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

In the case of national contracts, they fall under public contracts, but fundamentally they are contracts under civil law, so the principles of cancellation and termination under civil law are generally applied. Additionally, the National Contract Act specifically adds provisions related to the cancellation and termination of national contracts.

In particular, this applies to construction subcontracting contracts, but in construction contracts, unlike the general principles of civil law, even if the contract is terminated due to non-performance of one party, the contractual relationship does not retroactively cease but is considered ineffective only for the incomplete parts, based on the already completed portions.

Therefore, even if the contracting party’s non-performance causes the construction to stop and the contract is terminated, the entire construction subcontracting contract is not annulled but only the parts that are incomplete are terminated, and they can still claim payment for the already completed portions, so it is necessary to look into this issue.

[Question]

The effects of termination of construction subcontracting contracts and the scope of payment for remuneration

[Answer]

Article 548 of the Civil Act stipulates the effects of termination, stating that “When one party terminates the contract, each party has an obligation to restore the original state to the other party. However, this does not impair the rights of a third party.” According to this basic principle of civil law, if a contract is terminated due to the non-performance of one party, the contractual relationship retroactively ceases and imposes an obligation to restore the original state between the contracting parties. Hence, there is generally no issue of payment for remuneration at this time.

The Enforcement Decree of the Act on Contracts to which the State is a Party (hereinafter referred to as the "National Contract Act") under Article 75 has separate provisions regarding the termination of national contracts, but it does not stipulate contents that differ from the principles of civil law mentioned above. In the National Contract Act, public contracts are essentially civil contracts entered into by the state or public enterprises as equal parties to the other party; therefore, contracts should be concluded based on the agreement of the parties, except in cases where special provisions in laws exist, and the parties must perform the contract in good faith, along with other principles of private autonomy and contractual freedom under civil law (Supreme Court Decision 2017.12.21, 2012Da74076, en banc decision).

However, in construction contracts, the special characteristics of construction work result in different legal principles being applied. If a construction subcontracting contract is terminated due to the contractor's non-performance, and construction has progressed to a significant degree at the time of termination, requiring restoration would cause significant social and economic losses; in cases where the completed part is deemed beneficial to the contractor, the subcontracting contract is deemed only ineffective for the incomplete parts, and the contractor must deliver the building to the contractor in the state of termination, and the contractor has a duty to pay for the incomplete building unless there are exceptional circumstances (Supreme Court Decision 1992.3.31, 91Da42630 decision).

In this way, when the subcontracting contract is deemed ineffective only for the incomplete parts, the remuneration for the incomplete building that the contractor must pay is calculated based on the total construction cost agreed upon by the parties, and from this amount, the amount based on the progress of work at the time the contractor ceased work is subtracted, rather than based on the actual costs incurred by the contractor (Supreme Court Decision 1993.11.23, 93Da25080 decision).

Furthermore, if the contractor in the construction subcontracting contract agrees to pay construction costs according to the percentage of progress in the agreed subcontract amount, the payment the contractor must make shall be calculated based on the agreed subcontract amount, multiplied by the percentage of progress, and this percentage of progress shall first confirm the details of the agreed upon construction and the already completed parts and the contents of the construction that have not been completed; and at the time the obligation to pay arises (when the contractor ceases work), it will be evaluated how much of the total construction cost is made up of the costs incurred for the already completed part and costs that would be required to complete the unfinished part (see Supreme Court Decision 1996.1.23, 94Da31631, 31648 decision).

If there are disputes regarding these percentages and payments, the parties can reconcile the percentages and payments based on the scale of work, progress, etc.[Supreme Court Decision 2017.1.12, 2014Da11574 (main case), 2014Da11581 (counter case) decision reference].

However, if the completed part does not benefit the contractor, the legal principle restricting retroactive effect as mentioned above cannot be applied, so if the contractor is unable to continue the work based on the completed part with another third party, the completed part cannot be considered beneficial to the contractor, and in this case, retroactive effect will not be restricted(Supreme Court Decision 1992.12.22, 92Da30160 decision reference).

That is, if the completed part does not benefit the contractor, even if the building is demolished for restoration, if it does not cause serious social or economic losses, even in the case of construction contracts, upon termination of the contract, the contractual relationship retroactively ceases, and both parties bear the obligation of restoration.

In this way, we briefly examined the effects of the termination of construction subcontracting contracts and the scope of payment for remuneration. In cases of disputes related to national contracts and public procurement, the related laws are very complex and subject to frequent amendments, hence it requires knowledge and experience in the field, and it is essential to be well-versed in court rulings as well as the interpretations and actions of administrative agencies. Therefore, it is recommended that you seek the assistance of an attorney with expertise in the legal provisions of national contracts and experience in resolving various national contract and procurement disputes.

Cheongchul Law Firm consists solely of attorneys from Korea’s four major law firms: Kim & Chang, Yoojin, Bae, and Sejong, and not just one attorney, but a team of specialized attorneys in the relevant fields of the case. Cheongchul provides comprehensive solutions beyond resolving specific issues, ultimately focusing on achieving what clients desire through legal consulting. If you need assistance in achieving your goals, please do not hesitate to contact Cheongchul.