Hello, I am Lawyer Park Jong-han from Cheongchul Law Firm.

In construction contracts, it is common to include penalties for delay. However, when a construction contract is canceled, the cancellation means that the effects of a validly established contract retroactively ceases, which creates a state as if the contract never existed in the first place; thus, the issue may arise regarding whether the delay penalties also retroactively cease.

Therefore, when the construction contract is canceled, it is necessary to examine whether the effectiveness of the delay penalties also ceases due to the cancellation of the contract, or whether the effectiveness of the delay penalties continues despite the cancellation of the contract.

[Question] - Whether the application of penalty for delay applies when the construction contract is canceled

[Answer] - Even if the construction contract is canceled, the penalties for delay will continue to apply, only that the occurrence and end of the delay penalties are limited to the time from when the contracting party could have canceled the contract until the point when the ordering agency could have commissioned another contractor to complete the construction.

The construction contract for building new structures is a contract for the purpose of completing the work of the completion of that building, and the agreement regarding penalties for delay constitutes compensation for damages due to the contractor's delay in completing such work. Therefore, the contractor has an obligation to pay the delay penalty unless there are special circumstances, unless the contractor completes the work within the agreed period and delivers it to the client.

However, in the above case, the occurrence of delay penalties cannot indefinitely continue until the commencement date or the completion date, and should be limited to the moment when the contractor could have canceled the contract (not the actual moment of cancellation) and until the point when the client could commission another contractor to complete the same building, and if the construction is delayed for reasons that the contractor cannot be held liable for, that period should be deducted. Furthermore, if the calculated amount of delay penalties is recognized as excessively high, the court may appropriately reduce it pursuant to Article 398, Paragraph 2 of the Civil Act (see Supreme Court ruling on July 25, 1989, case numbers 88DaKa6273, 88DaKa6280).

In other words, even when the construction contract is canceled, the delay penalty agreement will continue to apply, and the occurrence and end of such penalties are limited to the time when the contracting party could have canceled the contract until the point when the ordering agency could have commissioned another contractor to complete the construction.

Thus, we briefly looked into the applicability of the delay penalty agreement upon the cancellation of the construction contract. In cases of disputes related to national contracts and public procurement, the relevant laws are very complex and there are frequent amendments, so understanding and experience in this regard are necessary. You should also be well aware of not only court judgments but also the administrative interpretations and case decisions. Therefore, I recommend that you seek the assistance of Lawyer Park Jong-han, who has expertise in national contracting laws and experience in resolving various national contracting and procurement disputes.

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