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

According to Article 58 of the Defense Acquisition Act, if the head of the Defense Acquisition Program Administration submits false or otherwise improper cost calculation data to the government to gain unjust enrichment, the law stipulates that the unjust enrichment amount shall be recovered.

Furthermore, Article 58 of the Defense Acquisition Act provides that if a contractor submits false cost data, it can not only recover the unjust enrichment amount but also impose an additional penalty payment not exceeding twice the unjust enrichment amount.

Accordingly, if a contractor who has entered into a contract with an administrative authority submits incorrect cost calculation data, the authority can claim unjust enrichment from the contractor and impose penalties as well. In this case, the contractor will likely hope for a reduction in the unjust enrichment amount and the penalty. Therefore, it is necessary to examine whether the legal nature of the unjust enrichment and the penalty corresponds to damages or constitutes a form of a penalty.

[Question]

Legal nature and burden of proof of unjust enrichment claims and penalty payments arising from the submission of false cost data

[Answer]

Article 58, Paragraph 1 of the Defense Acquisition Act states, “The head of the Defense Acquisition Program Administration shall recover the unjust enrichment amount and a penalty payment not exceeding twice the unjust enrichment amount when a defense contractor, a general contractor, a general contractor unrelated to the defense business, a professional research institution, or a general research institution submits false or otherwise improper cost calculation data to the government to gain unjust enrichment, as prescribed by presidential decree.” This provision thus sets regulations for the recovery of unjust enrichment amounts and imposition of penalty payments against contractors who submit false or otherwise improper cost calculation data.

This provision is premised on the obligation of the contractor entering into a contract to supply defense material to not submit false or other improper data regarding price estimation during the contract formation process. If it is later discovered that a contractor has taken unfair advantage due to erroneous cost calculation data leading to an unjust determination of the estimated price or contract amount, the contractor must compensate for the damages that equal the difference with the proper amount (as stated in the main text of Article 58, Paragraph 1 of the Defense Acquisition Act), and furthermore, if the original cost calculation data is revealed to be 'false or otherwise improper data,' it can be interpreted as being able to additionally claim penalty payments corresponding to the ‘unjust enrichment’ (as stated in the proviso of Article 58, Paragraph 1 of the Defense Acquisition Act).

In other words, the right to claim the return of the ‘unjust enrichment’ as prescribed in the above provision corresponds to the claim for damages due to default, while regarding the ‘penalty payment’, it does not represent compensation for any other damage that has not been covered by the recovery of the unjust enrichment amount. Instead, it serves to enforce the requirement for defense contractors to submit proper cost calculation data by allowing the Republic of Korea to claim penalties of a sanctioning nature when the defense contractor commits actions specified by law (refer to Supreme Court Decision 2016.07.14, Case No. 2013Da82944, Case No. 2013Da82951).

In the case of claims for the return of unjust enrichment amounts, the burden of proof regarding the occurrence and extent of ‘unjust enrichment’ is primarily on the Republic of Korea. However, due to the specific nature that the data establishing the basis for cost estimation related to defense materials, generally, lies with the contractor, if the Republic of Korea demands the submission or inspection of cost calculation data or price supporting documents to ascertain the legitimate cost, the contractor must respond accordingly. If the contractor fails to submit or submits false supporting documents in response to such demands, the Republic of Korea may proceed to claim recovery of the unjust enrichment amount it deems appropriate through its own standards and methods.

If the Republic of Korea determined the unjust enrichment amount as mentioned above, its method of calculation being arbitrary or significantly unreasonable could result in it not being recognized as the proper damage amount. However, the burden of proof regarding whether the method of calculation is significantly unreasonable lies with the contractor.

On the other hand, concerning the recovery of the unjust enrichment amount, it should be viewed that its legal nature corresponds to a claim for damages due to default, hence contributory negligence is acknowledged. If there is negligence on the part of the administrative authority regarding default, the court, in determining the extent of the debtor's liability for damages, generally needs to take this into account; however, if allowing the debtor to ultimately retain benefits from default results in an outcome contrary to the principles of fairness or good faith, the creditor's claim for the debtor's contributory negligence based on the creditor’s own negligence will not be permitted (see Supreme Court Decision 2008.05.15, Case No. 2007Da88644).

Therefore, when an administrative authority is recovering unjust enrichment and imposing penalty payments, the contractor needs to clearly demonstrate any errors in the administrative authority's determination of the occurrence and extent of unjust enrichment for proper claims for damages, and regarding penalty payments, it is necessary to show that the penalty is excessively burdensome and thus invalid in part or in whole.

In this way, we briefly reviewed the legal nature and burden of proof concerning unjust enrichment and penalty payments. Disputes related to state contracts and public procurement laws are not only very complex but also frequently revised, requiring knowledge and experience regarding these matters, as well as a clear understanding of both the court's rulings and the administrative agency's interpretations and decisions. Therefore, it is strongly recommended to seek the assistance of an attorney with expertise in national contract laws and experience in resolving disputes related to various state contracts and procurements.

Cheongchul Law Firm is composed exclusively of attorneys from the four major law firms in South Korea: Kim & Chang, Lee & Ko, Bae, Kim & Lee, and Sejong. Instead of one lawyer addressing an issue, specialized attorneys in the relevant field form a team to respond. Cheongchul provides comprehensive legal consulting services that go beyond addressing specific issues to offering holistic solutions for the entire business, ultimately focused on achieving the client's goals. If you need assistance in achieving your goals, please do not hesitate to contact Cheongchul.