Hello, this is Attorney Bae Gi-hyung from the law firm Chungchul.

Adequate Performance Guarantee is a means commonly used in construction contracts to secure damages arising from the non-performance of the construction contract by the contractor (construction company) against the client. It is the most frequently used method in construction contracts.

In practice, the Standard Construction Contract for Private Construction stipulates that the circumstances under which the performance guarantee can be forfeited include ‘cases where the contract is canceled or terminated for reasons attributable to the contractor.’ Furthermore, the Specialized Construction Guarantee Association Contract Guarantee Terms defines guarantee incidents as ‘the creditor not fulfilling the contract without justifiable reasons, leading to the contract being canceled or terminated by the guarantee creditor within the guarantee period.’ Therefore, it is generally understood that in order to claim the performance guarantee, the contract must be canceled or terminated.

So, does the client always have the right to claim the performance guarantee in cases where the contractor interrupts the construction work?

[Question]

When the contractor stops the construction, can they always claim the performance guarantee?

[Answer]

Most performance guarantee terms define guarantee incidents as being when the contract is terminated due to ‘the contractor’s attributable reasons.’ In other words, if the contractor stops construction for justifiable reasons, the contracting party cannot regard it as terminating the contract due to the contractor’s attributable fault, and thus, it cannot be considered that a guarantee incident as defined in the performance guarantee terms has occurred, and therefore the performance guarantee cannot be claimed.

In the actual case where ‘the subcontractor demanded additional compensation due to difficulties in progress but was not paid by the main contractor, and upon the subcontractor stopping work, the main contractor demanded payment of the performance guarantee based on the guarantee letter provided by the subcontractor,’ the first instance court found that the subcontractor stopped work for justifiable reasons and did not recognize the claim for the performance guarantee (Seoul Central District Court ruling on December 14, 2017, case number 2016Gahap553718). Subsequently, the second instance court judged, “The subcontractor’s interruption of work, asking to cover its losses even though it was not a reason for adjustments in the contract amount, constituted a default due to the subcontractor's attributable reasons, so a guarantee incident must be acknowledged.” and accepted the claim for the performance guarantee (Seoul High Court ruling on January 30, 2019, case number 2018Na2001481).

In conclusion, whether the contractor can claim the performance guarantee in the event of construction interruption depends on whether there is a justifiable reason for the contractor's interruption. In fact, in most lawsuits surrounding the payment of performance guarantees, there is considerable dispute over what caused the interruption and whether such causes can be attributed to the contractor's responsibility.

In practice, it is often overlooked, and there is a common expectation that the contractor can claim the performance guarantee once they declare a suspension of work; however, if one's preparation fails to meticulously analyze the reasons for the interruption and secure sufficient evidence to prove the contractor's fault, one may unexpectedly face losses due to the denial of the guarantee payment.

Attorney Bae Gi-hyung has experience working in the Defense Facilities Office and the construction/real estate teams of large law firms, providing legal advice on all processes of national contracts and construction projects, including public construction works, as well as having extensive experience and skills in resolving related disputes. If you need assistance related to public construction, private construction, public procurement contracts, state assets, local property, or public property, please feel free to contact us.

The law firm Chungchul consists exclusively of attorneys from major domestic law firms such as Kim & Chang, Kwangjang, Taepyungyang, Sejong, and Yulchon, as well as legal teams from large corporations, and is structured in a way that professionals related to the case come together as a team rather than relying on a single attorney. Chungchul offers comprehensive solutions that go beyond resolving specific issues and focuses on achieving what the client ultimately desires. If you need help in achieving your goals, do not hesitate to contact Chungchul.