, but also an amount corresponding to the full agreed deposit. That reading seems more consistent with fairness.
Under that interpretation, in the example above, the seller would need to return the 20 million won already received together with the agreed 90 million won deposit amount, for a total of 110 million won, in order to terminate the contract. This is why disputes involving provisional deposits cannot always be resolved through a simple calculation based only on the sum actually paid.
A provisional deposit may be smaller in amount, but its legal consequences are not necessarily minor. Depending on the existence of a penalty clause, the legal formation of the contract, and the interpretation of relevant case law, both the scope of termination and the amount to be returned may vary significantly.
For that reason, some people advise against entering into provisional deposit arrangements altogether. In reality, however, parties often proceed in this way because they do not want to lose a desirable property merely because they cannot immediately prepare the full deposit.
If a provisional deposit is to be paid, the parties should at least define clearly what legal effect that payment is intended to have and how any future breach will be handled. If it is difficult to prepare a formal written contract at that stage, even a written exchange by text message is better than leaving the matter entirely undocumented. If a dispute later arises, the issues can quickly become more complicated than they first appear, and professional legal advice should be sought.
About the Author
Hong Seung-kwon is the managing attorney of Pan Law Office in South Korea. He handles civil and criminal litigation as well as emerging legal issues in the digital era. He also writes regularly on legal developments affecting technology, property rights and regulatory policy.
