Hello, this is attorney Park Jong-han of Cheongchul Law Firm.

Article 673 of the Korean Civil Code provides that "before the contractor completes the work, the owner may rescind the contract by compensating for damages," allowing the owner to freely rescind a contract for work (도급계약) on grounds such as change of circumstances, while requiring the owner to compensate the contractor for damages in return.

The scope of damages the owner must compensate to the contractor is, as with damages for non-performance, all damages within a proximate causal relationship, and in the ordinary case it amounts to the sum of "the expenses the contractor has already incurred" and "the profit the contractor could have earned had the work been completed (lost profit, 일실이익)" (Supreme Court Decision 2000Da37296, 37302, May 10, 2002).

We will therefore examine how the “expenses incurred” and the “profit obtainable” are specifically assessed in practice.

[Question] How to assess the “expenses incurred” and the “profit obtainable” to be compensated to the contractor upon the owner’s free rescission

[Answer]

A. How the expenses incurred are assessed

The expenses incurred are those the contractor actually spent to perform the contract, and their items include labor costs, material costs, subcontracting costs, indirect labor costs, and general management costs. However, not every expenditure is recognized unconditionally; lower courts judge recognition by the following standards.

First, the representative cases that are denied are as follows.

1. Costs of work performed at the contractor’s discretion before contract conclusion — Items such as salaries of staff doing 3D modeling and design drawings, and software usage fees that the contractor performed at its own discretion before the contract was concluded are treated as discretionary pre-contract work costs and denied. Head-office management costs, where there is no separate line item in the contract details, are deemed to be covered within the profit (lost profit) range, so double compensation overlapping with lost profit is refused (Suwon High Court Decision 2020Na24805, Dec. 23, 2021).

2. Salary of a permanent on-site agent — The salary of a permanent on-site agent is in principle denied as not being labor cost related to the construction. However, where it is recognized that the suspension of technical staff deployment was impossible without the orderer’s written consent, it is recognized on a limited basis within the indirect labor cost range contemplated by the contract (Busan District Court Seobu Branch Decision 2020Gadan103991, Feb. 18, 2021).

3. Portion lacking proof of actual on-site work — Items such as a specific person’s salary within general management costs are excluded from the expenses on the ground of insufficient proof of actual work at the construction site (Seoul High Court Decision 2015Na2044036, Mar. 31, 2016).

4. Insufficient proof of labor costs — Where the proof of the labor cost expenditure itself is insufficient, the relevant item may be denied in full and assessed as zero won (Daegu High Court Decision 2024Na16265, Aug. 21, 2025; Daegu District Court Decision 2024Gahap201455, Oct. 10, 2024).

On the other hand, the cases that are recognized are items that do not fall under the above grounds for denial and that ① have their direct relevance to the contract for work proven by objective materials, ② fall within the cost range contemplated by the contract, and ③ do not constitute double compensation overlapping with lost profit.

B. How the profit obtainable is assessed — appraisal-based assessment as the principle

The principal method of assessment is “contract amount − construction cost = construction profit” (Supreme Court Decision 2000Da37296, 37302, May 10, 2002), and to derive the construction cost objectively, a court appraisal procedure is usually undertaken. That is, when the appraiser calculates the appropriate total construction amount and appropriate operating profit based on ① the quantity calculation statement, ② the working design drawings, ③ material and labor unit-price data, and ④ the construction period, the court either adopts that appraisal result as is or recognizes only a certain proportion at its discretion (Seoul Central District Court Decision 2009Gahap98138, Jan. 26, 2012, adopting only 45% of the appropriate operating profit per the appraisal).

However, in some cases the appraisal itself is difficult, and in such cases lower courts use methods such as ① borrowing the contractor company’s average operating profit margin (Busan District Court Decision 2020Gahap52623, Jun. 8, 2022: 4.52%), ② borrowing the industry-specific ratio of operating profit to sales from the Bank of Korea Economic Statistics System (Gwangju High Court Decision 2020Na22529, Apr. 13, 2022: 5.91% for small and medium manufacturing firms), ③ recognizing half of the operating profit margin (Suwon High Court Decision 2025Na11224, Apr. 16, 2026, recognizing about 3.3%, half of the 6.63% operating profit margin), and ④ lump-sum assessment at the court’s discretion (Seoul Western District Court Decision 2022Gadan247043, Nov. 24, 2023: recognizing about 30 million won at discretion in a case with a contract amount of 1.395 billion won).

C. Differences in assessment depending on whether construction has proceeded

Where construction has proceeded at least in part, assessing by appraisal the construction cost and appropriate operating profit margin for the completed-work portion is comparatively easy.

On the other hand, where the contract for work is rescinded in an un-commenced state with no construction having proceeded at all, the objective basis for deriving the construction cost is absent, so the orthodox appraisal method is practically impossible and the alternative methods examined in Section B above are mobilized. Even in this case, however, ① the contractor must submit materials proving its company’s average operating profit margin, ② there is a high possibility that profit-and-loss set-off or halving of the operating profit margin will be applied on the ground of non-commencement, and ③ where the contract for work is in a deficient state failing to fix the construction period, quantities, drawings, and the like, the appraisal itself is difficult and the assessment itself may be denied.

In particular, the legal principle applies that changes up to the point when future performance would have been possible (especially construction-cost increases) must be reasonably reflected, and in un-commenced cases, where the appraisal fails to reflect future changes and it is judged that the proof of a substantial probability of the existence of the performance interest is insufficient, there are cases in which the lost-profit claim is rejected in full (Seoul High Court Decision 2025Na206130, Apr. 16, 2026).

D. Differences depending on whether profit is stated in the contract

Where profit by process is separately itemized in the contract for work, lower courts have recognized only the total of that itemized profit as lost profit and rejected the contractor’s separate assertion of its company’s operating profit margin on sales (Suwon High Court Decision 2020Na24805, Dec. 23, 2021; in a case where profit by process was itemized in the contract, recognizing only the itemized profit total of about 19.68 million won as lost profit even upon non-commencement, and rejecting the 5.7% operating-profit-on-sales margin asserted by the defendant).

-----

Cheongchul Law Firm is composed solely of attorneys from Korea’s five major law firms — Kim & Chang, Lee & Ko, Bae Kim & Lee, Shin & Kim, and Yulchon — as well as the prosecution service and corporate legal teams, and responds not with a single attorney but with a team of specialist attorneys in the fields relevant to each case. Beyond resolving only specific issues, Cheongchul provides comprehensive solutions for the entire business and legal consulting focused on ultimately achieving what the client wants. If you need help reaching your goals, please do not hesitate to contact Cheongchul.