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

When the state enters into contracts with signatories, it must comply with the requirements and procedures under the National Contract Act, such as preparing separate contracts. However, there are instances where contracts with the state may not meet formal requirements, one of which is omitting the preparation of a contract. Furthermore, there are occasions where the preparation of contracts is indeed skipped.

Accordingly, it is necessary to examine the validity of contracts with the state that do not follow the requirements and procedures as mandated, and under what circumstances the preparation of a contract can be omitted.

[Question]

In public contracts, the validity of contracts where no contract has been drawn up and under what circumstances the preparation of a contract may be omitted

[Answer]

Article 11, Paragraph 1 of the 'Act on Contracts to which the State is a Party' (hereinafter referred to as the 'National Contract Act') states, “The heads of central administrative agencies or contract officials must prepare a contract that explicitly states the following items when intending to conclude a contract. However, in cases prescribed by presidential decree, the preparation of a contract may be omitted.” It stipulates the purpose of the contract (Item 1), contract amount (Item 2), implementation period (Item 3), contract deposit (Item 4), risk bearing (Item 5), delay compensation (Item 6), and other necessary matters (Item 7).

Moreover, Article 11, Paragraph 2 of the National Contract Act states, “If a contract is prepared according to Paragraph 1, the contract is confirmed when the responsible official and the contracting party sign and seal or sign it on the contract.”

In light of the aforementioned provisions of the National Contract Act and the purpose of clarifying the contents of contracts concluded where the state is a unilateral party, as well as ensuring that the state follows legal procedures when entering into contracts with signatories, when the state enters into contracts with signatories, it must prepare separate contracts in accordance with the National Contract Act, and even if a contract is concluded between the state and a signatory, such contracts that do not go through legal requirements and procedures will be invalid (Supreme Court Decision 2005. 5. 27, 2004Da30811, 30828, Supreme Court Decision 2009. 12. 24, 2009Da51288, etc.).

If it appears that there are no circumstances indicating that any agreement followed the legal requirements and procedures, such as detailing an explicit content in a contract as set out by the National Contract Act, and if the relevant agency has issued a notice and the opposing party prepared and submitted the necessary documents, such as a written guarantee regarding compliance with the notice, and paid the performance bond according to the selection plan, it cannot be concluded that a valid contract related to the performance bond was formed between the relevant agency and the opposing party. Therefore, such agreements are deemed as invalid agreements that did not follow the requirements and procedures under the National Contract Act, and the relevant agency must consider that there was no contractual basis to claim the performance bond from the opposing party from the outset (refer to Supreme Court Decision 2015. 1. 15, 2013Da215133). In other words, contracts that violate the requirements and procedures set forth by the National Contract Act are invalid.

However, the exception in Article 11, Paragraph 1 of the National Contract Act states that in certain cases, the preparation of a contract may be omitted. This is a policy decision suggesting that in certain situations, considering the contract amount, transaction type, and contract nature, preparing a contract according to the requirements and procedures specified in Article 11 of the National Contract Act may be unnecessary or inappropriate. Therefore, when able to omit the preparation of a contract under the exception set forth in Article 11, Paragraph 1 of the National Contract Act, even if a contract is not prepared according to the requirements and procedures established by the National Contract Act, it is reasonable to recognize the validity of the contract if there is consensus on the main contents of the contract between the parties (refer to Supreme Court Decision 2018. 9. 13, 2017Da252314).

According to the exception in Article 11, Paragraph 1 of the National Contract Act and Article 49 of the Enforcement Decree of the National Contract Act that specifies it, the preparation of contracts may be omitted in cases such as contracts worth 30 million won or less (Item 1), cases subject to auction (Item 2), instances where the purchaser pays the full price and receives goods immediately in sales of goods (Item 3), contracts between various national agencies and local governments (Item 4), and cases where it is not necessary to prepare a contract due to the nature of the contract, such as supply contracts for electricity, gas, or water (Item 5).

Thus, we have briefly reviewed the validity of contracts where no contract has been prepared in public contracts and cases where the preparation of contracts may be omitted. Disputes related to national contracts and public procurement involve very complex regulations and frequent amendments; hence, familiarity with and experience in such matters are necessary, as well as being well-acquainted with both court rulings and administrative interpretations and decisions. Therefore, we strongly recommend that you seek the assistance of a lawyer with expertise in national contract law and experience in resolving various disputes in national contracts and procurements.

Cheongchul Law Firm consists solely of lawyers from the four major law firms in Korea: Kim & Chang, Lee & Ko, Bae, Kim & Lee, and Shin & Kim, and not just a single attorney. Specialized attorneys in the relevant fields collaborate to respond to cases. Cheongchul provides comprehensive solutions beyond resolving specific issues, focusing ultimately on achieving what clients desire. If you need assistance in reaching your goals, feel free to contact Cheongchul.