Commercial Prescription Period Complete Analysis: 5 Years vs 10 Years, Essential Legal Principles for Businesses

1. Understanding Commercial Prescription Period – Background of the 5-Year Principle

Commercial prescription periods apply a shortened 5-year period, unlike general civil claims. This stems from the fundamental philosophy of commercial law that pursues speed and efficiency in commercial transactions, aiming to provide stability to the business environment by more quickly resolving creditor-debtor relationships arising from inter-company transactions.

Various creditor-debtor relationships arising from business activities require rapid processing and legal stability. The commercial prescription system prevents business management instability caused by long-neglected claims and applies a shorter prescription period considering the difficulty of securing evidence for old transactions, thereby promoting the safety and speed of commercial transactions.

Legal Basis and Purpose of Commercial Prescription

Commercial prescription reflects the expedited resolution principle for quickly concluding commercial transaction relationships according to the speed principle of commercial transactions. This is because commercial transactions have the business characteristic of being conducted continuously and repeatedly with unspecified multiple parties.

2. Commercial vs Civil Prescription Period Comparative Analysis

The key differences between commercial and civil prescription periods are the prescription period and scope of application. Commercial prescription stipulates a shorter period for the speed and safety of commercial transactions, serving as an important legal protective measure in business activities.

3. Commercial Code Article 64 and Related Legal Framework

Key Related Articles

Commercial Code Article 64 (Commercial Prescription)
“Claims arising from commercial acts shall be extinguished by prescription if not exercised for 5 years, unless otherwise provided in this Act. However, when other laws provide for a shorter prescription period, such provisions shall apply.”

Commercial Code Article 46 (Basic Commercial Acts)
Enumerates types of basic commercial acts, including buying and selling of goods or securities for profit, finance, transportation, insurance, and other commercial activities.

Civil Code Articles 163 and 164
When provisions stipulate a shorter prescription period than commercial law, such provisions take priority.

4. Scope of Application and Criteria for Commercial Prescription

The scope of ‘claims arising from commercial acts’ to which commercial prescription applies is as follows:

1) Basic Commercial Acts

• Buying and selling of goods or securities for profit
• Financial-related activities
• Transportation, insurance, and other commercial acts

2) Auxiliary Commercial Acts

• Acts performed by merchants for business purposes
• Examples: business fund borrowing, investment attraction, real estate transactions, etc.

3) Quasi-Commercial Acts by Deemed Merchants

• Acts performed by deemed merchants for business purposes

4) Claims Derived from Commercial Acts

• Damage compensation claims due to breach of commercial contracts
• Restitution claims following cancellation of commercial contracts
• Unjust enrichment claims arising from commercial acts

5. Expedited Resolution Principle and Commercial Transaction Safety

The Supreme Court uses ‘the necessity to resolve as quickly as commercial relationships’ as an important criterion when determining whether to apply commercial prescription.

Judgment Criteria

1. Business nature of transactions: Are they conducted continuously and repeatedly with unspecified multiple parties?
2. Necessity for expedited processing: Is quick resolution needed like commercial transactions?
3. Relationship with commercial acts: Does it maintain substantial identity with commercial acts?

These criteria are applied on a case-by-case basis based on specific application theory.

6. Successful Case Study: CEO Guarantee Letter

Case Overview

This case involved commercial prescription regarding debt based on a letter written by CEO B of Chinese corporation A Co., Ltd. to the plaintiff.

Key Facts:

1. Plaintiff’s investment and lending to A Co., Ltd.
2. August 11, 2014: B wrote a repayment letter to plaintiff for approximately 100 million won
3. Repayment dates in the letter: August 30, 2014, and September 30, 2014
4. March 29, 2024: Plaintiff filed lawsuit (approximately 9 years and 5 months elapsed)

K&P Law Firm’s Defense Strategy

1. Raising commercial prescription defense
   • The agreed amount in the letter constituted commercial acts as company business fund investment and borrowing
   • Application of 5-year commercial prescription as auxiliary commercial acts
2. Claiming prescription completion
   • 5 years elapsed from September 30, 2014 repayment date
   • Prescription completed on September 30, 2019
   • Lawsuit filed on March 29, 2024 was after prescription completion

Court’s Judgment

The court accepted K&P Law Firm’s commercial prescription defense and dismissed the plaintiff’s claim.

Basis for Judgment:

1. Investment attraction and money borrowing for company business fund procurement constitute auxiliary commercial acts
2. CEO’s personal guarantee letter also constitutes debt derived from commercial acts
3. Therefore, application of 5-year commercial prescription is appropriate

7. Calculation of Prescription Starting Point and Period

Starting Point

Commercial prescription follows the objective starting point:

• Calculated from when the creditor can exercise the right
• Actual knowledge of the right’s existence is irrelevant

Period Calculation

1. Principle: Prescription completes if not exercised for 5 years
2. Special provisions: Priority application if other laws provide shorter prescription periods
3. Interruption: Interrupted by claims, seizure, provisional seizure, provisional disposition, debt acknowledgment, etc.

8. Strategic Exercise of Commercial Prescription Defense

Defense Strategy

1. Proving commercial nature: Demonstrate that the transaction constitutes commercial acts
2. Prescription period calculation: Confirm accurate starting point and elapsed period
3. Timely assertion: Explicitly raise defense during proceedings

Precautions

1. Subjective starting point: Discussion ongoing regarding introduction of subjective starting point through Civil Code amendment
2. Scope of commercial acts: Carefully judge whether auxiliary commercial acts are included
3. Short-term prescription priority: Priority given to shorter prescription periods under Civil Code

9. Preventive Legal Guide for Corporate Practitioners

1. Establishing credit management system
   • Thoroughly record timing and content of credit occurrence
   • Introduce prescription period management system
2. Understanding commercial act judgment criteria
   • Most corporate activities correspond to commercial acts
   • Pay particular attention to scope of auxiliary commercial acts
3. Precautions when drafting letters
   • Letters may have prescription interruption effect
   • New prescription calculated from repayment date in letter
4. Importance of evidence preservation
   • Preserve materials that can prove transaction nature
   • Systematic management of contracts, emails, meeting minutes, etc.
5. Regular legal review
   • Regular inspection of major transaction relationships
   • Advance confirmation of prescription completion status

10. Key Case Law Analysis and Legal Interpretation

1. Application of Commercial Prescription to Subrogation Rights

Supreme Court Decision 98Da17544, July 10, 1998, addressed cases where an insurer who concluded an insurance contract with one joint tortfeasor paid damages to the victim and then exercised subrogation rights directly against another joint tortfeasor’s insurer. The Supreme Court ruled that this subrogation claim constitutes a claim from auxiliary commercial acts, applying a 5-year commercial prescription.

2. Commercial Prescription for Delay Damages

Supreme Court Decision 79Da1453, November 13, 1979, judged delay damage claims for loans from bank business activities after the repayment due date. The Supreme Court ruled that these delay damages are not subject to short-term prescription under Civil Code and that a 5-year commercial prescription applies as claims from commercial acts.

3. Restitution Claims from Contract Cancellation

Supreme Court Decision 93Da21569, September 14, 1993, ruled that commercial prescription applies to restitution claims from cancellation of commercial act contracts. This is an important precedent showing that commercial prescription applies to ‘transformed claims’ derived from commercial acts.

4. Directors’ Breach of Duty Damage Claims

Supreme Court Decision 84DaKa1954, June 25, 1985, ruled that a 10-year civil prescription applies to damage compensation claims acquired by corporations due to directors’ breach of duty. This case shows civil prescription rather than commercial prescription applied despite being related to auxiliary commercial acts.

5. Limitations on Short-term Prescription for Product Prices

Supreme Court Decision 2007Da12944, June 25, 2009, applied general commercial prescription (5 years) rather than viewing fee burden agreements between telecommunication terminal sales agents and telecommunications operators as ‘prices for goods sold by merchants.’ This is an important precedent limiting the scope of short-term prescription under Civil Code.

6. Performance Guarantee Liability Claims in Consignment Sales

Supreme Court Decision 95Da39854, January 23, 1996, ruled that 5-year commercial prescription rather than 3-year short-term prescription under Civil Code applies to performance guarantee liability claims that consignment sellers have against consignment sales agents. This decision broadly interpreted the scope of claims from commercial acts.

K&P Law Firm has recent experience achieving successful results in commercial prescription cases related to corporations and possesses extensive legal service experience regarding complex commercial prescription issues arising from inter-company transactions.