Hello, I’m Attorney Park Jong-han of Cheongchul Law Firm.

In a construction contract, if the contractor fails to complete the work within the prescribed period, they become liable for liquidated damages for delay. The amount of such damages depends on how the base amount is set, so let’s examine that.

[Question]

Base Amount for Calculating Liquidated Damages for Delay

[Answer]

A. General Rule

As a general rule, the base amount for calculating liquidated damages for delay is determined according to how it is stipulated in the construction contract. Typically, construction contracts provide in the liquidated damages clause that the damages are to be calculated as "the amount obtained by multiplying the contract amount by the liquidated damages rate stated in the contract for each day of delay." Therefore, the base amount varies depending on how "contract amount" is defined in the other provisions of the construction contract.

For example, if the contract defines "contract amount" as (1) an amount excluding VAT or (2) an amount including VAT, multiplying each contract amount by the liquidated damages rate yields different results. In particular, since construction contract amounts are often large, the difference in liquidated damages resulting from how the contract amount is defined can be substantial.

• (1) Type: Contract amount = KRW 90 billion (VAT excluded), liquidated damages = 10 days × 0.1% × KRW 90 billion = KRW 900 million

• (2) Type: Contract amount = KRW 100 billion (VAT included), liquidated damages = 10 days × 0.1% × KRW 100 billion = KRW 1 billion

B. When the Contract Amount Has Increased

If the contract amount increases during construction due to a design change or similar reasons, and a change agreement has been executed for the increased portion, then the "contract amount" has been changed to the increased amount. Accordingly, it appears appropriate to calculate liquidated damages based on that increased contract amount. However, there is no explicit precedent on this point, and if the contract separately provides otherwise, that provision will govern.

Where the increase in the contract amount occurs after completion of the work, there are Supreme Court and High Court decisions holding that liquidated damages should be calculated based on the original contract amount (Supreme Court Decision 2015Da214691, 214707, rendered October 29, 2015).

C. When Completed Work Exists

If the construction contract provides that the base for liquidated damages is the contract amount minus the construction price corresponding to the completed portion, or that it is the contract amount minus the construction price for the portion that has been partially accepted or partially used, then liquidated damages are calculated accordingly.

However, if there is no separate agreement as described above, it seems unlikely that liquidated damages can be calculated based on the contract amount minus the construction price for the completed portion, the partially accepted portion, or the used portion.

D. In the Case of a Joint Contractor Arrangement

If the work is carried out by a joint contractor arrangement, the treatment differs depending on whether it is a joint performance arrangement or a divided performance arrangement. Even in such cases, if the contract separately provides otherwise, that agreement takes precedence.

In the case of a joint performance arrangement, even if each joint contractor’s scope of work is specified, each contractor has given mutual joint and several guarantees regarding performance, and from the employer’s perspective the individual works together form one whole. Therefore, if the first contractor fails to complete the work it was responsible for within the completion deadline and becomes liable for liquidated damages, the contract amount serving as the basis for those damages should be viewed not only as the construction price corresponding to the portion assigned to the first contractor, but as the total construction price (Supreme Court Decision 93Da42887, rendered March 25, 1994).

In the case of a divided performance arrangement, even if, due to the nature of the work, delay in one member’s allocated portion inevitably causes delay in another member’s allocated portion as well, absent special circumstances only the member who caused the delay bears the obligation to pay liquidated damages, limited to its own allocated portion (Supreme Court Decision 98Da33888, rendered October 2, 1998).

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