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

The National Contract Act stipulates that contracts in national contracts must be concluded based on the agreement of the parties, ensuring that both parties are on an equal footing, and prohibits the imposition of special agreements or conditions that unfairly restrict the contractual interests of the contracting parties.

In determining whether a particular special agreement qualifies as an unfair restriction or condition, the Supreme Court has established that "it is insufficient to merely show that the special agreement is somewhat disadvantageous to the contracting party; it must also be recognized that the special agreement causes unjust disadvantages to the contracting party by setting conditions that violate fairness against the legitimate interests and reasonable expectations of the contracting party." Therefore, it is stated that all circumstances should be comprehensively evaluated, including the content and extent of potential disadvantages that may arise for the contracting party due to the special agreement, the possibility of disadvantage occurrence, the impact on the entire contract, the process of contract conclusion between the parties, and relevant legal provisions.

As noted, whether a special agreement is unfair is assessed individually by considering various circumstances related to that special agreement. Let's examine which special agreements the court has judged to be unfair.

[Question]

Various special agreements recognized as unfair in national contracts
(Entitlement of interest on the difference deposit, Transfer of technology usage fees, Criteria for calculating unfavorable delay penalties)

[Answer]

Article 5, Paragraph 3 of the Law on Contracts to which the State is a Party (hereinafter referred to as the 'National Contract Act') stipulates that "the heads of each central government agency or the contracting officer shall not establish special agreements or conditions that unfairly restrict the contractual interests of the contracting party when entering into contracts." Thus, special agreements that unfairly restrict the contractual interests of the contracting party in public contracts are not effective.

In this regard, determining what kind of contract unreasonably restricts the contractual interests of a contracting party requires a comprehensive evaluation of all circumstances, including the content and extent of potential disadvantages that may arise for the contracting party due to such a special agreement, the possibility of disadvantage occurrence, the impact on the entire contract, the process of contract conclusion between the parties, and relevant legal provisions (refer to the Supreme Court's ruling on December 21, 2017, Supreme Court Case No. 2012Da74076).

When examining the various special agreements the Supreme Court recognized as unfair in national contracts, they are as follows.

① Special provisions regarding the entitlement to interest accrued on the difference deposit

In cases where the state retains the difference deposit prescribed in Article 93 of the former Budget Accounting Act (prior to its amendment to the Law on Contracts to which the State is a Party on January 5, 1995), and refunds it to the contracting party upon performing the contract, the provisions of the government's handling rules for retained money requiring payment of prescribed interest should also apply to local governments in similar cases. Therefore, even if there was an implicit agreement to allocate the interest accrued from depositing the difference deposit to the administrative agency, such an agreement cannot be effective as it constitutes a special agreement that unfairly restricts the contractual interests of the contracting party as defined by the former Budget Accounting Act and related regulations (refer to the Supreme Court ruling on April 28, 1998, Supreme Court Case No. 97Da51223).

② Special agreement to pass technology usage fees to the contractor

Considering that various regulations, including the Local Contract Act, its Enforcement Decree, and the Enforcement Regulations, impose obligations on local governments to establish tender prices and detail calculation methods, and the process of determining bidders in qualified bid evaluations, it must be ensured that all necessary cost items for construction are included in the estimated price or basic price. If any cost items are omitted, a special agreement that imposes the burden of the omitted costs on the contracting party violates Article 6, Paragraph 1 of the relevant law, which is seen as both unfairly limiting the contractual interests of the contracting party and significantly undermining public interest and fairness; thus, any agreement to pass the technology usage fees that should be borne by the administrative agency onto the contractor corresponds to a special agreement that unfairly restricts the contractual interests of the contracting party (refer to the Supreme Court ruling on February 14, 2013, Supreme Court Case No. 2012Da202017).

③ Special provisions on additional penalties for delays beyond those stipulated by law

Penalties for delays can be contracted multiple times for a single contract, and thus whether the penalties for delays are unduly excessive is judged based on the total delay penalties calculated according to each agreed delay penalty rate (refer to the Supreme Court ruling on February 14, 2013, Supreme Court Case No. 2012Da202017). In other words, whether delay penalties are unreasonable is not assessed solely by the existence of the penalties themselves; it is necessary to calculate the total delay penalties and evaluate if their extent unduly restricts the interests of the contracting party.

Thus, we have briefly examined the invalidity and judgment criteria of unfair special agreements in national contracts. Given that disputes related to national contracts and public procurement involve very complex regulations that are frequently amended, it is essential to have knowledge and experience in these areas, as well as familiarity with the interpretations and case decisions of administrative authorities, not just court rulings. Therefore, it is highly recommended to seek assistance from attorneys who possess expertise in national contract laws and experience in resolving various national contract and procurement disputes.

The Law Firm Cheongchul is composed solely of attorneys who have worked at the four major law firms in Korea: Kim & Chang, Kwangjang, Taepyeongyang, and Sejong. A single lawyer is not assigned to a case; rather, a team of specialized attorneys in the relevant fields is formed to respond. Cheongchul provides legal consulting that focuses on delivering comprehensive solutions for overall business issues, beyond merely resolving specific disputes, ultimately aimed at achieving the client's objectives. If you need assistance in achieving your goals, please do not hesitate to contact Cheongchul.