Hello, this is Attorney Park Jong-han from Cheongchul Law Firm.

When a construction contract includes a delay damages (지체상금) clause, questions often arise as to how far it applies. In particular, this article examines the relationship between delay damages and a contract bond when both are agreed, the relationship with other losses arising during a delay, whether delay damages apply when the owner is responsible for terminating the contract, and the issue of statutory or contractual caps on delay damages.

[Question] Scope of Delay Damages Clauses

[Answer]

A. When Agreed Together with a Contract Bond

Where a construction contract requires the contractor to provide a contract deposit or contract guarantee bond to the owner, if the owner forfeits the contract deposit due to the contractor's default, there is a possibility that delay damages or damage compensation cannot be claimed separately to the extent that they overlap. However, this depends on the nature of the contract deposit and on how the contract deposit, delay damages, and damages are stipulated in the construction contract, so it must be judged on a case-by-case basis.

First, one must determine whether the legal nature of the contract deposit is a penalty for breach or a liquidated damages clause. Absent special circumstances suggesting a penalty for breach, it is reasonable to treat it as liquidated damages rather than a penalty (Supreme Court Decision 2000Da35771, December 8, 2000). Where the contract deposit has the nature of liquidated damages, since the contract deposit generally also secures delay damages, delay damages are in principle included within the scope of the contract deposit (Supreme Court Decision 2004Da39511, April 28, 2006).

Where the contract deposit has the nature of liquidated damages, in principle delay damages corresponding to the contract deposit are offset against the deposit (it is not possible to claim delay damages in addition to forfeiture of the contract deposit), and delay damages exceeding the contract deposit may be claimed separately—although interpretation may differ depending on the specific contract terms.

B. When Other Losses Occur During the Delay

Where a construction contract contains a delay damages clause, since delay damages constitute liquidated damages, if the loss is causally related to the construction delay, the owner can claim only the predetermined amount (delay damages) for both ordinary losses and losses arising from special circumstances, and absent a special agreement, cannot claim damages exceeding the predetermined amount (Supreme Court Decision 92Da41719, April 23, 1993). Accordingly, when the owner claims delay damages from the contractor, losses related to the construction delay cannot be separately claimed absent a special agreement.

Of course, where separate losses unrelated to the construction delay arise from the contractor's default, they may be claimed separately from delay damages. However, since such cases often constitute special damages, the owner must prove the existence of those special circumstances (losses arising from factors unrelated to the construction delay) and that the contractor knew or could have known of them (Supreme Court Decision 2009Da41137, 41144, January 28, 2010).

Lower court precedent has also held that increased construction costs within a reasonable range, caused by suspension of construction, are losses resulting from the constructor's breach of the construction contract, and that such losses are separate from losses caused by construction delay, and therefore may be claimed separately from losses under the delay damages clause (Seoul High Court Decision 2017Na2029758, 2017Na2029765, February 23, 2018).

C. When the Contract Is Terminated Due to the Owner's Fault

The Supreme Court has held that even where a construction contract is terminated due to the owner's fault, if construction would have been delayed in any event due to causes attributable to the contractor even absent the grounds for termination, the owner can still hold the contractor liable for delay under the delay damages clause. In such cases, the period of delay must be calculated based on the time at which the contractor would have been able to complete construction had the owner's fault not occurred, measured from the originally scheduled completion date (Supreme Court Decision 2010Da34043, 34050, October 11, 2012).

D. Caps on Delay Damages

For private domestic building construction, contracts generally do not include caps on delay damages, while power plant or process plant construction contracts sometimes do (caps are typically 10%–25%). For overseas construction (or domestic construction where one party is a foreign company), contracts often include caps (e.g., "delay damages shall not exceed 10% of the contract amount").

As such, for private domestic construction, contract caps on delay damages are rare, and there is no general statutory cap, so contractor protection is mainly achieved through court-ordered reduction.

In contrast, for public (government) construction, several statutes have recently begun to impose caps. Article 74(3) of the Enforcement Decree of the Act on Contracts to Which the State Is a Party (국가계약법 시행령) provides that the delay damages payable shall be capped at 30/100 of the contract amount where they would otherwise exceed that figure, and Article 61(4) of the Enforcement Decree of the Defense Acquisition Program Act (방위사업법 시행령) provides that for certain contracts such as weapons system prototype contracts, the total delay damages shall be capped at 10/100 of the contract amount. Article 25(1) of the General Conditions of Construction Contracts (a public contract precedent) was also amended in line with the above Enforcement Decree to include the cap. However, whether a particular provision applies should be checked against its requirements and supplementary provisions.

Even where the delay damages cap is limited by the construction contract or relevant statutes, courts may reduce delay damages ex officio under Article 398(2) of the Korean Civil Code (민법 제398조 제2항). However, where the delay period is substantially long relative to the capped delay damages, court reduction may not be granted (Seoul High Court Decision 97Na61185, April 23, 1998).

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