Hello, this is Attorney Park Jong-han from the law firm Cheongchul.

The National Contract Act states that in national contracts, agreements must be concluded based on mutual consent between the parties on an equal footing. It prohibits stipulations or conditions that unjustly restrict the contractual benefits of the contracting party, so it is necessary to examine what kind of stipulation may be regarded as an unjust stipulation or condition.

Regarding the criteria for this judgment, the Supreme Court has defined the standard, stating, "It is insufficient to merely recognize that the stipulation somewhat disadvantages the contracting party; it must be acknowledged that by establishing stipulations that violate fairness against the legitimate interests and reasonable expectations of the contracting party, the contracting party is unfairly disadvantaged." It clarifies that all circumstances should be comprehensively assessed, including the nature and degree of potential disadvantages arising from the stipulation, the likelihood of inconvenience occurring, the impact on the entire contract, the contracting process between the parties, and the provisions of related laws.

In other words, whether a stipulation is unjust is judged individually by comprehensively assessing various circumstances related to the relevant stipulation; let us examine the contents where the court judged that there is no unjust stipulation.

[Question]

Various stipulations judged not to be unjust stipulations in national contracts
(Adjustments to contract amounts due to price fluctuations, post-settlement related to costs in change contracts)

[Answer]

Article 5, Paragraph 3 of the “Act on Contracts with the State” (hereinafter referred to as the ‘National Contract Act’) stipulates that “The heads of each central government agency or the public officials in charge of contracts shall not establish stipulations or conditions that unjustly restrict the contractual benefits of the contracting party as prescribed by this Act and related laws when entering into a contract.” Therefore, stipulations that unjustly restrict the contractual benefits of the contracting party in public contracts are not valid.

In this regard, what kind of contract unjustly restricts the contractual benefits of the contracting party is judged by comprehensively assessing all circumstances, including the nature and degree of potential disadvantages arising from the stipulation, the likelihood of inconvenience occurring, the impact on the entire contract, the contracting process between the parties, and the provisions of related laws (refer to the Supreme Court’s decision of December 21, 2017, Case No. 2012Da74076).

Looking at the stipulations that the Supreme Court judged not to be unjust in national contracts, they are as follows.

① Stipulations for adjusting contract amounts due to price fluctuations

The stipulation for adjusting contract amounts due to price fluctuations under the National Contract Act aims to prevent situations where the contracting party may abandon contract performance due to unpredictable price fluctuations at the time of contracting or fail to fulfill obligations as per the contents of the contract, thereby hindering achieving the public contract's objectives. Moreover, considering the nature of public contracts funded by taxes, when a significant time interval has passed since the contract was concluded, if the prices of various goods or items constituting the contract amount have sharply increased or decreased, it is meant to reflect adjustments in the contract amount in the public contract to prevent waste of budget and avoid unfair advantages or disadvantages to the contracting party.

The contracting officer, etc., may reach an agreement with the contracting party to exclude the application of the contract amount adjustment clause due to price fluctuations, considering the specific characteristics of individual contracts, price trends of necessary goods for contract execution and supply situation, risks of exchange rate fluctuations, policy necessities, and reasonable distribution of risks due to economic changes, as long as it does not contradict the intent of the aforementioned provisions.

Though prices of goods comprising the contract amount may rise or fall, if a stipulation is made to exclude the application of the above clause in public contracts and the contracting party relies on it and takes measures to hedge against price fluctuations, yet subsequently, the state, etc., demands a reduction in the contract amount due to a drop in prices, it could unfairly result in unforeseen losses for the contracting party (refer to the Supreme Court’s decision of December 21, 2017, Case No. 2012Da74076).

② Addendum of post-settlement provisions related to costs in change contracts

In the situation where public agencies are raising suspicions regarding budget waste and embezzlement of private agency fees during the contracting and execution processes related to private agency projects, it appears that there was a necessity for post-settlement to ensure the fairness and objectiveness of private agency contracts, thus proposing a change contract to the contracting party so that the legitimacy of the purpose to conclude this change contract is acknowledged. Since the criteria for post-settlement can already be determined through a cost review after the expiration of the contract, and it was decided that the post-settlement would be conducted through a 'cost review specialist agency,' the content and procedures of this settlement clause are unlikely to be regarded as unjustly restricting the contracting party’s contractual benefits.

Considering the motives and circumstances of concluding this change contract, the contracting process, and the contents that changed, even if the settlement clause included in the change contract may somewhat disadvantage the contracting party, it is unlikely to be considered as an unjust stipulation that unjustly restricts the contractual benefits of the contracting party or is contrary to public morals or social order (refer to the Supreme Court’s decision of February 13, 2018, Case No. 2014Du11328).

In this way, we have briefly examined various stipulations that do not constitute unjust stipulations in national contracts. In cases of disputes related to national contracts and public procurement, the related laws are very complex and often amended, thus requiring familiarity and experience regarding these matters. It is also essential to be well aware of not only the court's judgments but also the administrative agency's interpretations and case handling. Therefore, it is recommended to receive assistance from lawyers who have expertise in national contracting laws and various dispute resolution experiences in national contracts and procurement.

The law firm Cheongchul consists solely of attorneys from the four major law firms in Korea: Kim & Chang, BKL, Taepyungyang, and Sejong, and teams are formed by specialized attorneys in the relevant fields related to each case rather than one attorney. Cheongchul provides legal consulting focused not only on solving specific issues but also on offering a comprehensive solution for overall business needs, ultimately aiming to achieve what the clients desire. If you need assistance in achieving your goals, please feel free to contact Cheongchul.