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

In cases where public enterprises or public institutions enter into various contracts with their counterparties, it is often the case that the Integrity Contract Special Conditions are included in the contract content. Typically, the Integrity Contract Special Conditions consist of content stating that if the counterparty engages in corrupt acts, they will not be able to participate in future bids of that institution.

However, if the eligibility restrictions for bidding participants set forth in the Integrity Contract Special Conditions are stricter than the sanctions for dishonest contractors as defined in the National Contract Law and other relevant laws, the issue arises as to whether public enterprises can impose restrictions on bidding participation procedures based on those Integrity Contract Special Conditions, exceeding the eligibility restrictions imposed on the counterparty based on the Public Institution Operation Law and other grounds.

[Question]

Whether the additional restrictions on bidding participation qualifications under the contract of a public enterprise are lawful.

[Answer]

A contract where a government investment institution is a unilateral party (hereinafter referred to as 'public contract') is a civil law contract concluded on an equal footing with the counterparty as a subject of the private economy in accordance with the principle of civil autonomy and the principle of freedom of contract, which basically does not differ from contracts between private individuals, and unless there are specific provisions in related laws, the principles of civil law apply in their entirety.

It cannot be said that adding special terms to the contract based on the contract with the counterparty to ensure the proper performance of the contract is prohibited or restricted, and such provisions or measures are not denied under the principle of civil autonomy and the principle of freedom of contract. However, in light of the special nature of public contracts, if the content is clearly in violation of the related laws of the contract relationship mentioned above, or if it results in excessively harsh terms for the counterparty in violation of the principle of proportionality, or if it could bring about outcomes against good morals or social order, in which case it would be difficult to maintain the public nature and fairness of public contracts, it may be deemed invalid.

Therefore, the limitations on bidding participation qualifications imposed by the special terms added to the contract are generally valid, and similarly to liquidated damages agreements between parties, if they exceed the limits of the principles of civil autonomy and freedom of contract, the whole or part of it may be assessed as invalid.

The Supreme Court has ruled the criteria for assessing legality as follows.

① The special terms of this case are regarded as an agreement on civil law penalties subordinate to the contract and are generally recognized as valid, and however, similarly to liquidated damages agreements between parties, if they exceed the limits of civil autonomy and freedom of contract, the whole or part may be assessed as invalid.

② The sanctions anticipated by the special terms of this case are limited to restricting participation in bids conducted by the defendant and do not relate to restricting participation in bids conducted by other national or public institutions, meaning that the relevant laws do not apply to it.

③ Even if the special terms of this case set the maximum period for restricting participation in bids based on the amount of bribery and other factors, it cannot be said that it violates or contradicts the intent of relevant laws that were in effect at that time.

⑤ The purpose of the special terms of this case is to prevent the occurrence of the aforementioned unjust acts, ensure the fairness of the contract, and at the same time achieve the public goals pursued by the defendant by securing faithful performance of the contract, and thus, their purposes and methods are recognized as legitimate, and it does not appear to impose excessively unfair disadvantages to the plaintiff against the principle of proportionality.

⑥ The plaintiff has participated in bids conducted by the defendant for several years and has been selected as the successful bidder, and has also prepared contracts containing conditions identical to those of the special terms in the case, and the textual meaning of the special terms is clear, and the plaintiff has submitted written agreements regarding this.

⑦ The fact that the plaintiff monopolizes the supply market for specific materials and in view of the plaintiff’s scale of business and revenue, it cannot be concluded that the plaintiff is in a position of weakness in relation to the defendant.

⑧ Just because after the signing of each contract, the relevant laws regarding restrictions on eligibility to participate in bids were amended favorably towards the counterparty, it cannot be said that the restriction measures in this case are unlawful or invalid.

In this way, we briefly examined whether the additional restrictions on bidding participation qualifications under the contracts of public enterprises are lawful. Since disputes related to national contract and public procurement involve very complex relevant laws and frequent amendments, it is necessary to be well-informed and have experience in these matters, and to be knowledgeable not only about judicial rulings but also about administrative interpretations and case examples. Therefore, it is strongly recommended that you seek the assistance of attorneys who have expertise in national contract laws and experience in resolving various national contract and procurement disputes.

Cheongchul Law Firm is composed solely of attorneys from the four major law firms in Korea: Kim & Chang, Bae, Kim & Lee, and Sejong, and attorneys who specialize in the related fields of the cases form teams to respond. Cheongchul provides legal consulting focused on delivering comprehensive solutions for business as a whole, beyond just resolving specific issues, ultimately aiming to achieve what the client desires. If you need assistance in achieving your goals, please don’t hesitate to contact Cheongchul.