Hello, this is Attorney Park Jong-han from Cheongchul Law Firm.

A joint procurement entity is when multiple companies become parties to a contract together due to the large size of the contract or when part of the contract is under patent, and in this case, multiple contractors form a consortium, which fundamentally takes on the nature of a partnership under civil law.  

However, even in a joint execution method, there may be cases where each member divides the sections for construction or carries out construction differently by timing. In such cases, if some or all of the members fail to complete the construction on time due to mistakes, they will be liable for delay penalties according to the delay responsibilities.  

In cases like this, if the construction work of a joint procurement entity using the joint execution method is delayed and it incurs liability for delay to the client, it is necessary to examine whether that liability for delay is borne jointly by the joint procurement entity or separately by each member.

[Question]

The contract performance responsibilities of joint procurement entities by type towards their clients and the criteria for delay penalties

[Answer]

The Ministry of Strategy and Finance Contract Regulations Joint Procurement Management Guidelines (September 13, 2024, Ministry of Strategy and Finance Contract Regulation No. 715) states in Article 7, “Contracting officials must ensure that members of a joint procurement entity are held responsible for the performance of contract obligations for construction, manufacturing, and service obligations to the client in accordance with the following items.” It specifies that “in the case of a joint execution method, members must be held jointly responsible. However, companies that do not meet the contract execution requirements for construction projects for which a construction performance guarantee has been submitted should be held responsible according to their equity ratio.” (Item 1) It also states, “in the case of a divided execution method, members must be held responsible according to their division.” (Item 2), and “in the case of a primary contractor management method, members shall be held responsible only for the parts they contributed, and if non-performance occurs, the guarantor of that member shall be responsible, and the primary contractor shall ultimately bear responsibility for the total contract, and if non-performance occurs, the guarantor of the primary contractor shall be responsible. However, in the case where there has been no agency exercise of the primary contractor's contract performance obligations after the primary contractor has withdrawn, other members than the primary contractor shall be considered as not fulfilling their contract execution for their contributed portions.” (Item 3).

Thus, regarding the contract performance responsibilities of joint procurement entities in government contracts, the principle is that in the case of the joint execution method, the members are jointly responsible, and in the case of the divided execution method, the members are individually responsible according to their divisions, while in the primary contractor management method, the members are responsible only for their contributed parts, and the primary contractor is responsible for the entire contract.

Therefore, according to the above types, the criteria for delay penalties also differ depending on the contract amount. In the case of a joint execution joint procurement entity, the deadline specified in the contract is generally considered as the deadline for the entire construction, and the basis for the delay penalties is also the total construction cost. In contrast, in the case of a divided execution joint procurement entity, unless there are special circumstances, the construction cost of the portion contributed by each individual company serves as the basis for the delay penalty.

Regarding the Supreme Court's ruling on the joint execution joint procurement entity, it stated, “Although the portions for which the plaintiff and the non-litigated company are responsible for this construction are specified, they provided a mutual guarantee for the construction execution, and from the perspective of the contractor, the entirety undertaken by the plaintiff and the non-litigated company constitutes one facility construction, the underground expansion construction, and due to the nature of the said construction, the paving work entrusted to the non-litigated company can only be done after the plaintiff completes the remaining work they are responsible for, thus if the plaintiff fails to complete their entrusted work within the deadline, the non-litigated company will also be unable to complete its entrusted paving work within the deadline. Furthermore, since the deadline stipulated in the construction contract is not only the deadline for the work entrusted to the plaintiff but a deadline that includes all the construction of the project, in cases where the plaintiff incurs delay penalties for not completing their entrusted work within the specified deadline, the contract amount that serves as the basis for the delay penalty should not only be limited to the construction cost corresponding to the portion the plaintiff is responsible for, but should consider the entirety of the project's construction cost.” The ruling clarified that the basis for delay responsibility for joint execution joint procurement entities is the total construction cost. (Supreme Court ruling on March 25, 1994, Case No. 93Da42887).

On the other hand, regarding the Supreme Court's ruling related to the divided execution joint procurement entity, it stated, “When the joint procurement entity contracts for a divided execution method, even in cases where the properties of the construction essentially mean that the delay of any member's portion of work would inevitably delay other members' portions, unless there are exceptional circumstances, the member that directly caused the construction delay will bear the obligation to pay for delay penalties only for their own portion.” It clarified that the criteria for delay responsibility for the divided execution joint procurement entity is based on each member’s portion of contributions. (Supreme Court ruling on October 2, 1998, Case No. 98Da33888).

In this way, we briefly examined the responsibilities of different types of joint procurement entities regarding their contract execution responsibilities towards clients and the criteria for delay penalties. Disputes related to government contracts and public procurement involve very complex regulations that are frequently amended, hence a good understanding and experience in this area are required, as well as knowledge of not only court rulings but also the administrative agency's authoritative interpretations and administrative actions. Therefore, I recommend receiving assistance from Attorney Park Jong-han, who has expertise in government contract regulations and a wealth of experience in dispute resolution related to various government contracts and procurements.

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