Accord and Satisfaction
Purpose of Accord and Satisfaction
- If a debtor has done an act of performance different from, and in substitution for the one originally intended with the consent of the creditor, such act shall be deemed a valid performance. (Article 466 of the Civil Act)
· For example, a debtor who had borrowed KRW 5,000,000, with the consent of the creditor, may give the creditor a diamond ring in substitution for the debt.
Requirements for Accord and Satisfaction
- There has to be an agreement between the parties as to the accord and satisfaction.
- There shall be a debt in existence.
- There has to be an agreement between the parties as to whether the performance is in substitution for the one originally intended.
· The value of the substitute may not necessarily be the same as that of the one originally intended.
· Accordingly, the debtor who owes KRW 5,000,000 may agree with the creditor to give a diamond ring worth KRW 4,000,000 as an accord and satisfaction.
- An act of performance as an accord and satisfaction shall actually be done by the debtor.
Effect of Accord and Satisfaction
- If an act of performance as an accord and satisfaction was done by the debtor, such act shall have the same effect as making repayment. (Article 466 of the Civil Act)
- Therefore, the debt obligation shall extinguish therefrom.
Set-Off
Purpose of Set-Off
- A "Set-Off" may arise where two persons are bound to each other by debt obligations whose subject is of the same kind. By making a set-off, the extent of the amount corresponding to that of his or her obligation shall be discharged at the same time.
· For example, if a debtor borrowed KRW 1,000,000 from the creditor, but the creditor had already owed KRW 500,000 to the debtor, the debt obligation of KRW 500,000 may be discharged at the time when the debtor declares a set-off.
Requirements for Set-Off
- If two persons are bound to each other by debt obligations whose subject is of the same kind and both of which have become due, each obligor may make a set-off to the extent of the amount corresponding to that of his or her obligation: Provided, that this shall not apply where the nature of the obligations does not so permit. (Article 492(1) of the Civil Act)
- If a party has declared an intention to the contrary, a set-off shall not be made against such intention. However, such declaration of intention cannot be thus set up against a third party acting in good faith. (Article 492(2) of the Civil Act)
Method of Set-Off
- A set-off shall be effected by means of a declaration of intention to the other party. No condition may be attached, nor a time be fixed, to such declaration of intention. (Article 493(1) of the Civil Act)
- In the case of a claim which is time-barred, which would have been made a set-off before the time bar, such claim may be set-off by the creditor. (Article 495 of the Civil Act)
Prohibition of Set-Off
- Where the debt obligation has arisen from an intentional unlawful act, the debtor cannot avail himself or herself of a set-off against the creditor. (Article 496 of the Civil Act)
- If the claim is one of which an attachment cannot be effected, the debtor may not set up against the creditor any defense of a set-off. (Article 497 of the Civil Act)
- A third obligor under garnishment order may not set up against the obligee any defense of set-off. (Article 498 of the Civil Act)
Effect of Set-Off
- The declaration of intention for a set-off shall be deemed to extinguish the debt obligation to the extent of the same amount when each obligation is eligible for a set-off. (Article 493(2) of the Civil Act)
Novation
Purpose of Novation
- "Novation" means an agreement by which the essential elements of the obligation are modified in order to extinguish the original debtor's obligation.
· For example, if the creditor considers that the debtor may not afford to make repayment, the creditor may request to change the debtor to any third party to the original contract by novation. Also, the creditor under the original contract may be changed to any third party by novation.
Requirements for Novation
- There shall be a debt to be extinguished.
- A new debt obligation shall be arisen from a novation.
· If the new debt obligation arisen from a novation does not come into existence or has been avoided by reason of illegality of its cause or of any circumstance of which the parties were not aware, the original debt obligation shall not be extinguished. (Article 504 of the Civil Act)
- The debtor, the creditor or the details of the obligation shall be changed by novation.
· A novation by change of the debtor may be effected by a contract between the creditor and the new debtor. However, it shall not be affected against the intention of the original debtor. (Article 501 of the Civil Act)
· A novation by change of the creditor cannot be set up against a third person, unless it is done by a document with a certified fixed date. (Article 502 of the Civil Act)
Effect of Novation
- If the parties have entered into a contract by which the essential elements of the obligation are modified, such obligation shall be extinguished by novation. (Article 500 of the Civil Act)
- The parties to a novation may transfer the security for the original obligation to that of the new obligation, within the limit of its objective. However, if the security has been furnished by a third person, his or her consent must be obtained. (Article 505 of the Civil Act)
Release
Requirements for and Effect of Release
- If the creditor declares to the debtor an intention to release the debtor from the obligation, such obligation shall be extinguished. However, a release cannot be set up against a third person who has a reasonable interest. (Article 506 of the Civil Act)
· For example, the debtor borrows KRW 1,000,000 from the creditor through an Agreement for Consumer Cash Loan, but if the creditor, considering the debtor is in financial difficulties, shows an intention to release the debtor from his or her obligation, such obligation shall be extinguished.
Merger
Requirements for and Effect of Merger
- If a claim and the corresponding obligation become vested in one and the same person, the claim shall be extinguished. However, this shall not apply if such claim itself is subject of a third person's right. (Article 507 of the Civil Act)
· For example, if a wife borrows KRW 10,000,000 from her husband, the husband dies, and the wife becomes an heir, the obligation to repay KRW 10,000,000 owed by the wife shall be extinguished because the husband’s estate to receive the debt has been inherited to the wife.