[National Contract, Bidding] The Nature of Contract Guarantee and Delay Penalties under the National Contract Law

Hello, I am Attorney Eom Sang-yoon from Cheongchul Law Firm.

The National Contract Law states in Article 12 that those who intend to enter into a contract with the state must pay a contract guarantee, and Article 26 stipulates that if the contracting parties delay the performance of the contract, they must pay a delay penalty. Today, we will explore the legal nature of both with an introduction to relevant case law.

[Question]

We entered into a construction contract according to the National Contract Law and carried out the construction; however, due to delays, we could not complete the construction within the contract period. As a result, we were burdened with a delay penalty, and the ordering party claims that the contract guarantee paid at the time of contract signing should also be forfeited. Is this claim legally valid?

[Answer]

First, to understand the legal nature of the contract guarantee and the delay penalty, one must grasp the concepts of 'liquidated damages' and 'pre-determined damages for non-performance.'

Liquidated damages refer to penalties for failing to perform the contract and are distinct from damages. Thus, in the case of a liquidated damages agreement, the party liable for non-performance must pay both the liquidated damages and the actual damages to the other party.

On the other hand, pre-determined damages are amounts agreed upon in advance concerning damages due to non-performance, meaning that if there is a liquidated damages agreement, the creditor does not have to prove the occurrence of damage or the amount of damages, and the debtor cannot argue that there was no damage or that the damage was less.

Civil Law Article 398, Section 4 states that 'an agreement on liquidated damages is presumed to be a pre-determined amount for damages.' Therefore, if an amount to be paid due to breach of contract is defined without special mention in the contract, it is presumed to be a 'pre-determined amount for damages,' and one cannot claim additional damages.

However, the law regarding contracts involving the state (“National Contract Law”) regulates delay penalties that correspond to a pre-determined amount for damages (Article 26) while separately stipulating the contract guarantee in Article 12. When a contract is not performed, the contract guarantee is forfeited to the state treasury, and this content of the National Contract Law is mostly reflected in the general conditions of contracts.

In this regard, case law has previously ruled that 'unless there are special circumstances, if there is an agreement on the contract performance guarantee and delay penalties, the contract performance guarantee has the nature of liquidated damages or penalties, and the delay penalty is considerably seen as pre-determined damages.' However, there has been a somewhat changed stance, stating that 'liquidated damages are presumed to be pre-determined damages according to Civil Law Article 398, Section 4, so for liquidated damages to be interpreted as penalties, special circumstances must be claimed and proven; it is difficult to regard the contract guarantee as liquidated damages simply because the construction contract specifies both the contract guarantee and the delay penalty' (Judgment 2007Da13992, etc.).

Therefore, it is not enough to interpret the contract guarantee as liquidated damages solely because the delay penalty and the contract guarantee are stipulated together in a contract involving the state. However, if there are contract conditions that allow for the entire contract guarantee or the amount corresponding to the delay penalty to be forfeited to the state treasury due to delay, there may be grounds for interpreting the contract guarantee as liquidated damages, different from the previous case law.

Thus, we cannot uniformly interpret the legal nature of the contract guarantee as liquidated damages or pre-determined damages; rather, it needs to be judged according to the specific contents of each contract. In practice, since it is often specifically stipulated in general conditions of contracts regarding the forfeiture of the contract guarantee to the state treasury in case of delays in performance, it is important to verify whether it is being handled according to those contract provisions.

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