Hello, I am Lawyer Baegihyung from the Law Firm Cheongchul.
Public contracts are agreements between administrative entities and private entities, applying different public law principles compared to the principles of civil law contracts concluded between private parties. The principle of freedom of contract applies to civil contracts, but in public contracts, the principles established by laws such as the National Contracts Act must take precedence, which can restrict the freedom of contract between administrative entities and private parties.
As such, national agencies, local governments, and public institutions practically adhere to the contents stipulated in the National Contracts Act when defining contract terms. However, the National Contracts Act, especially detailed provisions such as enforcement decrees, are periodically amended, leading to instances where contracts are formed based on laws prior to amendments, resulting in conflicts between the contents of public contracts and national contract laws.
In cases where the provisions of the National Contracts Act and general conditions of the contract conflict, which should be given priority?
[Question]
In cases where the National Contracts Act conflicts with the general contract conditions, which takes precedence?
[Answer]
The Supreme Court ruling on October 12, 2018, in the case 2015Da256794 addressed a matter where the provisions of the National Contracts Act Enforcement Decree regarding the interest rate on delayed payments conflicted with the content of the general contract conditions, concluding that the interest rate should be determined according to the National Contracts Act Enforcement Decree.
However, it cannot be generalized from this ruling that 'the National Contracts Act always takes precedence over contract contents.' This Supreme Court ruling presupposes that whether the conflicting provisions of the National Contracts Act result in 'nullifying legal acts that violate them' or are mandatory provisions must be evaluated on a case-by-case basis, deeming the disputed provisions of the National Contracts Act as 'valid provisions.'
Specifically, the Supreme Court ruling stated, “Where the regulations impose certain obligations on the parties to the contract or prohibit particular actions, and explicitly determine the validity of legal acts violating these rules, it suffices to assess the validity of the legal acts according to those provisions. If the law explicitly states that legal acts violating the relevant provisions are invalid or if the provisions are expressed as valid provisions or mandatory provisions, then such violations will render the legal acts invalid. Conversely, if there is no clear stipulation regarding the efficacy of legal acts violating prohibitory provisions, the context and purpose of the legislation, protected legal interests, severity of the violation, whether the parties intended to violate the regulations, the impact of the violation on the parties or third parties, social, economic, and ethical valuations of the violations, and the legislative attitude towards related or similar actions must be comprehensively considered in determining the validity.”
Based on the aforementioned principles, the Law on Contracts with the State (hereinafter referred to as 'National Contracts Act') was established to provide a fundamental framework for contracts where the state is a party or for public enterprises subject to the laws governing public institutions, enabling smooth contract execution (Article 1). It contains key provisions to ensure that public contracts are executed fairly and efficiently.
Article 15, Paragraph 2 of the National Contracts Act stipulates that if the payment due under the contract, which is a debt to the state, cannot be made by the deadline, interest must be paid according to the number of days of delay as determined by Presidential Decree. In accordance with this delegation, Article 59 of the Enforcement Decree of the National Contracts Act (hereinafter 'Enforcement Decree') specifically sets the interest rate for delayed payments to originally apply the 'overdue interest rate applied to loans by financial institutions,' but was revised on May 25, 2006, to specify that 'interest must apply the average loan rate of financial institutions (average loan rate of Bank of Korea statistical monthly reports).' Notably, the revised Article 4 of the Enforcement Decree states, 'Regarding the payment of interest on delayed payments for contracts concluded before this enforcement, the provisions prior to the amendment of Article 59 shall apply.' Considering such provisions of Article 15 of the National Contracts Act and the textual and content differences in Article 59 before and after amendment, the nature of public contracts, and the system and objectives of national contract laws, the provisions concerning interest on delayed payments should be deemed to apply universally to all public contracts. If Article 59 does not affect the validity of the contract, then the provisions of the Enforcement Decree would be rendered meaningless which further justifies this interpretation.
Generally, public institutions rarely intentionally include content that conflicts with the National Contracts Act in their contract terms, so in many cases, such issues arise from unintentionally overlooking the provisions of the National Contracts Act, and in such cases, contracts are likely to be processed according to the National Contracts Act’s contents.
However, from the perspective of the contracting party, there may be instances where interpreting the contract according to its provisions is much more advantageous than the National Contracts Act, and in such cases, it may be necessary to argue that the contract intends to establish provisions that differ from the National Contracts Act, based on circumstances, and that there are reasons that do not warrant defining provisions of the National Contracts Act as valid rules in light of the amendment process, appendices, etc. Conversely, in situations where the National Contracts Act is more favorable, it is important to argue precisely the opposite basis while leveraging the essence of the Supreme Court’s precedents.
Lawyer Baegihyung has extensive experience and skills in providing legal advice throughout the entire process of public contracts, large-scale construction projects including national defense facility projects, SOC construction projects, and relevant litigation, as he has worked with the Defense Facilities Administration and the construction/real estate team of a major law firm. If you need assistance regarding public contracts, private construction projects, public procurement contracts, national property, local property, or public property, please feel free to contact us at any time.
The Law Firm Cheongchul consists solely of attorneys from the four major domestic law firms: Kim & Chang, Kwak Law Firm, Taepyeongyang, and Sejong. Rather than one lawyer, specialized attorneys related to the case form teams to respond. Cheongchul provides comprehensive solutions not only resolving specific issues but focusing on achieving the client's desired outcomes. If you need assistance in achieving your goals, feel free to contact Cheongchul without hesitation.
