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

The National Contract Act states that contracts in national procurement must be concluded based on the agreement of the parties from an equal position, and it prohibits stipulations or conditions that unfairly restrict the contractual interests of the counterparty.

Meanwhile, case law separately judges whether each provision of the National Contract Act is a mandatory provision or an effective provision, so it is necessary to examine whether the provision that prohibits unfairly restricting the interests of the counterparty is a mandatory provision or an effective provision. Additionally, we will look at the criteria for determining what constitutes an unfair restriction of the counterparty's interests.

[Question]

Validity of unfair stipulations in national contracts and criteria for judgment

[Answer]

A contract involving the State as a party or a public enterprise subject to the Act on the Operation of Public Institutions (hereafter referred to as 'public contracts') is a juridical contract concluded by the State or a public enterprise ('State, etc.') with the counterparty on an equal footing as a subject of the private economy, and its essential content is not different from that of a contract between private parties. Therefore, unless there are specific provisions in statutes, contracts must be concluded based on the agreement of the parties from an equal position, and the parties must perform the contents of the contract in accordance with the principle of good faith and trust, thus the principles of private autonomy and freedom of contract, among the principles of civil law, are generally applied.

Therefore, it cannot be said that public contracts prohibit or restrict the addition of special conditions that only have effects between the contracting parties based on their agreement, and under the principles of private autonomy and freedom of contract, such contract contents or measures cannot be easily denied.

However, Article 5(3) of the National Contract Act states, "The heads of central government agencies or contracting officials must not set stipulations or conditions that unfairly restrict the contractual interests of the counterparty in contracting." Therefore, stipulations that unfairly restrict the contractual interests of the counterparty in public contracts are ineffective.

To say that any stipulation is one that unfairly restricts the contractual interests of the counterparty and hence is ineffective under Article 5 of the National Contract Act, it is not sufficient to assert that the stipulation is somewhat disadvantageous to the counterparty, and it must be recognized that the State, etc. has created stipulations that are unfair to the counterparty and contradict the counterparty's legitimate interests and reasonable expectations.

Furthermore, whether a stipulation is one that unfairly restricts the contractual interests of the counterparty is judged based on all circumstances, including the contents and degree of disadvantages that may arise for the counterparty from the stipulation, the likelihood of disadvantages occurring, the impact on the overall contract, the process of contract formation between the parties, and the provisions of related laws (refer to the Supreme Court ruling on December 21, 2017, case number 2012Da74076, full bench decision).

In other words, it is not automatically prohibited as an unfair stipulation merely because the contract terms are disadvantageous to the contracting company; it must be objectively recognized that the stipulation is unfair to the counterparty against their reasonable expectations.

Thus, we have briefly looked into the validity and criteria for judgment of unfair stipulations in national contracts. Since the laws related to national contracts and public procurement are very complex and frequently revised, it is necessary to have knowledge and experience on this matter, and one must also be well aware of not only court judgments but also administrative interpretations and disposition cases. Therefore, I strongly recommend seeking assistance from a lawyer who has expertise in national contract laws and experience in resolving disputes concerning various national contracts and procurements.

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