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

During the performance of a construction contract, questions arise as to whether the contractor may suspend the work where the client delays payment of construction proceeds (such as progress or interim payments) or where no agreement is reached on additional construction costs. We will examine the basis on which such a right to suspend work is recognized, how far the anxiety defense (불안의 항변권) under the Civil Code extends, and conversely, when the client may refuse to perform its payment obligation through a simultaneous-performance defense.

[Question] The anxiety defense upon rescission of a construction contract

[Answer]

a. The contractor's right to suspend work

Where the client delays payment of the contractual construction proceeds (progress or interim payments, etc.), the issue is whether the contractor may be recognized as having a right to suspend the work. A further issue is whether, where no agreement is reached between the client and the contractor on additional construction costs, the contractor may suspend the work on the ground of delayed payment of those additional costs.

As to the contractor's right to suspend work: (i) if the construction contract recognizes such a right subject to certain requirements, the matter is handled accordingly; and (ii) if the construction contract contains no express provision, one must examine whether the anxiety defense under the Civil Code is recognized.

b. Contractual right to suspend work — Standard Contract Form and Standard Subcontract Form

The Standard Form of Private Construction Contract provides that, where the client delays payment of advance and progress payments, the contractor may suspend the work subject to certain requirements (delayed payment of additional construction costs, however, is not included). By contrast, the Standard Subcontract Form for the Construction Industry provides that the work may be suspended not only for advance and progress payments but also for delayed payment of additional construction costs.

For reference, unless the contract expressly recognizes a right to suspend work, cases in which a contractor has had the lawfulness of a work suspension recognized on the basis of the Civil Code anxiety defense are few. In particular, where there is a dispute over 'additional construction costs' and payment is thereby delayed, it is highly likely that the contractor's right to suspend work will not be recognized. Depending on the construction contract, an express provision is sometimes included to the effect that 'the contractor may not suspend work on the ground of a disagreement over payment of additional construction costs.'

c. The Civil Code anxiety defense — the courts' position and the need for careful review

Regarding the anxiety defense under the Civil Code, the courts take the position that it may be recognized where there is a marked circumstance making it difficult for the client to perform its obligation to pay the construction proceeds due to a lack of financial capacity (Supreme Court Decision 2003Da60136, Nov. 25, 2005), and also where, after the contract is concluded, the client fails to pay progress payments without justifiable reason, such that the contractor can no longer reasonably expect to receive, as agreed, a substantial portion of the proceeds corresponding to the work even if it continues performing (Supreme Court Decision 2011Da93025, Mar. 29, 2012).

However, since whether the anxiety defense may in theory be recognized is a separate question from whether it may be recognized in a specific case, careful review is required as to whether the anxiety defense can be recognized in an actual matter. In particular, caution is needed because there are cases in which the anxiety defense was not recognized where only part of an interim payment constituting a progress payment was delayed (Supreme Court Decision 2001Da1386, Sep. 4, 2002).

d. The client's defense — where a serious defect is found in the completed portion

Conversely, from the client's standpoint as well, where a serious defect is found in the already-completed portion, the client may refuse to perform the payment obligation that stands in a quid pro quo relationship with that defective portion of the work.

For example, in a turnkey (design-build) automation-equipment construction contract, there is a decision holding that even if the client's interim-payment obligation temporarily fell into default, where a serious defect in the automation equipment made the success of the trial run uncertain, the client could refuse to perform its interim-payment obligation up until the successful trial run that stands in a quid pro quo relationship with its payment obligation (Supreme Court Decision 96Da16650, Aug. 23, 1996).

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