Hello, I am Attorney Bae Ki-hyung of Cheongchul Law Firm.

At construction sites, a contractor (the builder) may, due to financial difficulties or internal circumstances, fail to meet the agreed completion deadline and ultimately abandon the site midway through the work. In such cases, the project owner (the client) rescinds the construction contract midstream and claims enormous "liquidated damages for delay" (지체상금) against the contractor.

In practice, what contractors find most unfair and confusing is this: "It has been quite a while since I left the site, but must I pay liquidated damages for the entire period the site was left neglected because the owner delayed rescinding the contract or was late in selecting a new contractor?" This is because, the longer the site is left abandoned after work stops, the more the liquidated damages swell to astronomical sums that a contractor can hardly bear.

Today, I will explain, together with clear statutes and precedents, the Supreme Court's "doctrine limiting the end date of liquidated damages for delay" — a doctrine that lets an otherwise indefinitely growing period of liquidated damages be reasonably cut off when work is suspended due to the contractor's fault and the construction contract is rescinded.

The Doctrine Limiting the End Date of Delay Damages — Cutting Off Indefinitely Growing Penalties

[Question] After a contractor suspends work and leaves the site, if the owner takes several months to rescind the contract and select a replacement contractor, are those neglected months all included in the contractor's liquidated-damages period?

[Answer] In principle, they are not all included.

Where a construction contract is rescinded midstream, Supreme Court precedents interpret the end date (the point at which liquidated damages stop accruing) restrictively — not as "the time the contract was actually rescinded" nor "the time replacement construction was actually completed."

The Supreme Court Decision of October 12, 1999, Case No. 99 Da 14846, among numerous other precedents, holds that where the contractor fails to complete the work within the completion deadline, suspends the work, and completion is delayed as a result of the contract being rescinded, liquidated damages accrue from the day after the agreed completion date, but their end date is limited to the span "from the time the owner could have rescinded the construction contract because the contractor suspended the work or another ground for rescission existed (not the time it was actually rescinded), up to the point at which the owner could have entrusted the work to another contractor and completed it."

The reason this limiting doctrine applies is that the owner (the client) also bears a good-faith duty to prevent unnecessary expansion of the loss. If the contractor abandoned the work and rendered performance impossible, the owner should have immediately rescinded the contract under Civil Act Article 546 (Impossibility of Performance and Rescission, 민법 제546조) and hastened completion by entrusting the remaining work to another contractor. If, nevertheless, the owner procrastinated and delayed exercising its right of rescission, or left the selection of a new contractor unattended, the resulting extra time is deemed not to be the contractor's responsibility and is excluded from the liquidated-damages calculation period.

That said, this general principle also has exceptions that must be considered together. The end date is not limited in the contractor's favor unconditionally.

1. The Owner's Absence of Fault and the Contractor's Sole Responsibility

The Supreme Court Decision of March 25, 1994, Case No. 93 Da 42887 held that where the owner did not neglect its duty to prevent expansion of the loss and, on the contrary, the contractor bears sole responsibility for the delay — a situation in which there is no need to protect the contractor — liquidated damages exceptionally accrue up to "the point of actual completion of the work."

2. The Impossibility of Replacement Construction

Furthermore, because the doctrine limiting the end date presupposes that the owner can itself complete the work by entrusting it to another contractor, the limiting doctrine cannot be applied where, due to special circumstances, construction by another contractor is inherently impossible (Supreme Court Decision of April 9, 1996, Case No. 95 Da 43143).

Key Points: Proving the Replacement-Construction Period / Responding with Prompt Rescission and Re-selection

In practice, when a contractor must unavoidably withdraw from a site, meticulously documenting the point of stoppage and the completed portion of work, and rigorously proving in any subsequent litigation how long "the objective period ordinarily required for the owner to select another contractor and complete the remaining work" would be, becomes the key defense strategy for avoiding a multi-billion-won liquidated-damages bomb.

Conversely, from the owner's perspective, when a contractor walks off the site, one must not simply wait idly; only by promptly sending a notice of contract rescission by certified mail (내용증명) and immediately commencing replacement-contractor selection procedures (such as a bidding announcement) — while thoroughly preserving the supporting evidence — can the owner claim the full liquidated damages without an unfair reduction.

Determining the end date of liquidated damages is entangled with complex facts and burdens of proof — such as the scale and difficulty of the remaining work and the ordinary time required to select a replacement contractor — so conclusions can vary greatly with the case, and specific legal review is necessary.

Drawing on a deep understanding of the complex process-delay issues at construction sites and of liquidated-damages doctrine, Cheongchul Law Firm provides optimal defense solutions to clients facing the crisis of excessive liquidated damages. If you are struggling with an unjust liquidated-damages claim or with settlement issues arising from a work stoppage, please consult with the experts at Cheongchul Law Firm.

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Attorney Bae Ki-hyung previously served at the Defense Installations Agency and in the construction/real estate teams of major law firms, where he provided legal advice across the full lifecycle of large-scale construction projects — including public-procurement construction, defense facility projects, and SOC construction projects — and resolved related litigation. He brings extensive experience and capability to public-procurement construction, private construction, public procurement contracts, and matters involving state property, local government property, and other public assets. Please contact him whenever you need assistance.

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Cheongchul Law Firm is composed exclusively of attorneys from Korea's top 5 major law firms, the prosecution service, and corporate legal teams. Rather than relying on a single attorney, we assemble teams of specialists in fields relevant to each case. Cheongchul goes beyond resolving isolated legal issues to provide comprehensive solutions across the client's entire business — legal consulting focused on helping clients achieve what they ultimately want. If you need help reaching your goals, please do not hesitate to contact Cheongchul.