Hello, I am Attorney Bae Gi-hyung from the law firm Cheongchul.

When entering into public contracts, it is stipulated that the 'General Conditions of Contract' and 'Special Conditions of Contract' must necessarily be incorporated into the contract terms.

The Enforcement Decree of the Act on Contracts to which the State is a party (hereinafter referred to as the ‘State Contract Act’) specifies the standard contracts for construction work, service contracts, and standard purchase contracts as separate forms, and these standard contracts all use the 'General Conditions of Contract' and 'Special Conditions of Contract' as attached documents. Accordingly, the Ministry of Strategy and Finance has established 'General Conditions of Construction Contracts', 'General Conditions of Service Contracts', and 'General Conditions of Purchase Contracts' in line with these standard contracts.

However, recently as the procurement contracts of public institutions have increased, the financial capability of these institutions has deteriorated, often leading to the establishment of contract terms that are relatively unfavorable to the contracting party. In particular, unfavorable content for the contracting party is frequently specified in the 'Contract Conditions', and it appears that unfavorable content is more often reflected in the 'Special Conditions of Contract' than in the ‘General Conditions of Contract’ set by central agencies.

The ways to contest the unfairness of such conditions may vary by individual cases, but in common, if the contract conditions fall under 'terms and conditions', it is possible to challenge the efficacy of the contract conditions by citing various provisions under the Act on the Regulation of Terms and Conditions (hereinafter referred to as 'Terms Act'), particularly the provisions on unfair terms.

So, do the contract conditions qualify as 'terms and conditions' and fall under the application of the 'Terms Act'?

[Question]

Do ‘General Conditions of Contract’ and ‘Special Conditions of Contract’ qualify as ‘terms and conditions’ subject to the application of the ‘Terms Act’?

[Answer]

Article 2(1) of the Terms Act defines “terms and conditions” as ① regardless of their name, form, or scope, ② the content of the contract that is prepared in advance in a certain form by one party to the contract ③ to enter into contracts with multiple counterparties.

First, the Supreme Court recognizes ‘General Conditions of Contract’ as terms and conditions. The Supreme Court ruling from April 23, 2002 (2000Da56976) judged the validity based on the premise that the general conditions of facility construction contracts fall under terms and conditions, determining whether it violates the Terms Act.

However, in practice, because the general conditions of contract are often used directly as stipulated by central agencies, it is not easy to raise issues of unfair terms, and even if contested, it is very difficult for unfairness to be accepted.

Ultimately, the issue that becomes problematic is the ‘Special Conditions of Contract’. The courts have determined whether these terms qualify as terms and conditions by examining whether the project owner prepared them unilaterally and repeatedly used them in similar types of contracts, regardless of the label 'special conditions', which corresponds to the requirements of Article 2(1) of the Terms Act.

The Supreme Court has stated that 'the term “terms and conditions” subject to the regulation under the Act on the Regulation of Terms and Conditions means the content of the contract that one party prepares in advance in a certain form to enter into contracts with multiple counterparties without regard to their name, form, or scope, and provisions resulting from negotiations between the parties in a specific contract are not unilaterally drafted, hence, do not count as terms and conditions subject to regulation.' (Supreme Court ruling from February 1, 2008, 2005Da74863). Based on this principle, provisions regarding ‘liquidated damages’ within the Special Conditions of Contract were found not to be terms subject to regulation, as they were provisions resulting from negotiations (Supreme Court ruling from February 10, 2011, 2009Da81906).

On the other hand, provisions related to ‘adjustment of contract amount due to price fluctuations’ within the Special Conditions of Contract were deemed as terms, forming the basis for judging their validity (Supreme Court ruling from December 21, 2017, 2012Da74076).

In lower court rulings, there are cases where “the special conditions of contract that state that adjustments to the contract amount cannot be requested if construction is carried out before approval of design changes” were considered to be terms (Seoul Central District Court ruling from October 21, 2015, 2012Gahap540400), and there are also cases where “the special conditions of contract stating compensation shall be paid in kind at five times the volume in the event of a leak” were not deemed terms (Seoul High Court ruling from March 19, 2015, 2014Na2022015). This suggests that the terms nature of Special Conditions of Contract is being evaluated individually.

In particular, court rulings that denied the nature of terms generally cite the fact that ‘negotiations’ took place between the project owner and the contracting party. However, a closer look reveals that even merely providing an opportunity to express opinions about the Special Conditions through meetings can be considered as having had negotiations, indicating that the scope of negotiations is being interpreted quite broadly.

In other words, while the opportunity for ‘negotiation’ may seem favorable at the stage of entering into the contract, in subsequent dispute situations regarding the unfairness of the Special Conditions, the fact that there was an opportunity for ‘negotiation’ could work to the disadvantage, and it should be noted that ‘negotiation opportunities’ can be recognized more broadly than expected.

If the Special Conditions can be regarded as 'terms', it becomes possible to claim exclusion of effectiveness under the Terms Act during litigation. Furthermore, it is also possible to utilize the Fair Trade Commission's review system for terms, allowing for various strategies to be comprehensively formulated.

Therefore, when entering into public contracts, it is important to keep in mind that contract conditions, particularly Special Conditions, are likely to be treated as ‘terms’, and to carefully consider whether there is room for negotiation, and if so, whether it is possible to reflect or assert the will of the other party, and then clearly decide whether to negotiate from the outset or assert the terms as terms in the event of a dispute arising later.

Attorney Bae Gi-hyung has extensive experience and skills in providing legal advice throughout the entire process of large-scale construction projects, defense facility projects, SOC construction projects, and national contract matters, as well as resolving related lawsuits, while working with the Defense Facilities Agency and large law firms' construction/real estate teams. Please feel free to contact him whenever you need assistance regarding public procurement projects, private construction projects, public procurement contracts, national property, local property, and public assets.

The law firm Cheongchul consists solely of lawyers from the top four law firms in Korea—Kim & Chang, Lee & Ko, Bae, Kim & Lee, and Shin & Kim—and responds with expert lawyers in the relevant fields related to the case rather than just a single lawyer. Cheongchul aims to provide comprehensive solutions not only to resolve specific issues but also to achieve the overall business objectives of its clients. If you need assistance in achieving your goals, please do not hesitate to contact Cheongchul.